Sunday, July 31, 2011

If you have more than ONE child...

...we confiscate he/she and sell him/her to someone in the West...but YOU do things for VOTES, therefore you are immoral capitalists who are irresponsible. Q.E.D.

Who is persuaded by this?

Try not to echoes so much of the Soviet era propaganda in the 80s by its fabrication of shibboleths and straw men to distract its people. Distract/villify/retract/redefine/repeat cycle.

I am seriously trying to determine where the equivalent of the Berlin Wall is in the Middle Kingdom.

BEIJING-- The mouthpiece of the Chinese Communist Party has castigated
the United States' handling of its debt crisis as "irresponsible" and
"immoral", saying in a Saturday editorial that the U.S. democratic
system was to blame for the "farce".

The official People's Daily newspaper accused U.S. politicians of
"sacrificing other people's interests in exchange for a few votes",
adding that "not a single representative has considered the world, and
even U.S. national interests are being banished from the mind".

It said elections next year meant that each representative was
unwilling to risk being tarnished with "the crime of giving way".

I am ALTERING the deal...

...pray I don't alter it any further...


Do the holders of TIPS securities have an action in law or equity given a change in the CPI?

Answer: The holders bear the risk of any re-working (typically the "re-worked" CPI shows less inflation). Accepted business practice has held this, especially given the fact the CPI is used for a variety of different calculations. Presumably, the Government would not change the definition to benefit one class of investors over another.

This is just a friendly reminder that RULES can be changed MID-GAME. This is one of the fundamental laws of Power. And it behooves all investors to contemplate what RULES may be altered by whose Power, and the reliability of available remedies.


One of my more spectacularly bad calls over the past year has been my insistence of Gold as a terrible investment idea. Gold has obliged me by increasing by 30%.

But let me be more specific. I "get" the insistence to hold PHYSICAL GOLD as some sort of inflation hedge. I may even understand the "gotterdamerung" notion that gold will hold its value given a massive and sudden decline in Western Civilization. (my objections still hold in these cases...I would rather hold ammunition than gold, as the former will be far more important and valuable given bellum omnium contra omnes, to say nothing about its heavy weight and uselessness for anything but an obvious signal that you hold a wealthy object)

However, what I have trouble understanding is the misguided trust in various financial vehicles (be they futures, ETF's or the bouque of instruments invented by clever non-fiduciaries that tie their "value" to gold prices, and hold some "promise" of delivery of physical gold given certain conditions)

This bubble is going to end in tears for many folks who thought they had some claim to deliverable physical gold. It will only take one large player to squeeze the supply if he/she demands delivery. A delay or failure will occur. Then, dear readers, and it will be a mad scramble for the exits of these financial vehicles.

But then again, I have been wrong about this before...

Still the One

Latest chart/graph getting some attention from various participants and pundits is reproduced above (S&P produced it).

Relative to the rest of the world, the U.S. is in excellent position. What is not produces on the graph is the balance of attributes that guarantees the U.S. will continue as Hyperpower for at least half a century.

Private Action

More good will come from this than all the "aid" from Western Governments cumulatively and extant. But assistance does not come without a price, and readers here are instructed to my "cloth or gavel" writings. Battles are always fiercest on the frontier.

2011-07-31 Vatican Radio

Pope Benedict XVI on Sunday appealed for those
suffering in the Horn of Africa from the dramatic
consequences of famine, aggravated by war and the
absence of solid institutions.

Addressing three thousand people in the courtyard
of the Papal Summer Residence in Castel Gandolfo,
he said Jesus confronts us with our
responsibility: which is to do everything in our
power to bring assistance to those who suffer from
hunger and thirst.

He was commenting on the Sunday Gospel passage,
which was about the multiplication of the loaves
and fishes.

The passage is repeated (in Matthew, Mark, Luke, and John). This was instructive to me as the same passage was repeated in this morning's sermon at my own house of worship. The nature of memes.

Tremors in the East

The Recapitulator, always at the forefront of the intersection (perhaps collision is a better word) between the worlds of Finance and Power, has been monitoring developments in Eastern Europe for some time now.

The below Resolution is important in the sense that it is an escalation in an area historically prone to conflict...and it remains "low-hanging fruit" for Moscow should nationalistic pride need bolstering prior to an election.

Source here.

The U.S. Senate unanimously passed on July 29 a resolution supporting Georgia’s territorial integrity and recognizing Abkhazia and South Ossetia as regions “occupied by the Russian Federation”.

The resolution, S. RES. 175, was sponsored by Democratic Senator Jeanne Shaheen and Republican Senator Lindsay Graham. The both Senators are co-chair of Georgia Task Force at the U.S. think-tank Atlantic Council - a bipartisan group aimed at promoting policy debate on Georgia.

“Today, the Senate spoke with one voice in support of Georgia’s territorial integrity,” Senator Shaheen said on July 29. “While I am pleased by the Senate’s action and the clear message we are sending to Georgia and the Russian Federation, the situation there remains fragile and unresolved, as Russian troops are still occupying Georgia’s Abkhazia and South Ossetia regions.”

Georgia’s ambassador to the United States, Temur Yakobashvili, praised the resolution.

“This document is a very solid and firm foundation for de-occupation of the Georgian territories,” Yakobashvili said.

Comparative Law

Again, the differences in the ability to engage a legal system are stark and increasing. I again ask investors with regards to holding Paper Dragon assets: What, precisely, do you own? What contractual rights are protected under any agreements or covenants at your disposal? What are the rules of divestiture to ensure a safe and orderly disposition of your assets?

The high-speed rail disaster has only confirmed my own suspicions about the above. China, one must be reminded, is no-where near a free country.

WENZHOU, July 30 (Xinhua) -- The judicial bureau of Wenzhou in east China's Zhejiang Province has apologized for a statement that told lawyers not to "unauthorizedly" handle cases involving last Saturday's deadly bullet train collision.
The judicial authorities apologized to the public for its "lax supervision" over the Wenzhou Lawyers' Association, which allegedly issued the order arbitrarily, according to an apology statement posted on a local official news website on Thursday.
On Tuesday, law firms in the city received an "urgent statement" issued under the names of the Wenzhou Judicial Bureau and the Wenzhou Lawyers' Association.
The statement asked lawyers to "report to the judicial bureau and lawyers' association immediately after the injured passengers and families of the deceased in the accident come for legal help," and said lawyers "shouldn't unauthorizedly respond and handle the cases," because "the accident is a major sensitive issue concerning social stability."
The statement immediately aroused public anger after being exposed by netizens.
In response to the criticism, the judicial bureau accused the lawyers' association of using the bureau's name to issue Tuesday's statement without authorization.

and also from this source:

And the clampdown has begun.

According to leaked directives from the propaganda department on Friday: "All articles on the Wenzhou train collision are to be put off the homepage with immediate effect. None are to be put on the homepage itself. In the news section, only one article may be placed there, but no commentaries are allowed. Promoting the discussion of related topics on forums, blogs and microblogs are not allowed. Forum sites are to remove all previously promoted articles and blogposts off from the frontpage and mini-sites immediately. All posts, blogposts and microblog posts that do not meet with the requirements of this afternoon's orders are to be resolutely deleted. All sites are to implement this order with immediate effect, and to complete execution within half an hour. Checks will begin within half an hour."


The Debt Ceiling mass hysteria is increasing geometrically the closer we get to the arbitrary date of August 2. Payments will not cease. The U.S. will not default. This is all so much Kabuki theater.

And yet all manner of articles questioning the U.S. as a going concern are proliferating the news wires.

This following article is one of the more egregious. It fails to mention the Fed also has over a Trillion in other liquid short-term assets on its books, to say nothing of the Treasury and its ability to generate "cash".

Who's ready for iAmerica?
As the BBC has reported, the software company Apple has more cash on hand than the United States federal government, according to the company's financial records.
Apple's quarterly financial report shows that the company responsible for the iPad, iPod and the iPhone now has $76.4 billion in reserve cash, while the Treasury Department is sitting on just $73.7 billion.
The feds could probably learn a thing or two from Apple's success. Congress remains embroiled in a debate over spending and whether the federal government, which currently owes trillions in debt, should be allowed to borrow even more. International credit rating agencies have threatened to downgrade the national debt for the first time in the nation's history if Washington doesn't come up with a solution to lift the $14.3 trillion debt ceiling while implementing a concrete plan to get the nation's financial house in order.

Thursday, July 28, 2011

Global Warming

I have written about this phenomenon in the past in reference to intellectual bubbles and meme formation.

Nothing changes. When an outcome is desired, all manner of engineering, data mining, etc., are employed without critical restraint. Dissenters are made to look like fools for their lack of genuflection on the "altar of obviousness". The result is as predetermined as the Alhambra Decree of 1492. (where "bad influence" was used as a pretext to evacuate all Jews from incredibly convenient way to gain property)

JUNEAU, Alaska (AP) — A federal wildlife biologist whose observation in 2004 of presumably drowned polar bears in the Arctic helped to galvanize the global warming movement has been placed on administrative leave and is being investigated for scientific misconduct, possibly over the veracity of that article.
Charles Monnett, an Anchorage-based scientist with the U.S. Bureau of Ocean Energy Management, Regulation and Enforcement, or BOEMRE, was told July 18 that he was being put on leave, pending results of an investigation into "integrity issues." But he has not yet been informed by the inspector general's office of specific charges or questions related to the scientific integrity of his work, said Jeff Ruch, executive director of Public Employees for Environmental Responsibility.
On Thursday, Ruch's watchdog group plans to file a complaint with the agency on Monnett's behalf, asserting that Obama administration officials have "actively persecuted" him in violation of policy intended to protect scientists from political interference.
Monnett, who has coordinated much of the agency's research on Arctic wildlife and ecology, has duties that include managing about $50 million worth of studies, according to the complaint, a copy of which was provided to The Associated Press.

Wednesday, July 27, 2011


As stated, the risks currently not priced or predicted by markets lie in Latin America.

Brazil’s real declined by the most in more than a month after the government said it will levy a tax on some investments in foreign-exchange derivatives, the latest step in a bid to stem the currency’s rally.
The real dropped 1.1 percent to 1.5556 per dollar, the biggest decline since May 11, from 1.5391 yesterday. It earlier fell as much as 2 percent to 1.5704 per dollar, the largest drop since June 2010.
Brazil took further action to end a rally in the real after efforts to weaken the currency this year failed to prevent it from reaching a 12-year high against the dollar yesterday. The real tumbled after Brazil authorized the monetary council to charge a 1 percent tax on certain derivatives operations and to raise taxes on futures operations.

Thursday, July 21, 2011


... "By the pricking of my thumbs, something wicked this way comes."
-From Shakespeare's MacBeth

The Bard's words hold true today. There is something afoot in the EU area to be sure, but the East is they key to things.

Wednesday, July 20, 2011

Tobin Squared

Tobin's tax on financial transactions takes a new, ominous turn.

The capture of capital and restriction of financial movement is becoming a comparative advantage among developed countries. This is not a welcome development.

EU builds case for finance tax ahead of draft proposals

Published 20 July 2011

If set at a low enough rate, a tax on financial transactions (FTT)
would hinder speculation on sovereign debt while avoiding a massive
relocation of banks to safe offshore locations, argues Michel Barnier,
the EU's internal market commissioner. Brussels is expected to present
plans for an FTT in the autumn.

However, the tax has one powerful opponent – the UK. Britain's
opposition has not wavered as the country's government is adamant that
it will not introduce new taxes at a time when banks are struggling to
prove their liquidity.

In spite of London's staunch resistance, the European Commission said
it will come up with a draft FTT in the autumn, arguing it will help
hinder speculation on sovereign debt.

The argument comes as eurozone leaders prepare to meet in Brussels on
Thursday (21 July) to agree a second bail-out plan to rescue Greece
from its mounting debt pile.

"We know it will be difficult, we know there needs to be unanimity
[among EU member states]," Commissioner Barnier told members of the
press recently.

But he thinks it is worth trying. "We believe that this tax is
economically sustainable by markets as long as the rate is modest," he
said. The tax, he added, would be "technically easy, financially
productive and politically appropriate" given the huge amount of
taxpayers' money that governments invested to rescue the banking
sector during the 2008 financial crisis.

Tuesday, July 19, 2011


One of the more important visual depictions of global instability is reproduced above.

The correlations are obvious.

The Recapitulator is sympathetic to the "youth-bulge" theories of conflict. It is a unfortunate coincidence that those most willing and able to resort to violence are simultaneously the most ill-equipped to temper an emotional response from a perceived threat.

The following quote from Pope Urban II, giving the boys a good send off on the eve of the First Crusade, is a perfect example:

"For this land which you now inhabit, shut in on all sides by the sea and the mountain peaks, is too narrow for your large population; it scarcely furnishes food enough for its cultivators. Hence it is that you murder and devour one another, that you wage wars, and that many among you perish in civil strife. Let hatred, therefore, depart from among you; let your quarrels end. Enter upon the road to the Holy Sepulchre; wrest that land from a wicked race, and subject it to yourselves."

In other words, don't waste your efforts among my jurisdiction by killing each other, go to another and kill that population (the "good" kind of murder!), which of course happens to coincide with my organizations goals.

Monday, July 18, 2011

Ping... my readers. Does the recent EU rate hike make any sense in any framework of economic or political thought? A last ditch attempt to establish some "hawkish" credibility in light of the current crisis seems too amateurish to comprehend.

Accuracy... a problem here. It would be impossible for an outsider to accurately calculate the inflation rate in China (much less GDP figures). "Real" Real GDP is likely zero or negative, and has been for some time.

BEIJING -- China could raise interest rates in coming months as it keeps monetary policy tight to tame inflation that is running at three-year highs and is still the biggest threat to its economy, a researcher at a government think tank said.
Chen Dongqi, deputy chief at the Academy of Macroeconomics Research, said he expects China’s consumer inflation to quicken to 6.5% in July from June’s three-year peak of 6.4%, before easing to 4.5% by December.

Mr. Chen’s call for more rate rises come at a time when some investors are speculating that a mild slowing in China’s economy, the world’s second biggest, could persuade Beijing to desist from further policy tightening.

“Compared with China’s consumer price index, China’s current interest rates are certainly not reasonable and require further adjustment,” Mr. Chen told Reuters in an interview.

Friday, July 15, 2011

The Biomimicry of markets

Feeding frenzies occur due to a large supply of available prey in close proximity to a large population of predators.

Generally speaking, the supply of prey declines rather rapidly during frenzies, leaving these periods as brief, intense interludes.

In markets, however, The ingenuity of man has concocted various ways to mask the decline in supply of available prey.

So it is with commodities, where supply seems endless, and Banks and commodity investment companies the world over selling multiples of contracts tied to the same basket of physical gold.

This will end very badly, and the final feeding frenzy period appears to have begun...a most dangerous time for any would-be predator caught in the fury.

EU Stress Tests...

...all important players receive a "passing" grade. How could it be otherwise? Markets will promptly ignore this and continue putting pressure on the entire area.

Thursday, July 14, 2011

In search of...

at a time when wise men peered
through glass tubes toward the sky
the heavens changed in predictable ways
and one man was able to find
that he had thought he found the answer
and he was quick to write his revelation
but as they were scrutinized
in his colleagues eyes
he soon became a mockery
don't tell me about the answer
'cause then another one will come along soon
I don't believe you have the answer
I've got ideas too
but if you've got enough naivete
and you've got conviction
then the answer is perfect for you

-Greg Graffin, from "The Answer"

There are many narratives that fit the current economic environment. Suffice to say, none of the prevailing and popular ones have any chance of being correct (popularity being a function of simplicity and ease of transmission, as opposed to inherent truth value). The Recapitulator hears any number of these narratives during the day, but has learned long ago (after rigorously scrutinizing these narratives, which all fail to withstand even the most cursory examinations) not to waste too much energy in dispelling them.

Hubris from the past...

..."we will succeed where everyone in history failed". It's instructive to revisit the euphoria which seeds its own destruction. 61 years of peace in Europe is unprecedented. The odds are against it continuing (I am prepared to admit "conflict" might be something other than conventional warfare, but the time of solidarity is past.)

"We are carrying out a great experiment, the fulfillment of the same recurrent dream that for ten centuries has revisited the peoples of Europe: creating between them an organization putting an end to war and guaranteeing an eternal peace. The Roman church of the Middle Ages failed finally in its attempts that were inspired by humane and human preoccupations. Another idea, that of a world empire constituted under the auspices of German emperors was less disinterested; it already relied on the unacceptable pretensions of a ‘Führertum’ (domination by dictatorship) whose 'charms' we have all experienced.

Audacious minds, such as Dante, Erasmus, Abbé de St-Pierre, Rousseau, Kant and Proudhon, had created in the abstract the framework for systems that were both ingenious and generous. The title of one of these systems became the synonym of all that is impractical: Utopia, itself a work of genius, written by Thomas More, the Chancellor of Henry VIII, King of England.
Today, the commencement {of the Council of Europe} is characterized by a timorousness which many people will find disappointing. In this period while our States have not yet consented to renouncing any part of their sovereignty, and, when they make international decisions, they do not submit themselves willingly to each other as an engagement that they are fully observing their decisions, the debates of the Parliamentary Assembly {of the Council of Europe} can still have a moral and psychological effect. At least I hope so. They can influence the Governments and national Parliaments but they will create by themselves neither rights nor obligations.

We are still at the start of things. We would do well to bridle our impatience. If not, we are likely to make the doubters more distrustful and what is more serious, endanger not only the experiment but also the whole idea of a united Europe.

At the signature of the Statutes of the Council of Europe, I recalled to everyone’s mind that that we do not yet have a definition of Europe as recognized by everybody. I believed that I was then able to claim that in thus laying the first bricks of an organization, Europe is now beginning to define herself, without the aid of scholars and academics, who I fear, will never be able to agree amongst themselves. ... I do not have any intention of drawing a geographical line of demarcation between Europe and ‘non-Europe’. There is another valid way of setting limits: that which distinguishes those who have the European spirit and those who do not.

The European spirit signifies being conscious of belonging to a cultural family and to have a willingness to serve that community in the spirit of total mutuality, without any hidden motives of hegemony or the selfish exploitation of others. The 19th century saw feudal ideas being opposed and, with the rise of a national spirit, nationalities asserting themselves. Our century, that has witnessed the catastrophes resulting in the unending clash of nationalities and nationalisms, must attempt and succeed in reconciling nations in a supranational association. This would safeguard the diversities and aspirations of each nation while coordinating them in the same manner as the regions are coordinated within the unity of the nation.

-Robert Schuman, 1949

Meanwhile... sleepy Belgium...

Today's rating action follows the corresponding rating actions taken by
Moody's Financial Institutions Group on Dexia Bank Belgium (A3 / P-1;
Stable). For further information on the rating action taken by Moody's
Financial Institutions Group, please refer to "Moody's downgrades Dexia's
main operating entities to A3 from A1; outlook stable " published on 8
July 2011. The rating of the notes is solely based on the guarantee
provided by Dexia Bank Belgium (A3/P-1; Stable) under the terms of the
transaction documents entered into for the purpose of the issuance of
such Notes. The rating of the Notes is therefore fully linked to the
rating of Dexia Bank Belgium.

Country Formation

Expect more of this, and from more developed parts of the world (whether Christined by the UN or not).

UNITED NATIONS — The United Nations has a new member — South Sudan.

The African nation, which gained independence Saturday, became the U.N.’s 193rd member by acclamation Thursday.

General Assembly President Joseph Deiss banged a gavel signifying South Sudan’s admission to the world body as diplomats burst into applause.

The country’s independence was the climax of a 2005 peace agreement that ended decades of civil war with the Arab-dominated north and called for a referendum in which South Sudan voted overwhelmingly for secession.

Wednesday, July 13, 2011


As I have intimated here, there must be entire warehouse complexes where Chinese "exports" reside.

China’s economy and industrial output expanded more than analysts predicted, driving up stocks across Asia as the nation maintains momentum after monetary tightening to cool inflation.
Gross domestic product rose 9.5 percent in the second quarter from a year earlier, the statistics bureau said in Beijing today, after a 9.7 percent gain in the previous three months. The median estimate was 9.3 percent in a Bloomberg News survey of 18 economists.
Industrial output advanced 15.1 percent in June, the most since May 2010, even after the central bank boosted lending rates five times since mid-October and lifted bank reserve requirements to a record. Premier Wen Jiabao said yesterday that stabilizing prices remains the top priority, after food costs soared in June.
“This data should dispel concerns over a hard landing in China,” said Wendy Liu, a Hong Kong-based analyst with Royal Bank of Scotland.

Tuesday, July 12, 2011

The Watchmen and the Hecatomb

"When we come to inspect the watch, we perceive that its several parts are framed and put together for a purpose, e.g. that they are formed and adjusted as to produce motion, and that motion so regulated as to point out the hour of the day...The inference, we think, is inevitable, that the watch must have had a maker; that there must have existed, at some time and at some place or other, an artificer who formed it for the purpose which we find it actually to answer; who comprehended its construction, and designed its use.

-William Paley, 1803

"Every individual is constantly exerting himself to find out the most advantageous methods of employing his capital and labor. It is true, that it is his own advantage, and not that of society, which he has in view; but a society being nothing more than a collection of individuals, it is plain that each, in steadily pursuing his own aggrandisement, is following that precise line of conduct which his most for the public advantage. The true line of policy is to leave individuals to pursue their own interests in their own way, and never to lose sight of the maxim pas gouverner (not to govern too much). It is by this spontaneous and unconstrained effort of individuals to improve their conditions, and by them only, that nations become rich and powerful

-J.R. McCulloch, 1830

The Graphic Novel "Watchmen" is an alternate-history tale set in the midst of a possible nuclear war between the United States and the Soviet Union. A group of super-heroes investigates a murder which improbably leads to a staged alien invasion that unifies the world by sacrificing the lives millions.

A "Hecatomb" is, in literal terms, a hundred oxen offered in sacrifice to stave off misfortune. Its meaning has (somewhat ironically) come to mean any large number of deaths that benefit the population as a whole.

In "Watchmen" this hecatomb was manufactured by the design of a very intelligent antagonist in order to save humanity from the even larger hecatomb that would have ostensibly occurred if global thermonuclear war had proceeded. The plan was carefully laid out with great foresight and detail. Loose ends were eliminated (hence the murder investigation). It is an amazing book that discusses, inter alia, the differences between folly by human design and folly by evolution. For example, humans have "evolved" the capacity for great intelligence and scientific achievement (like nuclear technology) but have not "evolved" the capacity to jettison base human desires such as Power, Lust, Control, Dominion, and perhaps even Racism (evinced by the staggering amount of nuclear weapons humans have manufactured).

This debate between design and evolution, of creation and spontaneity, is the prevailing issue of our species. It supersedes and penetrates all issues and fields, especially economic policy.

The God Complex and the Descent of Man

Politicians and policymakers tend to forget the lessons of antiquity and the wisdom of forbears, and especially forget (as it would mean the end of their profession) the inability of humans to "design" systems that achieve beneficial outcomes.

These thoughts form the basis for my "rule saturation" theory; the number of rules and laws that exist at the inception of any government is inversely proportionate to the number of years that government will exist. In other words, it is best to begin any system with very general rules and let organic growth germinate among the substrata to create spontaneous and organic growth. If this sounds like evolutionary biology, that is precisely the right way to think about how society should work. Hecatombs are important. Businesses must be allowed to fail, and failure itself should not be looked upon harshly, for it is to everyone's mutual benefit ("everyone" narrowly limited to one sovereign nation) that this occurs. Distortions that interrupt the process lead societies to fall.

This is the ironic truth about the Watch. The artificer and the watch are serving others, and have themselves evolved though countless trials, errors, and iterations. The Watchmen, who would design the correct society with the correct policies does not have the cumulative wisdom to do so, nor the danger of the hecatomb to temper their ambitions.

Fed Minutes...

...the critical paragraph is below, in which the Fed admits its members have differing opinions on where and how the "recovery" progresses. Other comments highlight "transitory" factors in the economy (such as the reverberations from the Japanese quake).

Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. Others, however, saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labor and product markets than had been thought. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, may have temporarily reduced the economy's level of potential output. In that case, the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets. A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy.

(Very) General Commentary...

...written the previous Sunday Evening.

Full fathom five[1] thy father lies;
Of his bones are coral made;
Those are pearls that were his eyes;
Nothing of him that doth fade,
But doth suffer a sea-change
Into something rich and strange.
Sea-nymphs hourly ring his knell:
Hark! now I hear them — Ding-dong, bell.

-William Shakespeare

The world indeed is experiencing a Sea-Change of its own, and capital markets are beginning to understand the danger. Let me make this clear: Historically speaking, the following events have a way of unwinding with violent speed and ferocity.

This week is a pivotal one for global markets and the future of political stability in the Euro-area. Italian credit spreads (representing the difference in bond yields between Italian Debt and "safe" German Debt) have soared to record highs in the wake of the news that a partial default is on the table for Greek debt. This possibility is putting tremendous pressure on Italian financial assets. For example, UniCredit, Italy's largest Bank by assets, traded limit down and was suspended from further trading last Friday. Think of that. Imagine Citi or Bank of America's shares being suspended from trading, and you understand the plight of Italian finance.

The reason for this capital flight is as old as English Common Law. Why? Because it establishes a dangerous Precedent in how Euro-area debt will be handled, as it effectively opens the possibility of wide-spread default in several Euro-Area countries, in addition to causing a severe banking crisis as the debt from Greece and Italy are held by other Euro-area banks which must write down these losses. Let me reiterate that. If Greece, Italian, Portuguese, Spanish (and let throw in the Irish as well) debt can repudiated, these assets are worth far less than face value and the holders of that debt must take the losses. This creates a cascade of defaulting institutions far larger than the Credit Crisis in the U.S. that engulfed AIG, Lehman, Bear-Stearns, Merrill Lynch, and countless other smaller firms.

Thus, with Italy boasting the highest Debt to GDP ratio (after listless Greece, of course) in the Euro area, markets have naturally smelled the blood in the water and have decided to sell first and ask questions later.

There are many fissures at the moment globally. But fundamentally, the problem is a lack of aggregate demand. This demand was supplied by the United States for most of the last 10 years, but present difficulties (to say nothing of impending budget cuts and tax increases) indicate that this will not return for some time. Again, this "sea-change" effects ALL global assets, from New York to Milan to Shanghai. The world is a much more politically charged place, as leaders in their respective countries vie for advantage, and Devil take the Hindmost.

This fundamental constraint is absent in the Euro-area, where member countries are effectively forbidden to take steps to alleviate the pain its constituents are experiencing through traditional methods. In the past, if Italy or Greece experienced this kind of financial pressure, they would devalue the Lira or Drachma, respectively, and inflate away their debt while at the same time repairing their trade balances through favorable terms of trade via a weaker currency. But they cannot do this. These countries desperately need EUROS to fund their short-term debt in an environment of economic weakness. Citizens are understandably angry that their leaders have failed to see this outcome and have effectively out-sourced the most powerful asset a country has: its sovereignty. This will have dire consequences and as such the end of the Euro experiment is either a drawn-out muddle or something far more ominous.

In this environment, U.S. assets have typically performed well, being the one port in the storm that boasts deep capital markets, relatively transparent financial statements, and a court system that ranks among the most fair in the world. Most importantly, it is the United States perpetual ability to reinvent itself in light of global demand, which is a story for another commentary.

There are storms ahead in these waters, best to return to port and re-schedule the junket for more favorable conditions.

Monday, July 11, 2011

Everything is under control...

...Like it has been for the past 6 quarters...

From Bloomberg:

European finance ministers revived the prospect of bond buybacks to ease Greece’s plight and declined to rule out a temporary default, struggling to contain the debt crisis as investors pounded Italy, the continent’s third-largest economy.

Prodded by investors and the European Central Bank, the euro’s guardians said a bailout fund set up last year may be used to buy bonds in the secondary market or enable Greece to retire its debt at a discount. They offered another cut in rates on its emergency loans.

As exploding bond yields in Italy and Spain brought the crisis closer to the heart of the euro area, Europe’s search for answers took it back to proposals that were scuttled by Germany earlier this year. After a nine-hour meeting, the 17 euro ministers issued a six-paragraph statement pledging to flesh out details of a new strategy to end the 21-month-old crisis “shortly,” without setting a timeline.

“There are a variety of ways of enhancing the flexibility,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters late yesterday after the ministers met in Brussels. Buybacks are “one of those. I would at this stage not exclude any option. But instead we are exploring these possibilities.”

Wonderful commentary... AEP making the rounds. Full Article Here.

It will also take a total purge of the ECB's leadership, which clings
to its madcap doctrine that monetary policy can be separated from
other emergency operations, and which chose last week of all moments
to raise interest rates again and kick Spain in the teeth. It did so
knowing that the one-year Euribor rate used to price more than 90pc of
Spanish mortgages must rise in lock-step. As one Spanish commentator
put it, the Eurotower in Frankfurt should be torn down, and salt sown
in the ground.

If the governor of the Banco de Espana really endorsed this rate rise
(supposedly "unanimous") he should be hauled before the elected Cortes
and ordered to explain such locura: if the EU authorities object, they
should be told in crisp terms that Spain is a great and ancient
sovereign nation facing a national emergency and will do as it sees

Where is the inflation threat? The eurozone's M1 money supply has
contracted on a month-to-month basis over the past two months, with
sharper declines in the periphery. Annualized M1 growth is falling,
not rising: it was 2.9pc in March, 1.6pc in April, and 1.2pc in May.
Broader M3 grew at a rate of 2.2pc over the past three months.

The PMI data for Italy and Spain have dropped below the recession
line. The Goldman Sachs global PMI indicator shows that 80pc of the
world is tipping into a slowdown, including India and China. Taiwan's
bell-weather exports to China sank 12pc in June from the month before.

The calamitous US jobs data released last Friday leave no doubt that
the US remains trapped in depression. Broad U6 unemployment rose from
15.8 to 16.2pc in June; the numbers in work fell by a quarter million
to 153.4m; the average time without a job reached a fresh record of
39.8 weeks; hourly pay fell; hours worked fell; the
employment/population ratio crashed to new lows of 58.2pc.

This is not a time for the ECB to raise rates. It has repeated the
error made in mid-2008 when it tightened into the final phase of an
oil shock, when half the eurozone was already in recession. Once is
careless, twice is unforgivable.


...In Argentina, it appears they have been taking a cue from the Chinese in speech regulation.

Avoiding criticism is simple: decree it illegal and file charges resulting in fines and possible jail time. This is not exactly the type of action that soothes the nerves of already cautious a country that does not have the most favorable of records.

July 11 (Bloomberg) -- Argentina stepped up its pressure on economists who say the government has underestimated inflation in its official reports for more than four years by filing criminal charges against research company M&S Consultores SA.

Interior Commerce Secretary Guillermo Moreno filed charges against M&S on July 8, saying the company stood to profit by claiming prices in South America’s second-biggest economy are rising faster than the 9.7 percent annual rate reported by the national statistics institute. In February the government began fining economists 500,000 pesos ($121,000) for saying prices were rising as much as 25 percent per year.

“The false information generated by the consultant, intended to benefit not only the company but agents in the financial market who are clients of the company, with extraordinary profits, does damage to consumers and the state,” according to a statement on the government’s website. “If M&S were successful in convincing the community of the veracity of its inflation, we would have an annual adjustment of between 12 percent and 23 percent over current values.”

Sunday, July 10, 2011

More of the same...

What does the below do to the productive nations assets and liabilities? Why stop at a number? Why not just guarantee all sovereign debt, start writing checks, and see where that leads instead of harboring cosmic uncertainty?

July 10 (Bloomberg) -- The European Central Bank is seeking
to have the euro-rescue fund expanded to include help for Italy,
Die Welt reported, citing unidentified “high ranking” people
at central banks.
The fund may have to be doubled to 1.5 trillion euros
($2.14 trillion) to cover a crisis in Italy, the ECB said
according to the German newspaper.
Central banks are no longer ready to buy government debt,
so the rescue fund should take on that task instead, according
to the bankers, Die Welt said preview of an article for
tomorrow’s edition.

Why oh why...

...don't these people listen to me?

European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.
The new strategy, to be discussed at a Brussels meeting of eurozone finance ministers on Monday, could also include new concessions by Greece’s European lenders to reduce Athens’ debt, such as further lowering interest rates on bail-out loans and a broad-based bond buyback programme. It also marks the possible abandonment of a French-backed plan for banks to roll-over their Greek debt.

The Chinese Problem... a nutshell.

The biggest of the separate investment companies set up by the
municipal government here is an entity known as Wuhan Urban
Construction Investment and Development, created to help finance
billions of dollars’ worth of projects, including roadways, bridges
and sewage treatment plants.

According to city records, Wuhan U.C.I.D. has 16,000 employees, 25
subsidiaries and $15 billion in assets — including the possibly
inflated value of the land itself. But it owes nearly as much, about
$14 billion.

“U.C.I.D. is heavily in debt,” a company spokesman, Sun Zhengrong,
conceded in an interview. “This may lead to potential problems. So we
are trying to make some adjustments.” He declined to elaborate, saying
the state company’s finances were “our core secret.”

Europe's vulnerable underbelly...

...another continuing series...

SYDNEY, July 11 (Reuters) - The euro fell to fresh two-week lows versus the Swiss franc and U.S. dollar in Asia on Monday in the lead-up to an emergency meeting among European leaders worried that the debt crisis was spreading to Italy, the region's third largest economy.

Italian bond yields soared to euro lifetime highs on Friday, raising fears that Italy, with the highest sovereign debt ratio relative to its economy in the euro zone after Greece, could be next to suffer in the crisis.

The Financial Times reported some EU leaders were considering allowing a selective default by Athens to put its debt on a more sustainable footing.

The euro last traded at $1.4213 compared with $1.4245 late in New York on Friday, having dipped to an early low around $1.4200. Traders noted buying interest near $1.4180, which should help keep intact the $1.4190-1.4210 support area for now.

Friday, July 08, 2011

As I have said...

...the real problem is Italy.

Snippet From The Financial Times today...

European shares dipped on Friday as fears of eurozone sovereign debt crisis contagion hit Italian financial stocks, some of which were briefly suspended on Milan’s FTSE MIB index for excessive losses.
Trading was resumed, however, and by late morning UniCredit was down 4.5 per cent to €1.28, Intesa Sanpaolo shed 2.5 per cent to €1.69, while insurer Unipol fell 4.6 per cent to €0.35.

Italian yields hit nine-year highs as investors dumped the country’s sovereign bonds for fear the crisis would hit its shores, even perhaps ahead of Spain. Of major concern to investors is Italy’s 120 per cent debt-to-GDP ratio.
“The signal that is being sent by the bonds of Italy and Spain where price action is suggesting that market contagion concerns might be shifting to Italy and skipping Spain,” said Divyang Shah at IFR Markets.


Regardless of the validity, veracity, and viability of current ratings agencies, questioning their continued existance merely because you disagree with their conclusions sounds like something akin to local Chicago politics.

BERLIN, July 7 (Reuters) - Eurogroup chairman Jean-Claude Juncker said on Thursday he was in favour of having a European credit rating agency and that it was not right to downgrade countries like Portugal just as they were implementing reforms.
Juncker, joining the ranks of policymakers who have criticised rating agencies, said they would lose relevance if they continued to act like they have been.

Wednesday, July 06, 2011

Platitude of the year...

...has to be "Risk On". This phrase is typically conjured up amongst the CNBC crowd to describe any day when the stock market is up from the lows of the previous day.

But of coursed, "Risk On" as some sort of palliative measure to signal an "all go" to (primarily retail) investors is just silly. All investments...let me repeat that...ALL INVESTMENTS contain "risk". To say that "risk is off" and that means that investors shift assets into bonds and such does not imply that these are completely safe instruments.

Would it be any more instructive if someone said "Beta ON!" or "Variance and Standard Deviation measures GO!"??

Quote of the Day

"We're not sure the model is predicting the outcome,"

From an article published in American Banker describing the FHA's attempts to restore equilibrium to the Housing Market by putting caps to debt/income ratios when making loan approvals.

Tuesday, July 05, 2011

Debt Ceiling

Of course there will be a compromise. Unfortunately, a deeper understanding of the purposes of taxation and monetary operations will not be a by-product of the discussion.

What are "Taxes"? They are a demand management tool. They do not "raise revenue" for the government to cover operational costs. The level of taxation is off-set by a given size in government. The change in taxes at the margin reflect immediately actionable demand management tools.

What is the "National Debt"? Its an interest rate management tool. It regulates the price of money. The level of debt is somewhat inconsequential as the total level of "debt" outstanding is exactly (as an accounting identity) equal to private saving of dollar denominated financial assets.

Both of these definitions changed categorically with Nixon's repudiation of the Gold Window.

What is "Government"? Its a desire transmission mechanism. It aggregates desires and transmits the output as economic activity and (often) aggression. This has never changed.

Knowing these simple defintions allows one to take a sober and cynical look at all this sturm und drang that we hear on a daily basis from various competing interests.

Victory lap

Readers here knew to be aware of the likes of Nicholas Taleb and Bill Gross proclaiming the death of Treasuries. These reports have certainly been premature. Long ago I wrote about the great Rate Compression, and the danger of deflation given my view of the Fed's misguided monetary policies, and how rates would not, could not rise for years given prevailing economic conditions.

This compression will continue, but there will be plenty to say about up-coming macroeconomic themes and effects given the news in Europe, and the coming conflicts in Asia.

(From Bloomberg)

After failing to predict this year’s Treasury rally, Wall Street’s biggest bond traders are sticking to forecasts that government bonds will fall as the economy recovers and concerns over a European debt crisis recede.
Yields on 10-year Treasury notes will rise to 3.5 percent by the end of 2011 from this year’s low of 2.84 percent on June 27, according to a Bloomberg News survey of the 20 bond dealers that serve as counterparties to the Federal Reserve in its open market transactions. The higher rate is still only half the 7 percent average on the securities over the past four decades.
While Speaker of the House John Boehner says the country is broke, and the Federal Reserve has flooded the financial system with dollars, U.S. debt has returned 2.09 percent since December, including reinvested interest, almost triple the 0.7 percent for government bonds worldwide, according to Bank of America Merrill Lynch index data. Yields near record lows have frustrated fixed-income investors looking for more return.
“People make comments that rates can’t stay this low because there is sticker shock when they look how far we’ve come,” said Jeffrey Schoenfeld, a partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. “But we are in a moderate growth recovery with little evidence of inflation pressure and the Fed in no hurry to change its stance. The path of least resistance is very low” rates for a long time, he said.

The problem with Libertarians...

I am certainly sympathetic to the movement, having self-defined as "Libertarian" in the past. However, the major difficulty I have with free-market Libertarian purists is that they assume no cumulative effects and no concentration of power over time for repeated transactions...that relationships do not matter, and that free sovereign individuals will simply contract with one another ad infinitum without any nefarious concentration of wealth and/or power that would seek to propagate and protect itself, to the detriment of competitors and free markets.

There have never been free markets, and there never will. Prescribing as "ideal" something that is impossible given human nature is neither wise nor helpful.

One need only look to this. Its the Unites States International Trade Commissions Harmonized Tariff Schedule. 99 Chapters of entry barriers, protected industries, competitive advantage, and monopoly protection.

However, all this being said, a piecemeal approach, with plenty of "sunlight" and free examination will yield the best results. This is the primary reason why I have been warning against China for years. It will take decades for historians to understand the scale of corruption that must have germinated during its export boom.

Saturday, July 02, 2011

Distinguished Professors...

...of The Recapitulator's Alma Mater state formally what I have said here for years.

So what to do? Prepare for the worst. Europe needs to expunge the rot from its banks so that the inevitable write-downs do not imperil its financial system. Sovereign debt and sovereign exposure must face large capital buffers. Sovereign debt must be marked to market. Banks must run serious stress tests to find implicit sovereign exposure. Banks with inadequate capital must raise it, find buyers, or reorganize. If that means bailouts of "systemically important" banks, then governments must do so, face their taxpayers, and make their regulators explain how they let this happen.

Sovereign defaults often follow financial crises. But with a more proactive policy, any European sovereign defaults need not create a second financial crisis.

Friday, July 01, 2011

Self-Awareness... sometimes being "aware" of the problems of your own creation. Using the passive voice effectively for this propaganda, the premier does nothing to forestall the continued erosion of confidence the world holds for China.

"If corruption does not get solved effectively, the party will lose the people's trust and support," warned Hu Jintao, the party's general secretary and China's president in a 90-minute speech that was televised across the nation.

Addressing hand-picked delegates in the Great Hall of the People in Beijing, Mr Hu's anniversary speech came at the end of weeks of "Red" propaganda aimed at boosting the standing of the party that was founded in Shanghai in 1921.

The party's 80 million members have been urged to sing "Red" songs extolling the virtues of the Communist revolution and stirring up nationalist sentiment in the major economic achievements of China over the last three decades of 'reform and opening up'.

Mr Hu acknowledged in vague terms the mistakes of the Party's past which include the 'Great Starvation' of 1959-62 in which 30m-40m Chinese died, and the political civil war that was the Cultural Revolution of 1966-76.

"In some historical periods, we once made mistakes and even suffered severe setbacks, the root cause of which was that the guiding thought then was divorced from China's reality," he said.

"Our party managed to correct the mistakes by the strength of itself and the people, rose up amid the setbacks and continued to go forward victoriously." Focusing on the future, Mr Hu said that China's headlong economic growth had thrown up "all kinds of conflicts and problems", including a yawing rich-poor divide, environmental and social pressures.

"The party is soberly aware of the gravity and danger of corruption that have emerged under the conditions of the party being long in power," Mr Hu said.

"If not effectively curbed, corruption will cost the party the trust and support of the people. The whole party must remain vigilant against corruption." However Mr Hu made no mention of the kind of institutional reforms – a freer media, a more independent judiciary, strengthening civil society groups - that many analysts inside and outside China argue are essential to combat the cronyism and corruption that polls show anger ordinary Chinese.