Wednesday, June 29, 2011

The Bandwagon...

...of commentators and economists who now see the massive problems in China is growing by the day. The below snippet from is by Gary Shilling in Bloomberg. Readers here knew these problems years ago.

China is hoping to cool its white- hot economy without precipitating a recession. Doing so will be extremely difficult: Inflation fears are growing, the government’s ability to respond is quite limited, and China’s economic model, which leaves bureaucrats guessing about the market effects of their directives, is ultimately untenable.
Inflation worries start with housing. With Chinese exports curtailed by U.S. consumer retrenchment, capital spending threatened by government restraints and excess capacity, and domestic spending less than robust, housing has been China’s big generator of economic growth in recent years. By some estimates, half of Chinese GDP is linked to real-estate activity.
The government is fearful of rising prices, and has moved to prevent speculation. Buyers must now put down 60 percent of the purchase price on second homes, and 30 percent on first homes. The government is pressing banks to contain mortgages, and some have raised interest rates. In January, the mayor of Shanghai announced a new tax on property transactions that may be copied nationwide as other officials attempt to cool prices.
With these restraints in place, and with supply starting to catch up with demand, housing sales have slowed. But this has not fully curtailed China’s real-estate bubble: Housing starts rose about 40 percent last year. Developers are rushing to build while they try to support faltering prices by delaying completions and creating artificial shortages. Of course, these efforts are difficult to maintain because they tie up capital in uncompleted houses. Houses are now being built at about twice the rate they’re being sold, well above earlier norms.

Tuesday, June 28, 2011

The Great Repatriation...

...a continuing series. This theme is getting major traction now. It appears that the Great Repatriation will happen, causing the effects I have written about on this blog.

Cisco Systems Inc. (CSCO) has cut its income taxes by $7 billion since 2005 by booking roughly half its worldwide profits at a subsidiary at the foot of the Swiss Alps that employs about 100 people.
Now Cisco, the largest maker of networking equipment, wants to save even more -- by asking Congress to waive most federal taxes due when multinationals bring such offshore earnings home. Chief Executive Officer John T. Chambers has led the charge for the tax holiday, which would be the second since 2004. He says it would encourage companies to “repatriate” as much as $1 trillion held abroad, spur domestic investment and create jobs.
Cisco’s techniques cut the effective tax rate on its reported international income to about 5 percent since 2008 by moving profits from roughly $20 billion in annual global sales through the Netherlands, Switzerland and Bermuda, according to its records in four countries. The maneuvers, permitted by tax law, show how companies that use such strategies most aggressively would get the biggest benefit from the holiday, said Edward D. Kleinbard, a law professor at the University of Southern California in Los Angeles.

Supply and Demand...

...for dollars likely to receive some "revision" from world markets in coming months. I have already stated the dollar will enjoy strength going forward.

U.S. money market funds may wind up
paying to hold U.S. bills should increasing pessimism about
Greece’s ability to pay prompt flight from European assets
linked to the crisis.
* Top 10 U.S. prime money market funds, which represents $755b
of $1.66t of money market assets, have 50% of their exposure
to European banks, according to June 21 Fitch report, “U.S.
Money Fund Exposure to European Banks Remains Significant”;
Vanguard Group’s prime money market funds have had exposure
in the U.K. and Scandinavian banks for “quite some time,”
according to Robert Auwaerter, head of fixed income
* “An event like losing faith in Europe will force money
market funds to cram inflows into Treasury bills and push T-
bills to trade negative in the secondary market,”

Another advocate for Deflation...

Bob Mundell get some play in the Wall Street Journal. He is right. The risk of deflation far outweighs the inflationary risks the majority is concerned about (mostly due to the transitory nature of commodity prices).

Conservative economists have been raising alarms for months about the Federal Reserve's second quantitative-easing program, QE2. They argue it has lowered the dollar's value, leading to higher oil and commodity prices—a precursor to broader, more damaging inflation.

Yet the man many of them regard as their monetary guru—supply-side economics pioneer and Nobel Laureate Robert Mundell—says dollar weakness is not his main concern. Instead, he fears a return to recession later this year when QE2 ends and the dollar begins its inevitable rise. Deflation, not inflation, should be the greater concern. Avoiding the recession is simplicity itself: Just have the U.S. Treasury fix the exchange rate between the dollar and the euro.

Mr. Mundell's surprising statement came at a March 22 conference in New York sponsored by the Manhattan Institute, The Wall Street Journal and the Ronald Reagan Presidential Foundation. His economic predictions carry great weight because, unlike most economists of his generation, he is often right. His analysis of international economics has revolutionized the field, making him the euro's intellectual father and a primary adviser to China's economic policy makers.

Nevertheless, with gold around $1,500 and oil above $100 a barrel, supply-siders are scratching their heads: How can he possibly see deflation ahead? How can dollar weakness not be the problem?

The key to Mr. Mundell's view is that exchange rates transmit inflation or deflation into economies by raising or lowering prices for imported items and commodities. For example, when the dollar declines significantly against the world's second-leading currency, the euro, commodity prices rise. This creates U.S. inflationary pressure. Conversely, when the dollar appreciates significantly against the euro, commodity prices fall, which leads to deflationary pressure.

Monday, June 27, 2011

Cameron's slip...

...the "stress tests" were improper last time?

June 27 (Bloomberg) -- U.K. Prime Minister David Cameron
said a solution for Greece’s financial problems must be found
quickly and bank stress tests must be carried out properly to
reassure markets.
“We would be affected by a disorderly outcome to this
crisis,” Cameron told lawmakers in London today. “What is
important is that a solution be found quickly and is credible in
the markets.”
“Banks and bank balance sheets are strong enough,” he
said. “The current stress tests in the sector must be conducted
properly, unlike last time.”


"If there is anything that can give a layman in the sphere of economics the courage to express an opinion on the nature of the alarming economic difficulties of the present day, it is the hopeless confusion of the experts."

-Albert Einstein, 1931

The calls for greater austerity measures and a "balanced budget", where expenditures equal "revenue" are all based on antiquated models based on the gold standard. (a standard that threatens the sovereignty of any country by out-sourcing money creation to gold producers) It is a pity that consensus has formed around these issues especially considering the measures undertaken to forestall additional economic harm have had underwhelming effects.

If this trajectory continues, continued deflation is a massive risk for the global economy (save China, where loans will flow freely to export companies with little production).

Sunday, June 26, 2011

BIS: Everyone fix everything now.

The Bank of International Settlements, usually a sober group of mid-level servants whose chief duty is to ensure Banks have enough reserves to satisfy current international obligations, is now peppering the wires with calls for the entire world to fix all of its economic problems simultaneously and immediately. Strange timing on this:

The Bank for International Settlements urged Europe to end its dithering and find a permanent solution to the sovereign debt crisis.
“For well over a year, European policy makers have been scrambling to put together short-term fixes for the hardest-hit countries while debating how to design a viable and credible long-term solution,” the BIS said in its annual report published today in Basel, Switzerland. “They need to finish the job, once and for all.”

And also this...

Central banks need to start raising interest rates to control inflation and may have to act faster than in the past, the Bank for International Settlements said.
“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said in its annual report published yesterday in Basel, Switzerland. “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”

On another note, the BIS website has this gem:

" The BIS strongly advises caution against fraudulent schemes." Good advice.

Saturday, June 25, 2011

Sino Accounting

/start sarcasm

I am learn that auditors and the public at large have learned that Chinese accounting standards have been compromised.

/end sarcasm

I have written about Galbraith's retrospect it will be obvious. For now, the pressure is mounting amongst investors who are rightly asking "what, exactly, do I own?"

HONG KONG (Reuters) – The string of accounting problems and stock plunges at publicly traded Chinese groups has sparked deep concerns across the world's biggest audit firms, putting the so-called Big Four on alert from worries that their reputation could be brought down along with a growing list of stricken companies.

Auditing Chinese firms preparing to go public on overseas exchanges is a lucrative business and one that plays into the strengths of the top, international auditing partnerships known as the Big Four: KPMG, Ernst & Young, Deloitte Touche Tohmatsu and PricewaterhouseCoopers.

Yet fears are growing that the struggle to find enough high-quality auditors in China and Hong Kong means it may only be a matter of time until one of the top firms finds itself caught in a blow-up rivaling Enron, which brought down their old rival Arthur Andersen.

"Costs have gone up, fees have gone down, as competition for fees is enormous. You can easily see there is a real risk of an audit firm failing," said Paul Winkelmann, the partner in charge of risk and compliance for PWC in Greater China. According to interviews with professionals at the four firms, each firm is getting more and more cautious about the work they take on from mainland companies looking to IPO. "The whole industry, I will say, is very sensitive and cautious to China IPOs," said an auditor at one of the Big Four, who handles IPO work, who did not want to be named.

Friday, June 24, 2011

The Paper Dragon has it under control.

...and yet, wage pressures subsist in light of price controls.

“China has made capping price rises the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked,” Wen said in the commentary.

“We are confident price rises will be firmly under control this year,” Wen said.

He said the current situation follows increases in banks’ required reserve ratios and interest rates, which were hiked 12 times and four times, respectively, since 2010. He also cited reforms to the yuan’s exchange rate in June 2010, which have so far led to a 5.3% appreciation against the U.S. dollar.

Wednesday, June 22, 2011


The CBO is wrong. These arguments are artifacts of commodity currency systems, which we have jettisoned since Nixon abolished the Gold window. What crisis had Japan witnessed since its debt/GDP levels approach 200%? Zero interest rates and an appreciating Yen coupled with pervasive and growth-killing deflation. The economic model to describe this situation is false. The U.S. is not some household borrowing in a currency that it does not issue. It is not Greece borrowing in Euros to meet the obligations of its Euro-denominated debt. This kind of grandstanding is counter productive.

The report said the national debt, now $14.3 trillion, is on pace to equal the annual size of the economy within a decade. It warned of a possible "sudden fiscal crisis" if it is left unchecked, with investors losing faith in the U.S. government's ability to manage its fiscal affairs.

Democrats and Republicans have been stepping up budget talks aimed at averting what could be the disastrous first-ever default on U.S. government debt. A bipartisan group led by Vice President Joe Biden tasked with reaching an agreement has not made the politically difficult compromises on the larger issues, such as changes in Medicare, or tax increases.

The study reverberated throughout the Capitol as Biden and negotiators and senior lawmakers spent several hours behind closed doors. The talks are aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to generate enough support in Congress to allow the Treasury to take on new borrowing.

Biden made no comment as he departed, except to say the group would meet again on Thursday and probably Friday as well.

The CBO, the non-partisan agency that calculates the cost and economic impact of legislation and government policy, says the nation's rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax increases.


One of the chief areas I disagree with most economists is in the arena of context, both historically and in more theoretical arguments.

the below article regarding the remarks by Rogoff, et al., is typical of most specialized economic analysis with respect to U.S. obligations. It is also typical in the way it misses the contextual environment existing now.

"An inch wide and a mile deep" This phrase is uttered by one of my intellectual heroes, Richard Epstein, when he describes his compulsion, both in development and in furtherance of his charge as a professional academic, to seek out different lenses or facets with which to see the world. The phrase is uttered as a sort of pejorative "against specialization" where the afflicted know more and more about less and less. Its pervasive amongst most technical fields (and, alas, Economics has become inundated with its own language, complete with an acronym list that rivals the U.S. Army) and serves as blinders on a Horse...myopically leading them to a pre-determined goal but knowing very little about the adjacent terrain.

In any case, here we see the same arguments proffered about global economies and the inevitable conclusions that result from "debt". It fails to consider the difference between fiat currency regimes and the defunct gold standard. It fails to consider the geo-political apparatus that envelopes the world as it stands now. The U.S. is the sole hyperpower. It can provide instant security to any jurisdiction anywhere in the world within days. It can issue "debt" in its own currency as it sees fit, and its legal system and political stability provide the consumption engine for the world. This context is unique, durable, even self-perpetuating. Thus, analysis that depends on "traditional" measures of growth and "debt" which fails to account for these unique capabilities is doomed to fall far from the mark in terms of forecasting...because the value of these capabilities increase exponentially in times of crisis.

The shadow of an oncoming debt crisis is hindering job growth today and threatening our fiscal and economic future. The latest warning came today from “The Long-Term Budget Outlook,” an annual report from the Congressional Budget Office (CBO) which details the state of the nation’s finances. This year’s news is grim. We are on the verge of leaving the next generation with an unsustainable debt burden and a less prosperous nation.

According to economists Kenneth Rogoff and Carmen Reinhart, who have studied sovereign debt extensively, debt-to-GDP ratios of over 90 percent are associated with lower economic growth and increased risk of a severe debt crisis. According to the CBO, total U.S. debt will race across that tipping point and surpass 100 percent of the economy by the end of this year.


...the Paper Dragon continues to play princess. Which suitor will I allow to court my reserves? The U.S. or Europe? The entire play is silly and China would be foolish to count on the Euro area as being "growth engine" (read "purchaser of Chinese goods"), to say nothing of the geo-political ramifications by angering U.S. policy makers.

The language of China's willingess to "help", as if adherance to some moral code of global health enters any of their calculations, is LOL.

June 21 (Reuters) - China is willing to help European countries realise stable economic growth, China's Foreign Ministry said on Tuesday ahead of a visit by Chinese Premier Wen Jiabao to Hungary, Britain and Germany this week.

"The Chinese government has already taken a series of proactive measures to push Sino-Europe trade and economic cooperation, such as buying euro bonds," ministry spokesman Hong Lei told a regular news briefing when asked about China's view of the Greek debt crisis.

"China is willing to continue helping European countries realise economic growth in a stable manner through cooperation with relevant countries," he added, without elaborating.

Wen's latest visit to Europe from June 24 to 28 will come months after he visited France, Portugal and Spain, and offered to help European economies overcome their debt-driven crises.

Europe's vulnerable underbelly

In mythology and popular media (such as Tolkien's "The Hobbit", where Smog the Dragon has a most inconvenient equivalent to the heel of Achilles) the notion that tight systems have a soft midsection is a reoccuring theme.

In today's Europe, that notion has a geographical truth to it, in the sense that Greece and Italy represent the major systemic risks to the entire Euro area.

Monday, June 20, 2011

Gold's "reputation"

Just wait until the inevitable decrease in the price of gold. That will take care of the more risky elements of gold mining. And since when does a commodity have a "reputation" based on the source of its extraction?

The World Gold Council today announces that, working together with its member companies and the leading gold refiners, it has produced a draft framework of standards designed to combat gold that enables, fuels or finances armed conflict. The draft standards represent a significant, industry-led response to this challenge and are designed to enable miners to produce a stream of newly-mined gold which is certified as ‘conflict free’ on a global basis.

The ‘conflict free gold’ and ‘chain of custody’ standards set out a framework for tracking conflict-free gold from the mine to the end of the refining process and a framework for ensuring that where gold is mined in a conflict or high-risk zone, its production or transportation does not finance or benefit armed groups.

After almost a year of work, the draft standards are currently being ‘stress-tested’ by leading gold mining companies and refineries, as part of the development process. The World Gold Council recognises the multi-faceted nature of this initiative and is seeking input that will foster a collaborative and comprehensive solution and is, therefore, undertaking consultations with stakeholders. Interested parties including governments, NGOs, the investment community, artisanal miners, end-users and other participants in the gold supply chain are being invited to review the draft standards and to provide their feedback by 1 September 2011. There will also be continuing work and dialogue on related issues such as recycled gold, audit and assurance.

Aram Shishmanian, Chief Executive of the World Gold Council, commented that: “Responsible gold mining contributes positively to economic and social development in producing countries both at a national and community level. The misuse of gold to fund conflict is wholly contrary to this mission and is a threat to the reputation of gold.”


The Great Repatriation is under way.

Some of the nation’s largest corporations have amassed vast profits outside the country and are pressing Congress and the Obama administration for a tax break to bring the money home.
But Nobody Pays That

Billions Offshore

Articles in this series will examine efforts by businesses to lower their taxes and the debate over how to improve the tax system.
More Articles in the Series »
The Takeaway With The Times's David Kocieniewski

Daniel Rosenbaum for The New York Times

Apple has $12 billion waiting offshore, Google has $17 billion and Microsoft, $29 billion.

Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.

Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington.

“For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly,” Jim Rogers, the chief of Duke Energy, said at the conference. Duke has $1.3 billion in profits overseas.

Never fear... make a prediction when the outcome is inevitable. When I and many others warned of this fundamental problem with the Euro area in general (to say nothing of the "unique" history of Europe during epochs of financial distress) years ago, the counter-argument typically devolved into new-age progressive nonsense. Treaties in Europe average about 7 years historically...and the precipitating factor has overwhelmingly been economic stress (the causes of which vary, from Church monopoly to famine to our modern industrial "recessions"). As I have said before, the Euro area has had a good run of peace for an unprecedented amount of time.

June 20 (Daily Mail) -- EUROPE'S single currency is 'almost
certain' to break up within the next five years as a direct
result of the Greek debt crisis, international financial
experts warned last night.

They said Greece could be forced to leave the eurozone as
early as 2013, with weak economies such as Portugal and Ireland
following in its wake.

The bleak forecast, from the Centre for Economics and
Business Research, came as European finance ministers gathered
in Luxembourg to thrash out plans for another huge bail-out to
save the Greek economy from bankruptcy.

There were warnings last night that Britain may have to
donate another Pounds 1billion to help the Greeks.
Luxembourg's prime minister, Jean-Claude Juncker, said at
the weekend that the Greek crisis threatened at least five
other EU economies: Portugal, Ireland, Italy, Belgium and
Spain. Eurozone finance ministers were last night expected to
release the latest tranche of the Pounds 95billion bailout for
Greece agreed last year. The Pounds 11billion payment will keep
its economy going for a few more weeks.

Sunday, June 19, 2011

"National unity is a prerequisite for success"

The above taken from the last part of the Euro Finance Ministers latest statement regarding the Hellenic situation.

Suffer, Greece, suffer and re-gain your freedom. Is there a suitable translation for "Arbeit Macht Frei" in Greek? Individual policy failure collectivized once again, and in a jurisdiction with the History of Greece, this seems a bridge too far.

June 20, Luxembourg -- The Greek authorities are embarking on a
significant and necessary adjustment effort. Ministers
recognized the considerable progress achieved by the Greek
authorities over the last year, particularly in the area of
fiscal consolidation. Ministers are also conscious of the
serious challenges that Greek citizens are facing in these
difficult times.

Ministers took note of the debt sustainability assessment
prepared by the Commission and the IMF.

The assessment showed that debt sustainability hinges critically on
Greece sticking to
the agreed fiscal consolidation path, the plans of collecting
EU50 billion in privatization proceeds until 2015, and the
structural reform agenda which will promote medium-term growth.

Saturday, June 18, 2011

Return of the Ottoman...

...Turkey, at the crossroads of Asia and Europe, has historically been a strategic lynchpin for world powers.

It is important, therefore, to monitor the events in Turkey (the elections in particular as well as anecdotal events that indicate a rise in Islam rule).

The Die is cast

Expect more currency intervention in China as civil order is breaking down. Exports cannot be allowed to fall. This is precisely why the Euro and Yen have remained strong IMNSHO.

Residents look on Monday as riot police patrol the southern Chinese
city of Zengcheng, where violent protests had erupted over the rough
treatment of a migrant street vendor.

BEIJING—A wave of violent unrest in urban areas of China over the past
three weeks is testing the Communist Party's efforts to maintain
control over an increasingly complex and fractious society, forcing it
to repeatedly deploy its massive security forces to contain public
anger over economic and political grievances.

The simultaneous challenge to social order in several cities from the
industrial north to the export-oriented south represents a new threat
for China's leaders in the politically sensitive run-up to a
once-a-decade leadership change next year, even though for now the
violence doesn't appear to be coordinated.

Friday, June 10, 2011

Galbraith's "Bezel"... again in another bubble. Fraud is directly proportionate to perceived gain and risk, and becomes pervasive when there is no "risk" of sharply falling prices. The commodities market, and especially gold, is about to re-learn the lessons of history once again.

Montreal – Revenu Quebec has initiated a massive series of searches and seizures in the Montreal area, alleging that companies and individuals in the gold refining and trading industry engaged in widespread tax fraud on transactions worth $1.8-billion.

More than 175 government investigators conducted the sweep this week, targeting businesses, residences, accountant offices and bankruptcy trustees. Some 125 companies are complicit in the scheme that bilked the government of more than $150-million worth of taxes, Revenu Quebec asserts. No arrests have so far been announced.

The tax department has named only two companies publicly as being the subject of its investigations – Kitco Metals Inc. and Carmen International Inc. Privately-held Kitco, one of the largest retailers of precious metals in the world, denies the allegations against it.


Increasing rate of bad news for the Euro area and its wayward peripheral members. It seems unrest is unavoidable at this point unless major, "unprecedented" (read: the ECB capitulates and starts writing checks) measures are taken quickly.

This is unlikely. This is only slightly different than bank behavior during our own financial crisis. The players are at the table, poker faces on.

(from "Canadian Business")
The macroeconomic challenges facing the world are not looking any prettier after the leak of an official analysis of sovereign debt issues in the European Union and a renewed bearish call on U.S. municipal bonds by star market watcher Meredith Whitney.
A year ago, the International Monetary Fund and the European Union cobbled together a US$161 billion bailout package for Greece on the assumption that the troubled nation—which can't pay its bills or debts—would be able to rely on capital markets to finance itself in 2012. But that is now seen as highly unlikely, according to an alarming new report by the EU, IMF and European Central Bank obtained by SPIEGEL ONLINE.
Greece’s so-called troika of saviors has concluded that reform measures have come to a screeching halt, which means the nation's financial needs will not be supported by private sector loans anytime soon and will therefore need a new bailout. And that’s a major new hiccup because European taxpayers are tired of paying for bad bets on the nation's debt issues made by international bankers and other Greek bondholders. And IMF’s statutes do not allow the institutional lender of last resort to offfer financial aid to nations that are not deemed able to meet payment obligations within 12 months.
If a debt default takes place in Greece—where GDP grew at 0.2% in the first quarter, as unemployment jumped above 16% and investment plunged almost 20%—another global credit freeze could take hold as fallout reaches far and wide. As Business Insider notes, French and German banks hold US$18.8 billion and US$26.3 billion worth of Greek debt respectively, while British banks have US$3.3 billion at stake. In the U.S., the exposure is US$1.8 billion.


Treaties throughout history have been fickle creatures conjured in times of solidarity and summarily jettisioned at the first sign of inconvenience.

NATO has certainly been a success in terms of longevity, but the comments by lame duck Defense Secretary Gates are telling in the sense that the treaty has lost relevance and lacks a clear strategic goal.

These comments also come at a time where the Euro project is facing increased economic stress (with attendent social instability risks so common in European history) and it was certainly not lost on the Euro attendees in Brussells who their masters really are.

June 10 (Bloomberg) -- Defense Secretary Robert Gates, in a parting shot to Europe before leaving office this month, said NATO risks “collective military irrelevance” unless U.S. allies contribute more to the alliance’s operations.

Military missions in Afghanistan and Libya exposed the failure of allies to make contributions and showed North Atlantic Treaty Organization weaknesses, Gates told a meeting organized by the Security and Defense Agenda group in Brussels today, in his last policy speech as defense secretary.

“There will be dwindling appetite and patience in the United States Congress -- and in the American body politic writ large -- to expend increasingly precious funds on behalf of nations that are apparently unwilling to devote the necessary resources or make the necessary changes to be serious and capable partners in their own defense,” Gates said.

Gates issued the warning as both continents struggle with the remains of the global recession and President Barack Obama seeks $400 billion in defense spending cuts over 12 years to reduce the deficit. While Gates and NATO Secretary General Anders Fogh Rasmussen have cautioned European members not to reduce defense spending further, the implicit threat that the U.S. may withdraw support for the alliance marks a hardening of the U.S. position.

Rasmussen last year said European defense risked becoming a “paper tiger.”

Thursday, June 09, 2011

Notice... its defined as a "bubble" now. Some say bubbles only exist in retrospect, but for those who have been subjected to my lucubration over the past 5 years, this is only the prelude to a much larger act in this drama.

From the WSJ...


BEIJING—After years of housing prices gone wild, China's property bubble is starting to deflate.

Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.

Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay.

Monday, June 06, 2011

All the kings economists...

We have policy failure because our leaders are executing measures from the standard issue economics literature. Zero interest rates are supposed to trigger growth. Quantitative Easing is supposed to depress rates further and somehow trigger employment gains via various investment channels. Bank loans were supposed to increase given extremely favorable rate and capital environment.

Neither of these have done what our policy makers thought they would do. At what point (another 3 years?) will they jettison their views and support alternative measures? We are witnessing the monetary policy equivalent of The Light Brigade or various Russian aspirations by western Europeans...throwing more fungible items at the problem without regard to the soundness of underlying assumptions.

Sunday, June 05, 2011

Trees cannot grow to the sky

How could there possibly be a bubble with this type of money flowing in to passive commodity investment funds? Again, ever since commodities became an "asset class" whose returns are "uncorrelated" with the broader market, these funds have proliferated with astounding speed and are one of the chief reasons we see commodities enjoying their historic (soon to be infamous) run.

June 6 (Bloomberg) -- Funds boosted bets on rising commodity prices to the highest in four weeks, led by copper, amid signs that the global economic recovery will remain resilient and boost demand for raw materials.

Speculators raised their net-long positions in 18 commodities by 7.3 percent to 1.26 million futures and options contracts in the week ended May 31, government data compiled by Bloomberg show. That’s the highest since May 3. Copper holdings more than doubled. A measure of bullish agriculture bets also climbed as adverse global weather curbed crop production.

The Standard & Poor’s GSCI Spot Index rose for a fourth straight week as Chinese metal inventories plunged and droughts lingered in the Asian country and Europe, trimming prospects for wheat and cotton crops. The global recovery “is gaining strength,” the Group of Eight leaders said May 27 after a summit in Deauville, France. In the U.S., consumer sentiment rose to a three-month high in May, a private report showed last month.

“We are seeing a reasonable rate of growth in worldwide economic activity,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco. “The supply-demand associated with that growth, combined with a weaker dollar, probably explains the move into commodities.”

Copper prices have jumped 40 percent in the past year while wheat has surged 75 percent and corn has more than doubled amid increasing demand from China and other emerging economies. Raw materials have also gained as investors boosted holdings as an alternative to the dollar, which has slumped more than 6 percent this year against a six-currency basket.

$130 Million

Investors poured $130 million into commodity funds in the week ended June 1, the second straight increase, according to EPFR Global, a Cambridge, Massachusetts-based researcher. The previous week had inflows of $702.8 million.

My reply... a contemporary equating the U.S. economic situation with Greece and his related opinion that investment a good idea.

We shall see. For the purposes of this discussion, I categorically deny that the U.S., as sovereign currency issuer of its debt denominated in same, is the same UNIVERSE as Greece, which must "get" Euros to satisfy its Euro-denominated obligations.

Your comments assume the economy and global security are uncorrelated variables...they are not. The dollar as reserve currency is going no-where IMNSHO, especially given the current and forthcoming economic malaise the developing world is experiencing. Thus if your prediction of WW III comes to fruition where are global assets likely to flow? A jurisdiction with unparalleled military capability or...anywhere else?

For the record as well, China is one of the largest bubbles I have ever seen. Invest at your peril.

As always, your comments are appreciated and I only reply thusly in the hopes that my contributions will augment our mutual understanding of the most complex problems facing our world.

Saturday, June 04, 2011


With little statesmen, philosophers and divines all banding together saying that Treasuries will be decimated for this or that reason (China/U.S. Debt/Dollar weakness/etc.), I smile when the above chart is presented.

They have all made the simple mistake of thinking that monetary policy does the same thing no matter what contextual landscape it resides in. It does not. I have written about this multiple times on this blog coupled with my opinion regarding Treasuries.

Certainty... the enemy of flexibility.

"A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines"

-Ralph Waldo Emerson

One of my readers has rightly excoriated me for my certainty regarding upcoming events. I take this criticism with deadly seriousness, as being "fox-like" (as Tetlock would say) is best when attempting to comprehend the likely outcomes in something SO complex as the world economy. Myopically phase-locking into one mode of thinking, or failing to at least entertain the dark matter of "unknown unknowns", is a recipe for disaster.

I say this because I pay special attention to CERTAINTY and HUBRIS in the popular memorandum from investment advisors, "little statesmen", philosophers, and divines when attempting to identify financial bubbles.

Its not anywhere near an exact science, but to paraphrase Justice Potter Stewart I often "know it when I see it".

Principal protection... not always protected. When purchasing any security, its a good idea to understand the counter-party implications and any bankruptcy priority issues that surface in case of calamity. Typically, these risks are NEVER priced in, resulting in an expensive mechanism that is, for all intents and purposes, pure Beta.

(snippet from an article in my inbox)
Worried about the increasing number of retail investors jumping into complex financial products, securities regulators Thursday warned that structured notes with principal protection are not risk-free.
The Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. warned that such an investment may come with confusing terms that actually guarantee as little as 10% of the investment and limit the amount investors gain on the upside. It also can tie up those funds for a decade.

Structured notes with principal protection combine a zero coupon bond— that is, one that pays no interest until it matures — and an option whose payoff is linked to an underlying asset, index or benchmark (such as currencies, commodities, the Russell 2000) or a basket of benchmarks. The payoff can vary, based on the performance of the linked index, but the bonds offer the prospect of a greater return than money-market instruments, which makes them appealing.

“The current low-interest-rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors,” said John Gannon, Finra's senior vice president for investor education.

Investors typically are interested in such products because they believe they are gaining possible market upside while protecting their principal.

What investors believe and what's true are not necessarily the same thing. The SEC says principal-protected notes vary wildly by issuer, and investors tend to ignore — or don't understand — what's spelled out in prospectuses.

The obvious problem with principal-protected notes: Often, the principal isn't protected. Some sellers of the notes do indeed guarantee 100% of principal. That's fine, unless the issuer of

the note goes bankrupt, in which case the investor will likely lose all or most of the principal.

Wednesday, June 01, 2011


I have said on this blog that June and July represent inflection points for market volatility and the current economic figures do nothing to disuade me from that opinion. This ramains a contest between the Bond markets and the Fed.


Economic data coming in as I expected. Realpolitik in Europe and the U.S. continues its role as investment banker for the world. Today's ISM report confirms this with some dismal numbers for new orders and manufacturing.

All of this in light of round after round of QE and "accomadative" monetary policy. Once again, the levers are broke, it is time to re-route the engine.

The Great Repatriation

Given the current and forthcoming economic weakness, political pressures will manifest themselves into various measures to strengthen domestic demand and combat the (now obvious) deflationary pressures that, if left unchecked, threaten to launch the world's most dynamic economy into a Western Hemisphere version of Japan's "lost decade".

Since monetary policy has been an utter disaster (in the sense that it has failed to do what our leaders thought could be done), more imaginative fiscal policies will be brought forth in an effort to combat deflation.

Chief among these policy options will be a reform of tax policy on foreign earnings. This will consist of two prongs. The first is explicit tax breaks on foreign earnings repatriated back to the United states coupled with an implicit efforts "suggesting" that U.S. multinationals recycle these foreign earnings into domestic investment.

These measures, together with foreign demand for U.S. financial assets (based on my convictions that things in the developed world will continue to erode, the U.S. being the only safe port in the proverbial storm) will successfully combat deflation. The U.S. will not devolve into the Japanese experience.

But risks remain. Policymakers could be convinced of the debt hysteria surrounding economic debate and choose not to follow the above measures, but in my view tax refunds/breaks/rebates on foreign earnings is a wonderful way to stop deflation in its tracks, and something the Fed should consider lobbying congress to explore this option.