Friday, December 21, 2012

Galbraith's Bezel

So I recently saw the film "Prometheus".  Its interesting, no doubt, (R. Scott does not make uninteresting anything) but the suspension of disbelief was unfortunately punctured by several instances that would only make sense if humans were not humans.  But I will not spoil things for the uninitiated.  Keeping an open mind with respect to multiple interpretations is a healthy thing.

And so that wonderful spacecraft known as "Galbraiths Bezel" is about the land squarely upon the AU platform.  There will be much braying about the definition of a "safe" asset from people who put a significant portion of their savings (and it appears to me that the retail investor, as always, is left holding the bag) into gold and securities and financial instruments with a claim on the returns derived from gold holdings (yes, it is laughable that anyone would simply trust gilded financial institutions to buy and hold anything when prices drop substantially).

So here come the lawsuits.  Oh, I could name some of the culprits most likely to receive indictments/wells notices/congressional summons/etc.  But who wants to provide spoilers to a rapidly unfolding plot?  Just sit back and enjoy.

Tuesday, December 18, 2012


Gold is showing weakness.  If you took my advice years turns out using "real life" risk metrics you would of had a rough time!  Still, this atavistic fascination with something produced by other countries (thereby guaranteeing its non-use by the U.S. in terms of a currency or "store of value") has had a great run.  But all those shops you see in everydayUSA promising Gold as a great investment should have tipped you off that the smart money has left this trade long ago.

A restless night for Shalom...

...this is not the kind of result Bernanke wants to see.   More evidence that the monetary channel of "stimulus" is broken, something I have repeated here for years.  This is a major reason why deflation is should be of primary concern to the U.S. economy, and its interesting to note the policy recommendations and "debates" concerning solvency continue to get first-page treatment from the media and the political class.

But my use of "the political class" should clue you in to why that is, dear reader.

So perhaps he is sleeping very well tonight indeed.

Deposits at U.S. banks exceed loans by an unprecedented $2 trillion as the threat of a slowing economy tempers borrower demand and lenders preserve tightened standards.
Cash deposited at firms from JPMorgan Chase & Co. to Bank of America Corp. expanded 8.7 percent this year to a record $9.17 trillion through Dec. 5, Federal Reserve data show. That outpaced a 3.7 percent gain in loan assets to $7.17 trillion. The gap between what banks take in and lend out has surged since October 2008, the month after Lehman Brothers Holdings Inc. collapsed, when loans exceeded deposits by $205 billion.

Thursday, December 13, 2012

In an seemingly innocuous...

...yet highly pretentious article (read below...I have no idea how that sentence cleared the editors), it appears the IMF has decided to play a game that is analogous to the U.K.'s antiquated Knighting system e.g. granting a title that is meaningless but somehow bestows promotional value to the recipient.

There are no true "reserve currencies" without a powerful military.  It has always been thus.  A "new era in world money"?


LONDON (MarketWatch) — The Australian and Canadian dollars, the
world’s leading commodity-rich currencies, are being formally
classified as official reserve assets by the International Monetary
Fund, marking the onset of a multi-currency reserve system and a new
era in world money.

In a seemingly innocuous yet highly portentous move, the IMF is asking
member countries from next year to include the Australian (US:AUDUSD)
and Canadian dollars (US:USDCAD) in statistics supplied by
reserve-holding nations on the make-up of their central banks’ foreign
exchange reserves. The technical-sounding measure, reflecting growing
diversification of the world’s $10.5 trillion of reserves, is likely
over time to exert wide-ranging impact on world bond and equity

Sunday, December 09, 2012

For those...

...who are shocked (SHOCKED!) by the recent indictments/arrests/inquiries/etc. of prominant Hedge Fund managers, I direct you to this post by yours truly.

Tuesday, December 04, 2012

Where are they...

...a continuing series.

Where are the pundits who called for shorting Treasuries and informed the unwashed masses that a debt crisis was imminent?

Not on this blog, which has consistently pointed out the unique position of the U.S. relative to the rest of the world.  Global debt is not a fungible item only differentiated by price and yield.  There are massive liquidity and instability risks that ONLY (at the present time) the U.S. can ameliorate.

From Bloomberg:

Even as U.S. government debt swells to more than $16 trillion, Treasuries and other dollar fixed- income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds.
The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co.

Monday, December 03, 2012

A paper...

...discussing the unique characteristics of U.S. debt relative to the alternatives currently available.  This is precisely what I have been arguing with respect to the Date Rating Agencies.  There is no more unique "currency" in the world than U.S. debt and the following snippet from the paper echoes points made here for the last 5 years:

My only addendum would be that the author understates the soft power of U.S. debt and its coercive effects.

From Hamilton’s time to the present, the U.S. national debt has been viewed as much more than a means to finance the government beyond the means offered by taxation and money printing. By creating a class of creditors dependent on the federal government for debt payments, it became a cement of the American union of states. It was a currency that could be used to pay for shares in the first central bank as well as for the purchase of the Louisiana territory. It attracted foreign capital to an initially capital-poor nation. It furnished an outlet to return federal budget surpluses to the nation’s capital markets. It was used to back currency issues of national banks. It could be tailored to provide investors with appealing types of assets, to their own and the government’s advantage.
In our own time, the U.S. debt is once again held widely around the world. Perhaps it could become a cement of the world economy, as it once was a cement of the American union. Such an outcome depends, however, on whether it is managed as carefully and creatively as it was during the first two centuries of U.S. history.

Thursday, November 29, 2012

The Pendulum... swinging violently towards Russian with respect to world power.  The current manifestation of united China has reached and passed its apex, and the illusion of control appears to be torn asunder.

Many, many rumors swirling around Russia and shipments of arms and currency to the Middle East.  I expect the State Department to re-arm itself once again for a drawn out conflict with a resurgent Russia.

What would the world do without an Anglo-Saxon-Russo rivalry?  This has been occurring for centuries now.  In previous epochs, the riches of India was the prize and formed the skein of the "Great Game" played between Russia and the British Empire.  Now, the Middle East is in play.

And, similar to the "Great Game" the locale of battle was a pretext for future ambition.  It was India then.  It is Africa now.

Tuesday, November 27, 2012

A broken identity

Savings = Investment

This misleading little identity is one of the foundations in economics and serves as a bulwark in GDP accounting (Consumption + Investment + Government Spending + Net Exports = GDP).

And yet, "Savings" in aggregate, has very little to do with Investment in our modern fractional reserve Banking system with a floating currency.  Rather, "Investment" is driven by much more complicated set of inputs.

Over the weekend I listened to a discussion regarding Keyens's "paradox of thrift".   As a preface, no, this is not my idea of a well-spent weekend.  It happened to que up on the ubiquitous MP3 player while I was on a ladder painting a 14 foot ceiling, and, thus sequestered, I decided to make the best of the situation.   During this gripping conversation, one of the interlocutors stated that the paradox did not exist because more money would be saved, creating larger amounts of Investment...S=I.

However, Investment has nothing to do with the net dollars people and institutions deposit in banks.  Investment is dictated by return characteristics and market powers.  This is because if a bank sees a profitable lending opportunity (risk adjusted through whatever metric you wish to use), it simply creates a deposit in the lendees name and "poof".  INVESTMENT.  There is no "Savings" involved nor are "Savings" some sort of gravity that prevents deposits from shooting currency into orbit.  It is ex nihilo creation of currency.

This is why credit cycles have much more impact on monetary creation than Business cycles.  Attraction, formation, stability, instability, destruction.  Rinse and repeat.


The Saga continues.

HAMBURG, Germany (Reuters)—The United Nations' maritime court in Hamburg said on Wednesday [Nov. 21] it will hold hearings on Nov. 29 and 30 into Argentina's demands that Ghana free an Argentine naval ship stranded in the African country due to a court order brought by bondholders.
The ARA Libertad tall sailing ship, a naval training vessel, was detained in Ghana's eastern port of Tema on Oct. 2 at the request of hedge fund NML Capital Ltd., which says Argentina owes it $300 million on bonds in default.

Thursday, November 22, 2012

What could possibly...

...go wrong?

CAIRO — Egyptian President Mohamed Morsi took extensive new powers for himself Thursday, freeing his decisions from judicial review and ordering retrials for former top officials, including ex-president Hosni Mubarak.
The decree, issued a day after Morsi won international praise for fostering a cease-fire in Gaza, appears to leave few if any checks on his power. The president said all of the decisions he has made since he took office in June — and until a new constitution is adopted and a parliament elected — were final and not subject to appeal or review.

Lets us hope...

...that this highly contested transfer of a Billion dollars remains peaceful.  To be the manufacturer and final arbiter for global rule-sets is an awesome power.  A precarious time indeed to be bearish for the U.S.A.

As for Argentina, they will pay.  Then they will slouch into authoritarianism with yet more overtures concerning the Falklands.

BUENOS AIRES (AP) — Argentina has finally run out of wiggle room in a billion-dollar showdown over foreign debts unpaid since the country’s world-record default a decade ago.
Late Wednesday, a federal judge in New York ordered Argentina to pay immediately and in full everything it owed to what the Argentine president calls “vulture funds” that she blames for much of her country’s troubles. That adds up to $1.3 billion, due Dec. 15.
The judge also barred Argentina from paying other bondholders until it satisfies this judgment, putting the president’s back against the wall: if President Cristina Fern├índez doesn’t reverse her longstanding position and pay up, she risks setting off another Argentine debt default, this time totaling more than $20 billion.
“It is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes,” Judge Thomas P. Griesa of Federal District Court concluded. “After 10 years of litigation, this is a just result.”

Tuesday, November 20, 2012

On inflation... I have said multiple times on this blog, without wage pressure, the Fed will interpret commodity price increases as ephemeral and will continue with QE and other operations.

From a recent speech by Fed Chair Bernanke:

Because ongoing slack in labor and product markets should continue to restrain wage and price increases, and with the public's inflation expectations continuing to be well anchored, inflation over the next few years is likely to remain close to or a little below the Committee's objective.

...substantial slack remains in the labor market.

It appears...

...that my previous post possibly understates the current number of "backdoor" methods to acquire EU citizenship.  I was informed today that several EU member states have made it "much" easier to become a resident.  Citizenship to the EU is generally an administrative matter after that.

This will become very interesting once the tax avoidance and subsequent extradition demands come to issue.

Monday, November 19, 2012

When everyone is an expert... is.

No less than the World Bank now feels qualified to comment on the existance and the effects of Global Warming.   Intellectual bubbles, indeed.

The World Bank warned Sunday that if climate change isn't stopped or slowed down, the global economy will suffer greatly.
The report, titled "Turn Down the Heat," envisions a world that is warmer by an average of 4 degrees Celsius (7.2 degrees Fahrenheit). According to Jim Yong Kim, president of the World Bank, the report is meant to "shock [the world] into action."
"A 4 degree Celsius world is so different from the current one that it comes with high uncertainty and new risks that threaten our ability to anticipate and plan for future adaptation needs," he writes.
A global temperature increase like one estimated by the World Bank would lead to "the inundation of coastal cities; increasing risks for food production, potentially leading to higher malnutrition rates; many dry regions becoming dryer, wet regions wetter; unprecedented heat waves in many regions," water scarcity, and more natural disasters.

Much more...

...of this kind of policy measure is ahead.  Now all that is needed is a parallel financial system to compete with dollar hegemony and that will be something of extremely high value.  Liberal progressive types enjoy speaking about equality and the like, but it is a tautology that tax payments to Government are akin to equity investment...and the more shares you have, the more seats on the Board you can control.

It will become very interesting when tax refugees claim multiple residences to avoid payment (or worse).  Which is why the development of a competing system seems likely at this point.

 Madrid (AP) -- Looking for a new place to call home? Spain is hoping to give you a little bit more than a welcome basket of baked goods if you decide to move there. In an attempt to reduce the country's bloated stock of unsold homes, the government is set to offer permanent residency to any foreigner provided they buy a house or apartment worth more than €160,000 ($200,000).
     The plan, unveiled by Trade Ministry secretary Jaime Garcia-Legaz Monday and expected to be approved in the coming weeks, would be aimed principally at Chinese and Russian buyers.
Spain has more than 700,000 unsold houses following the collapse of its real estate market in 2008 and demand from the recession- hit domestic market is stagnant.
     Prime Minister Mariano Rajoy stressed Monday that the plan has not yet been finalized, but added that Spain "needs to sell these homes" and that getting them off the market could help revive the nation's devastated construction industry.

Thursday, November 15, 2012

The European Experiment... once again experiencing the anguish of atavism and Nostalgia.  There must be a 50 syllable German word that is suitable for this occasion, but I will refrain from being a Sehnsucht nach der Vergangenheit Komiker.    Democratic processes do not build nations.  Economic and cultural ones do.

Former Chancellor of West Germany Helmut Schmidt says Europe is on the verge of revolution as the confidence in European institutions has been shattered. 

According to a report published in the latest issue of Focus Online, which is affiliated with the renowned German weekly magazine Focus, Schmidt made the remarks during an important economic summit in the German city of Hamburg. 

Schmidt warned that public confidence in European governments and the European Union has been shattered and Europe is on the verge of revolution.

Letter to a client...

The following is a letter to a client I published recently.  I cannot emphasize enough the enormous advantage the U.S. enjoys relative to the rest of the world.  It is truly the age of Pax Americana.  Of course, as the great Lou Mannheim said in the movie Wall Street "Enjoy it while it lasts kid, cuz it never does".   The Nadir necessarily follows the Apex...even with Empires.

Its time to work on your handicap for the next 5 year period with respect to U.S. equities.

I see continued volatility for entirely fabricated reasons on U.S. equities through march of next year.  

Following this initial period, its time to just buy the market Beta, sit back and enjoy excellent returns for the next 5 years.

There are a number of reasons for this, chief of which is the the return of U.S. relative dominance as "the" global consumption and security engine, exploiting the enormous vantages in energy, services and even manufacturing that have been building up since 2007.  As the world shifts production away from China and to Africa and Central Europe, U.S. equities will emerge the winner.

Closer to home, net savings desires (by that I mean the trend to negative savings growth, i.e., borrowing for production) and a deficit that is closing the output gap is promising for equities.  Because of this, The Fed has a great deal of room before serious inflationary pressures are noticed...and the current Executive is certainly not going to reduce Deficit spending in any meaningful way.  Overall, credit structures are improving and even Housing is now starting to grind out a recovery.

Risks:  Euro area Implosion, Oil supply/demand shocks (a bit more unlikely now with U.S. dominance in the area) and Congress actually slashing the deficit.

Monday, November 12, 2012

When economic analysis...

is not tempered with political reality, you end up with statement like the below, which completely ignore the relative positions within countries and the resultant world order dominated by the U.S.A.  Once again I ask readers for their prediction of prospective volatility for NON U.S. assets (yes, I realize this question is recursive, but indulge me) in the next five years and the resulting effect for continued demand for U.S. financial assets.

There will be no "drastic cuts", even if that outcome materializes.  We once again return to basic monetary operations.  In an environment where the output gap is so massive (evidenced by unemployment, credit structure, Housing, etc.) additional deficit spending adds financial assets and assists the private sector in its recovery.  Now, there "will be" malinvestment in this process, but political mana from heaven invariably produces winners and losers.  What is important is the underlying institutional resilience that (ostensibly) operates to minimize the variance in this malinvestment.

It is an eventuality that doesn't just put fear into the hearts of Americans. In its annual report on the US, the International Monetary Fund (IMF) referred to the fiscal cliff as the largest risk currently facing America. Investors have already reportedly become more cautious in the face of the looming cuts. Should politicians not agree to a credible plan for reducing US debt, it could ultimately harm the credibility of the dollar as a reserve currency. More immediately, the IMF writes in its World Economic Outlook report published in October, the drastic cuts "would inflict large spillovers on major US trading partners." In other words, an already fragile Europe would become even weaker.

Wednesday, November 07, 2012

Just a reminder...

...all of this is wrong.  No discussion of sovereign debt should ever occur in some vacuum where a would-be sovereign investor only has a single choice of where to invest.  Relative return on (and of) capital should be the major consideration.  Furthermore, the debt to GDP ratios are not as important once we acknowledge that sovereign currency issuers offer an entirely different paradigm of economics than standard commodity-backed currency policy.

"The key measure on sovereign credit quality is debt-to-GDP, in the case of the U.S., it’s risen rather dramatically, from four years ago at 75 percent debt-to-GDP, to currently over 104 percent,” Egan told CNBC on Tuesday.
“The problem in the U.S. is that the debt has grown whereas the GDP has not grown. (While) the U.S. has had the benefit of being the major reserve currency, that only takes it so far,” he added.
Egan-Jones first cut U.S. credit rating to AA from AA+ in April, citing concerns over a lack of progress in cutting federal debt; and again in September, to AA-, triggered by concerns the quantitative easing from the Federal Reserve would hurt the country's credit quality.

A turn for the worse...

These things can unravel quickly.  China is behaving like the Communist Party knows precisely what is coming, and is planning furiously to intercept any form of civil unrest through whatever draconian methods that will suffice.

from AEP of the Guardian:

The contours of China's excess are by now well-known. Investment reached a world record 49pc of GDP last year, a level unseen in other Pacific tigers during their growth spurts. Consumption has fallen to 37pc of GDP, from an already very low 48pc a decade ago.
Negative real interest rates and restrictions on investing abroad forced savings into a housing bubble, pushing home to income ratios to 16 to 18 or even higher in Beijing, Shanghai, Tianjin, and Shenzhen.
As premier Wen Jiabao likes to put it, China's economy is "unstable, unbalanced, uncoordinated and ultimately unsustainable." It is why his allies in China's Development Research Centre (DRC) joined forces earlier this year with the World Bank to warn that the export-led growth model launched thirty years ago by Deng Xiaoping's is now obsolete.
The low-hanging fruit of state-driven industrialisation has been picked. Stagnation lies in wait if the country clings to the dirigiste model. "China has reached another turning point in its development path when a second strategic, and no less fundamental, shift is called for," they said,
"The forces supporting China’s continued rapid progress are gradually fading. The government’s dominance in key sectors, while earlier an advantage, is in the future likely to act as a constraint on creativity."

Tuesday, November 06, 2012

As expected...

..The incumbent wins, and the trajectories are more or less set.  I anticipate much bolder moves with respect to foreign policy and securing more favorable terms in the antipodes.  More on this to follow.

Monday, November 05, 2012

Yet another...

...paper making the rounds that demonstrates a particularly virulent form of mission creep infects the Fed. Maybe Seth Klarman is right with respect to the Fed's willingness to collapse "redistribution" and "social planning" into its well-known dual mandate of full employment and price stability. I will refrain from plucking the low-hanging fruit and comparing the language to Soviet-era planning conventions. (or maybe I won't...)

With the Fed going full "Unicron Mode" and gobbling up all the duration within sight, I suppose its quest to set negative real rates needs some intellectual support.  So this sort of tract is inevitable given current Fed policy.

An optimal level of capital exists for every level of social redistribution. When the young have more influence in the planner’s optimization problem, wages are high and the return from capital is low; and when the old have more influence in the planner’s optimization problem, wages are low and the return from capital is high. A critical feature of the planning problem we study is whether the planner can redistribute resources by means of lump-sum taxes or transfers. In the absence of lump-sum redistribution, we show that the planner might wish to use inflation or deflation to change the relative price of capital to induce young households to hold the right amount of capital. In general, the constrained redistributive solution is not fully efficient. That is, the implied level of savings is either too low or too high compared with the unconstrained efficient solution. In this sense, inflation or deflation will turn out to be an imperfect substitute for a full system of lump-sum taxes and transfers.

Wednesday, October 31, 2012


...will suffice when justifying current monetary policy.  The following quote is from the President of the Minneapolis Fed, toeing the line for whatever his chosen ministry wishes to do.

And thus, as if by magic, a "best possible forecast" is found to be more useful than a current measurement.  Presumably, these officials don't think the Efficient Market Hypothesis applies to inflationary measures, nor do they believe that current markets in TIPS discount expected inflation.

Basing the Fed reaction function (and subsequent incentive set for the greater economy) on hand-waiving forecasts is not exactly prudent given the Fed's less than perfect record of forecasting the economy.

Current monetary policy is typically thought to affect inflation with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy using our best possible forecast of inflation, not current inflation.

Tuesday, October 30, 2012

Well then...

...let the qui bono theories commence.  On the eve of Halloween, no less.

WARSAW (Reuters) - Polish investigators found traces of explosives on the wreckage of the government jet that crashed in Russia two years ago, killing Poland's president and 95 others, daily Rzeczpospolita reported on Tuesday.
Without citing sources, the newspaper said prosecutors and explosive experts who examined the remains of the plane in Russia found signs of TNT and nitroglycerin on the wings and in the cabin, including on 30 seats.
Traces of explosives were also found in the area where the Tu-154 crashed during its approach to a small airport near the Russian city of Smolensk on April 10, 2010, the daily reported.


I made the point in a previous post that the assassination of U.S. personnel in Benghazi appeared to be a politically motivated, perhaps even personal, attack against U.S. presence there.  I made the point that there are historical echoes as well and made the comparison with Robert Burnes and the Empire of Great Britain.

Much more will be learned from this debacle, but one thing appears certain:  intelligence failures are inevitable on hostile ground and perhaps even more so on "friendly" ground.

More fallout from the events include the sacking of the AFRICOM commander in addition to sober conversations regarding the over-extension of U.S. political power without access to immediate and forceful military follow-up.

And of course the fact this intertwines U.S. interests with Africa as a whole is not lost here.  It now appears that whomever occupies the White House come November, the Obama Doctrine will still come to fruition, if not by overt design then certainly by necessity.

Sunday, October 28, 2012

Summing up monetary policy...

...and its inability to produce the desired effects the Fed wishes, a paper is making the rounds.

Finally, some tacit admission among academia that the bulk of fiat "money" is created ex nihilo via bank loans (and the corresponding deposits).  This implies monetary creation is much more a function of lending environment than interest rates or other factors.

In a financial system with little or no reserve backing for deposits, and with
government-issued cash having a very small role relative to bank deposits, the creation of
a nation’s broad monetary aggregates depends almost entirely on banks’ willingness to
supply deposits. Because additional bank deposits can only be created through additional
bank loans, sudden changes in the willingness of banks to extend credit must therefore not
only lead to credit booms or busts, but also to an instant excess or shortage of money, and
therefore of nominal aggregate demand.

Supply and demand...

Interesting article by Mr. Pinker in the New Yorker.  I tend to agree with some of his points, but the use of some sort of collective cultural memory when describing murder rates leaves much to be desired.  A more simple explanation lies in the demand for violence, which is likely constant with humans, and the ability to experience physiologically significant proxies that satisfy the urge.

I argue the advent of hyper-realistic video games satisfies the killing urge and the resultant sales of various military simulation games certainly gives credence that both the supply and demand are there.  Video games provide endless simulations that provide bloody restitution for various transgressions, and provide evolutionary "satisfactory" proxies for real conflict.

Admittedly, it’s hard to believe that today’s Southerners and Westerners carry a cultural memory of sheepherding ancestors.  But it may not be the herding profession itself that nurtures a culture of honor so much as living in anarchy. All societies must deal with the dilemma famously pointed out by Hobbes: in the absence of government, people are tempted to attack one another out of greed, fear and vengeance. European societies, over the centuries, solved this problem as their kings imposed law and order on a medieval patchwork of fiefs ravaged by feuding knights. The happy result was a thirty-fivefold reduction in their homicide rate from the Middle Ages to the present. Once the monarchs pacified the people, the people then had to rein in the monarchs, who had been keeping the peace with arbitrary edicts and gruesome public torture-executions. Beginning in the Age of Reason and the Enlightenment, governments were forced to implement democratic procedures, humanitarian reforms and the protection of human rights.

The Extraction...

...continues in the Middle Kingdom.  Readers here are not surprised.

From the New Yorker:

By all accounts, China today has a growing Swiss Factor. Uncle House, like many other accused officials, was found to have family abroad, some with Australian citizenship, a condition that makes it easier for them to flee if he gets in trouble. (Official records indicate that eighteen thousand corrupt officials have fled the country since 1990, taking with them a hundred and twenty billion dollars.)

And of course even Greenwich seems like a safe haven:

As China's economy is in its slowest expansion rate since 2009, some of the country's wealthier citizens are looking to invest their money overseas, in the shape of sprawling, expensive properties in Fairfield County.

"The upper middle class has a lot of disposable cash, but they're not sure about the political and economic future of China," Yang said. "So they're moving it overseas."

Friday, October 26, 2012


...and of course, as if written by a hollywood film writer, the obvious distraction tactic du jour follows...this would be hilarious comedy if it were not real life.

BEIJING, Oct 26 (Reuters) - China reserves the right to take strong
countermeasures if Japan "creates incidents" in the waters around a
group of disputed uninhabited islands in the East China Sea, a Chinese
vice foreign minister said on Friday.

"We are watching very closely what action Japan might take regarding
the Diaoyu islands and their adjacent waters," Zhang Zhijun said at an
unusual late night news briefing. "The action that Japan might take
will shape China's countermeasures."

Sino-Japanese relations took a dive after the Japanese government
bought the islands, called Senkaku in Japan and Diaoyu in China, from
a private Japanese owner in September, triggering violent protests and
calls for boycotts of Japanese products across China.

"If Japan continues down its current wrong path and takes more
erroneous actions and creates incidents regarding the Diaoyu Islands
and challenges China, China will definitely take strong measures to
respond to that," Zhang said.


...everything I have written in the past 6 years with respect to China, the following should not be surprising to anyone here.

China's foreign ministry has accused the New York Times of smearing the country by reporting that the premier Wen Jiabao's extended family has controlled assets worth at least $2.7bn (£1.67bn).

A spokesman, Hong Lei, said the report "blackens China's name and has ulterior motives". Authorities have also blocked the news organisation's main and Chinese-language websites and banned searches for "New York Times" in English and Chinese on microblogs.

"China manages the internet in accordance with laws and rules," Hong told reporters at a daily briefing when asked why the sites were inaccessible.

The New York Times reported that several of Wen's close relatives had become extremely wealthy since his ascent to leadership. But in many cases their holdings were obscured by layers of partnerships and investment vehicles involving friends, colleagues or business partners, it said, in a detailed and lengthy account based on an extensive review of company and regulatory filings.

A single investment held on paper by Wen's 90-year-old mother Yang Zhiyun – a retired schoolteacher – was worth $120m five years ago, the New York Times said. It added it was unclear if Yang was aware of the holdings in her name.

The report is embarrassing not only for Wen himself – who comes from a modest background and is widely seen as the sympathetic, populist face of the government – but for the party. It is the latest in a string of unwelcome revelations about the vast wealth amassed by those around senior leaders.

Thursday, October 25, 2012

Shocking the world...

...the "World Gold Counsel" recommends using gold.

Awhite paper released earlier this month by the World Gold Council (WGC) proposes that eurozone member States with significant gold holdings relative to their medium-term financing requirements – particularly Italy and Portugal – should consider gold as collateral for sovereign-debt issuance to reduce bond yields.
The paper, compiled by finan- cial consultancy Europe Econo- mics MD Dr Andrew Lilico, was commissioned by the WGC to challenge and assess the merits of its proposals relative to other suggested monetary policy tools, such as the European Central Bank’s (ECB’s) recently proposed Outright Monetary Transaction (OMT) programme.

What is the marginal effect...

...on bond prices when buyers may (will?) lose the ability to negotiate advantageous positions.  And furthermore, class, what is the marginal effect on the liquidity of said bonds when secondary ownership loses valuable embedded options (such as the option to seize property of x foreign country)??

An Institute of International Finance panel has suggested that governments insert clauses in the new bonds they issue, to prevent a small group of bondholders from seeking better terms than other investors in the event of a restructuring.
The IIF's Joint Committee on Strengthening the Framework for Sovereign Debt Crisis Prevention and Resolution recommended that sovereign issuers should incorporate collective action clauses with appropriate aggregation clauses containing detailed information on terms and conditions in bond documents.

Attention world.

What you thought was warfare is not warfare anymore.  The rules have changed.  This is a game-changer of the first order.  What good are nuclear weapons when the "launch" button is disabled?

The timing of this is quite auspicious as well, given possible budget cuts at the Pentagon.  But that is neither here nor there at the moment.  Foreign Policy is steeped in calculating power, ability, and willingness to use force...and the capability to disarm a sovereign nation with the payload of smart-guided missiles (and miniaturization must also be taken into account) is a potential instant revolution anywhere the U.S. wishes.

Boeing [NYSE: BA] and the U.S. Air Force Research Laboratory Directed
 Energy Directorate, Kirtland Air Force Base, N.M., successfully tested
 the Counter-electronics High-powered Microwave Advanced Missile
 Project (CHAMP) during a flight over the Utah Test and Training Range
 that was monitored from Hill Air Force Base. (credit: Boeing)

HILL AIR FORCE BASE, Utah (CBS St. Louis) — Boeing successfully tests
 a new missile that can take out electronic targets with little
 collateral damage.

The aerospace company tested the microwave missile last week on a
 two-story building on the Utah Test and Training Range where computers
 and electronic systems were turned on to gauge the effects of the
 missile’s radio waves, according to a Boeing press release.

The missile, known as CHAMP (Counter-electronics High-powered Advanced
 Missile Project), fired a burst of High Powered Microwaves at the
 building, successfully knocking out the electronic systems and
 computers, and even taking out the television cameras recording the

The Punctuated Obama Doctrine...

...I fully expect the incumbent to carry the election come November, and I also expect the nascent (and heretofore, admittedly, rather circumspect) Obama Doctrine to germinate into a full-scale policy response to increased resource competition in Africa.

But there will be punctuations in the Doctrine, which I have compared to an extension of the Monroe Doctrine of the early 1800s.  I expect areas that garner too much friction from Russia (THE antagonist for global competition in the next 20-50 years) to be quietly de-emphasized.

The Monroe Doctrine itself had such punctuations that produces far-reaching effects.  The Falkland Islands themselves were first occupied by Argentinian nationalists prior to being forcefully jettisoned by American personnel.  When the resulting vacuum was filled by the British, the Americans conveniently forgot about the strong rhetoric of the Monroe Doctrine.

Monday, October 22, 2012

Kafka... does indeed imitate art.

"I thought I would have been acquitted. I still don't understand what I was convicted of."

A group of six Italian scientists and a former senior government official have been sentenced to six years over their handling of the L’Acquila earthquale. A court found them guilty of multiple manslaughter over the 2009 quake, which left 309 people dead.

Thursday, October 18, 2012

Commanding attention...

One of the core competencies of popular mainstream economists is their ability to command attention from either their peers or the public at large. There are, of course different distribution functions for both groups (something Krugman noticed) but the point is that a vast majority of academic and popular research is devoted to bolstering the status quo.

This tradition is as old as humanity. How else to get noticed by potential patrons? Cardinal Richelieu was more subtle when he wrote "A defense of the principal of the catholic faith" directly after the French coup of Louis the 13th which marked his ascension. The formula remains the same: offer clever arguments that absolve potential patrons in hopes of a sinecure. Apologetics remains the most furtive grounds for "philosophy" and it's offspring Political Economy.


...note that when the meme of Chinese superiority with respect to "Capitalism" (whatever that it certainly does not exist on this planet) seeps so deeply into academia that someone sees the need for an ENTIRE BOOK bearing a preposterous premise, its only a matter of time before something dreadful happens.

While the West struggles, China's economy continues to grow. In her new book, Maonomics: Why Chinese Communists Make Better Capitalists Than We Do, Napoleoni charts the ascent of the Chinese economic miracle and the West’s misconception of China and its economy, even as we acknowledge its growing influence and importance. Are we witnessing the beginning of the collapse of capitalism and the victory of “communism with a profit motive”? What lessons in economic development can the West learn from China? Please join The Chicago Council and Loretta Napoleoni as she discusses the economic revolution that is shifting the balance of power to the East.

Wednesday, October 17, 2012


...and its inextricable links to Government, Power, and regulatory inertia.

Nice podcast discussing some of the history regarding NCAA and NFL football.

Tuesday, October 16, 2012

Moving right along...

...readers here read about this some days ago.  Familiar themes.

Last week U.S. defense secretary Leon Panetta warned that critical infrastructure such as power grids or chemical plants could be inactivated or destroyed by a cyber attack, and he pledged that the U.S. would "defend the nation in cyberspace" as it does on land and sea, in air and space.
But with the art of cyber detection and defense lagging far behind the sophistication of attacks (see "Hey, Hackers: Defense Is Sexy, Too"), the U.S. and other nations appear largely unprepared to rapidly detect and respond to an attack on critical infrastructure. That would make it difficult to respond with "decisive action" as Panetta promised, or even to know whom to retaliate against.
Working out the nature and source of an attack is particularly challenging for critical infrastructure systems, which are operated by tried, trusted, and consequently outdated software 

Monday, October 15, 2012

The spigot needs a new coupling...

...right on the heels of one of my posts that cites the WWI trench warfare tactics depicted in the movie "Paths of Glory", comes this gem of Keynsian ideology, so deeply ingrained in Fed thinking as to be gospel:

William C. Dudley, president of the Federal Reserve Bank of New York, made that point explicit in a Monday speech .
"Monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances," Mr. Dudley said.
He underscored the point later, saying, "With the benefit of hindsight, monetary policy needed to be still more aggressive."

Sunday, October 14, 2012


I would like another line plotted to measure illicit drug prices (indexed and adjusted for inflation), but we do get the general idea here.  Trench warfare tactics (such as those utilized in one of my favorite films, Paths of Glory) were more idiotic.

In terms of drug usage and demand, nothing has changed.

Saturday, October 13, 2012

A new level of Power... to attack and cripple your opponent with complete anonymity.  Fearing no reprisal, and causing your opponent untold frustration and embarrassment.

This is part of the "warfare" of the future:  the ability to destroy order and optical institutional backstops such as legal processes, open markets, electronic grids, etc.  The conquest of physical territory, heretofore the primary goal of military action, is now a distant secondary objective.

This is why the article below is of great importance in my thinking.  The relatively benign explanations (a HFT algorithm testing the markets) are not nearly as interesting as contemplating the implications of a foreign interloper executing what amounts to a massive DDOS attack on American exchanges, and doing so with relative anonymity.

It is also worth mentioning that the business model for many Fortune 100 companies are entirely dependent on internet connectivity, and the risks accompanying that depedenency (and the decidedly non-linear outcomes should problems materialize) have not, in my opinion, been accurately reflected in their prices.  The "known unknowns" have been computed in kind, but not magnitude.

Full article here.

A single mammoth mystery algorithm has set alarm bells ringing for market regulators and players, and underlined the market’s vulnerability to technology and the woeful lack of regulation on algorithms.
A single algorithm last week placed and cancelled orders on the Nasdaq accounting for 4% of all quoted traffic in the US. Not only this, it also accounted for a colossal 10% of the bandwidth that is allowed for trading on any given day.

Friday, October 12, 2012

Safe Havens... I have stated previously, those sovereigns which can guarantee anynymity and provide protection from "interlopers" and protect assets (whatever their origin) will enjoy such a windfall that it is guaranteed to happen.  The difficulty lies in establishing a credible capability of protection and secrecy. The U.S. is the monopoly provider of security (both physical and financial) in the world, but that of course comes with significant drawbacks.

But apparantly, even Ghana is no safe haven.

Nobel: Give it to the entire planet.

When 740 Million people and/or an entire continent receive the Nobel Prize, I think we can safely say the award is meaningless.  Historians of the future will look at this and snicker playfully when explaining just how ridiculous and premature all these calls of "peace" are fated to be.  The Nobel prize commission (or whatever it is) has been extremely successful in attaching itself to the latest fashions, as a cursory examination of recent winners has demonstrated the commissions remarkable ability to award a zenith prior to a precipitous fall.

Next up, the entire planet will receive the prize, and I eagerly await my award of .00014 Euros, which is probably the cost in ink of saying "NOBEL PEACE PRIZE LAUREATE" upon my resume.

full article here.

PARIS — The Norwegian Nobel Committee awarded its 2012 peace prize on Friday to the 27-nation European Union, lauding its role over six decades in building peace and reconciliation among enemies who fought Europe’s bloodiest wars, even as the Continent wrestles with economic strife that threatens its cohesion and future.

Wednesday, October 10, 2012

The Intellectual movement... denounce "short-term" and "myopic" thinking is reaching its zenith.  The concept that "long term" strategical thinking is more effective than a stranglehold on current measurables is somehow simply assumed.  The Soviets employed strategy that would take decades if not centuries to mature, for example.

And, as I have intimated before, what does an alternative to this "myopia" look like in real terms?  You are simply reclaiming lost power to management and other "central planners" and incentivizing "very" close ties to policy makers and other folks who can pull the strings of strategical planning.  Power concentrates much more quickly under these conditions, and that is hardly an ideal set of circumstances to encourage equitable competition.

From a recent Foreign Policy article: (the fact that foreign policy wonks would love a reality where strategical planning wins over "short-term" thinking is not lost on this reader)

Full article here.

The biggest problem facing the global economy is not climate change, trade imbalances, financial regulation, or the eurozone. It is short-term thinking. An epidemic of myopia has swept over the world in the past few decades, and it threatens our living standards like nothing else.

Tuesday, October 09, 2012

Sheik-mat for Syria?

"Sheik-mat" (The King is dead, in Arabic) and its English counterpart in chess "Checkmate" is a good way to describe the Syrian regime.  With Turkey at the door and the U.N. setting new records for obsequity, its only a matter of time for the latest installment of the Arab Spring.

ANKARA, Turkey — Turkey’s top general inspected newly deployed units on the Syrian border Tuesday following six days of firing by Turkish batteries against President Bashar al-Assad’s forces.
Turkey has deployed additional tanks, howitzers, and missile defense systems on the border since a Syrian artillery shell killed five people in the town of Akcakale on Oct. 3, prompting parliament to give the government a one-year mandate to send forces into Syria if necessary.
General Necdet Ozel, chief of the general staff, today inspected troops in Hatay province, which was hit by seven artillery shells or mortar rounds in the past week, state-run TRT television said.

Thursday, October 04, 2012

The Apologists...

...declare victory over the Global Financial Crisis...

The 2008 financial crisis posed the biggest challenge to the global economy since the Great Depression and provided a severe "stress test" for global economic governance. States rely on a bevy of institutions—the International Monetary Fund, World Trade Organization, and the Group of Twenty—to coordinate action on the global scale. Since the Great Recession began, there has been no shortage of scorn for the state of global economic governance among pundits and scholars. However, in this International Institutions and Global Governance program Working Paper, Daniel Drezner concludes that, despite initial shocks that were more severe than the 1929 financial crisis, the evidence suggests that these structures responded to the financial crisis robustly. 

Monday, October 01, 2012

Pandora's box

Reversion to immortality is an ability held exclusively by Greek Gods...certainly not nation states...

Euro zone sovereign bonds will be regarded as risk-free again when markets are convinced that the member states will stick to sound budget policies, European Central Bank Executive Board member Benoit Coeure said on Monday.

Friday, September 28, 2012

To laugh or cry...

...Ah, the travails of competent Government.  Fund and incentivize alternative energy sources for vehicular transportation, then propose Orwellian solutions to the "problem" of declining gas tax revenues.  Budget 300 Million for a special committee to investigate the feasability of such a system, then eventually say it was all simply some sort of mistake, but make the case that additional revenues would have to come from "somewhere".

It would be hilarious, if not part and parcel of modern Governance.

The White House on Thursday walked back a proposal to tax people based on how many miles they drive. 
The proposal was included in a draft of the administration's Transportation Opportunities Act, but a White House spokesman said it "was not an administration proposal." 
"This is not a bill supported by the administration," White House spokeswoman Jennifer Psaki said. "This was an early working draft proposal that was never formally circulated within the administration, does not take into account the advice of the president’s senior advisers, economic team or Cabinet officials, and does not represent the views of the president.”
The legislation the White House is distancing itself from calls for creating a Surface Transportation Revenue Alternatives Office within the Federal Highway Administration. It would be tasked with creating a "study framework that defines the functionality of a mileage-based user fee system and other systems."
House Transportation Chairman John Mica (R-Fla.) has indicated that he did not think a tax-per-mile proposal was politically palatable, but said Congress would have to look for ways to supplement declining gas tax revenues.

Thursday, September 27, 2012


Asian stocks rose as a drop in Chinese industrial profits increased
pressure on Premier Wen Jiabao to step up measures to support growth
in the world’s second-largest economy.

...various (and highly publicized) alterantive energy companies aside, which country has a more likely chance to engage in "malinvestment" given a stimulus package?  My guess is that any Chinese "stimulus" will enjoy the same efficacy and efficiency (and hey, since we are all Keynsians now, lets throw in "better money multiplier" too!) as aid to African despotic regimes.

Like Hayek said:

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last.

Tuesday, September 25, 2012

International Community

What does that mean?  If a nation controls the rules, currencies, laws, and holds almost the exclusive right to engage in warfare (while concomitantly holding the ability to guarantee physical, kinetic victory in war anywhere in the world in a matter of days), are the "members" of its flock a "community"?

Mind you, dear reader, I am making no judgements here.  This blog is about reality, not its obfuscation.

Washington, Sept 22 (PTI) The US supports Pakistan's sovereignty, Secretary of State Hillary Clinton said, reminding Islamabad that all sovereign nations carry certain obligations like preventing threats to neighbours and the international community.

    Substance over form

    With the constant rhetoric and political propaganda utilized to communicate the complete and total commitment of Euro-zone authorities in saving the Euro-zone from further crisis, you would think there would be less display of commitment and more explication of what precisely will happen given certain adverse events.

    All this display behavior has already been perfected by the animal kingdom.  One of my favorite examples is the Fiddler Crab, which simply displays the size of its main claw to potential rivals.  There is no communication regarding other factors (such as overall body mass, observable speed, etc.) its simply just "hey, look at this claw...might do some big damage".  I find this amusing for predictable reasons, as it parallels what the Euro-area chiefs are doing with predictable results.  They are waiving a big claw and proclaiming that is sufficient to silence the skeptics.


    Tremors going off all over the Sovereign map.  The historical fissures and fault lines await more of this tectonic pressure.

    Most vulnerable are those regions that enjoy a special status and are full of inhabitants that self-identify not as "x nation" but as "x people or ethnic group".

    MADRID - Catalonia government president Artur Mas has called early elections for the powerful northeastern region, a vote that will likely be seen as something of a referendum on independence from Spain.
    In a regional parliamentary debate Tuesday, Mas set the date for Nov. 25.
    Mas called the elections more than two years ahead of schedule after the central government in Madrid last week rejected a demand to grant Catalonia special fiscal powers.
    Days earlier, Mas led a massive rally in Barcelona that was seen as a show of strength for the region's pro-independence camp and a warning to Madrid.

    Monday, September 24, 2012

    Comparative Advantage... a concept as old as society.  One of the major themes in the coming decades will be the ability to supply "freedom" and "anonymity" for business and personal transactions.  This is becoming more and more difficult in most of the world, which is precisely where the value will come from.  The below is just an example.  Hopefully be this issue will attract the attention of the SCOTUS.  In the coming years,  there will be existing countries or newly formed sovereigns that will offer these services.

    Motorists can be held indefinitely at toll booths if they pay with large denomination bills, according to a federal appeals court ruling handed down Wednesday. A family of drivers -- Joel, Deborah and Robert Chandler -- filed suit last year arguing they were effectively being held hostage by the Florida Department of Transportation (FDOT) and the private contractor in charge of the state's toll road, Faneuil, Inc.

    Under FDOT policies in place at the time, motorists who paid with $50 bills, and occasionally even $5 bills, were not given permission to proceed until the toll collector filled out a "Bill Detection Report" with data about the motorist's vehicle and details from his driver's license. Many of those who chose to pay cash did so to avoid the privacy implications of installing a SunPass transponder that recorded their driving habits. They were likewise unwilling to provide personal information to the toll collector, but they had no alternative because the toll barrier would not be raised without compliance. FDOT policy does not allow passengers to exit their vehicle, and backing up is illegal and usually impossible while other cars wait behind. FDOT dropped the Bill Detection Reports in 2010.

    Friday, September 21, 2012

    Scenario planning

    One of the things I constantly do is think about the future, the way society will be organized, and the relevant conflicts and resources that will form the basis for the competitive actions of nations when defending their "interests".  This is similar to "brainstorming" in the creative fields with the only constraint being the usual limitations of human achievement.

    So, what are the implications for "the masses" when government no longer needs them for military applications or to produce the necessary amount of food to sustain a given population?  Throughout history, there has been this tension between ruler and ruled which was largely based on the use or threat of force by the general populace.  What happens if technological progress renders this tension impotent?

    This is a very serious question for the way sovereign nations will organize themselves for the future, and, given the technological advancement of the past 20 years, this is something to consider when investing for the long-term.

    Thursday, September 20, 2012

    From Dragon to Bear

    The biggest risks in the world have transferred from the "Paper Dragon" of China to Russia, which has played its hand wonderfully during this Arab Spring.

    As the direct beneficiary of marginal changes in Middle East oil demand, you can be certain that Russian interlopers have been operating in the region for some time in order to secure the necessary volatility.

    The situation is reminiscent of the events leading to the battle of Adwa, with Russia countering the West's influence whilst simultaneously securing pipelines and stable demand in China and Europe.

    Compared to the flailing responses of the U.S., these are masterstrokes.

    New Sovereign States

    I cannot verify this, but the below is not exactly a new experiment and is fraught with problems.  Chief of which is the expropriation (or "sovereign reversion risk" as the fledgling State is subsumed back into its "parent" once it has displayed sufficient economic activity)

    However, as I have stated here many times in the past, this type of activity will only increase as "Liberty" will have increased value as a "scarce resource" for countries and their citizens to exploit.  It is likely this flexibility in legal access and jurisdiction will have as much value as hard resources in the next 20-50 years.

    TEGUCIGALPA, Honduras (AP) -- Investors can begin construction in six months on three privately run cities in Honduras that will have their own police, laws, government and tax systems now that the government has signed a memorandum of agreement approving the project.