Wednesday, February 29, 2012

Inspections for Food...

...followed soon enough by disarmament in exchange for financial stability? This is a positive sign for the U.S. and very negative for China. I am surprised similar aid was not immediately matched and exceeded by Beijing. Of course, that may still happen, but it is quite curious given the obvious risk (to China) of re-unification with the south.

Under an agreement reached in direct talks in Beijing last week, North Korea has agreed to allow the return of nuclear inspectors from the International Atomic Energy Agency, and has agreed to implement a moratorium on long-range missile tests, nuclear tests, and nuclear activities at Yongbyon, including uranium enrichment activities, the State Department said. In return, the United States will provide North Korea with a large food aid package.


...the great Satyajit Das, in a recent piece criticising The Economist newpaper's treatment of a special report on Financial Innovation:

"In David Hare’s play The Power of Yes, Adair Turner, head of the English FSA, is asked whether the fact that nobody understood what was going on was an issue. Turner responds that no, it wasn’t a problem as, for people like Alan Greenspan, it was just a matter of faith. The Economist follows their mentor’s modus operandi."

A matter of faith indeed. The Eunuch class in form and action. A new priesthood where order is not derived from the power of The Church and the Divine Right of Kings upon agrarian renters, but one of the comfortable and repetitive tranquility of commerce and trade.

So, what happens to world order if international trade is decreased by 5%? By 20%? By 50%?

Tuesday, February 28, 2012


...more hot potato. This time it likely to be (captive) national banks buying the corresponding issuance and debt. How that helps "real" capital ratios confounds me.

That cheering sound... hear is from the say nothing of the Defense Industry.


Monday, February 27, 2012

Its astonishing... long concepts take to percolate into established academia. All of the issues discussed here were both known and obvious 5 years ago when I started talking about them on this blog. Echo chambers are such an issue with economics and financial professionals that it is no wonder several of the more prominent figures have set up shop far, far away from both the ivory tower and the Big Apple.

Sunday, February 26, 2012

All the computers...

...have been turned off in the U.K. How else to explain this statement by the Chancellor:

Osborne: UK has run out of money

In a floating, fiat currency system, a Government cannot functionally "run out of money", nor does it need to "get" money from somewhere else in order to spend its own currency.

Its all spreadsheets now. I am not saying this current system does not have its problems, but "solvency" or running out of money is definitely not one of them.

Saturday, February 25, 2012

Nice research... my alma mater. A nice summary of the housing conundrum. I take issue with the IS/LM analysis given its various leads and lags as a framework for monetary policy. Still, a very good paper for those interested in the sector.

In this report, we focus on weakness in housing. Our analysis makes two broad points. First, weakness in housing and residential investment is a main impediment to a robust recovery. Second, problems related to housing have affected the transmission of monetary policy. More specifically, the unprecedented decline in house prices and residential investment has introduced headwinds that may require a more aggressive monetary response than in normal downturns. Further, problems related to housing markets may reduce the sensitivity of real economic activity to the interest rates that monetary policy can affect. Or in the parlance of textbook intermediate macroeconomics, housing problems have likely shifted the IS curve leftwards and steepened the slope of the curve by introducing a gap between policy rates and effective rates. For both of these reasons, problems related to housing introduce significant challenges to monetary policy-making.
There are six steps in our analysis

Friday, February 24, 2012


...I have already received several email inquiries regarding my previous email. I should elaborate.

By "Religion" I do not necessarily mean the major organized religions, although I think they are in the best position given their historical agility (yes, this may seem strange given the monolithic nature of the "Majors", but the very fact they have survived and prospered for centuries and Millenia is worthy of respect). It may very well be something else.

For example, an entirely voluntary set of rules and constraints, incentives and beliefs is possible with technology. Since true anonymity is increasingly more difficult on the internet (and the costs of preserving this status rising) a voluntary association based on simple morality and fellowship is possible. Punishment would be to simple be "excommunicated" from general connectivity. There would be little need for nation-state structures except for base physical needs such as roads and security. My position is not that nation states would cease to exist (again, they are needed for infrastructure and defense as those are very scalable services), rather, that a world where there are simple governmental structures that only provide minimal services with the remainder being the province of "Religion" or "Organized Fellowship" made possible by technology and more specifically the internet.

Perhaps I don't grok these concepts fully quite yet, but the risk that the current industrial and government imperial model will begin to erode is certainly there...and it would behoove the prudent and forward-looking investor (a group that I humbly include myself) to begin thinking about what the world would look like in that case.

Thursday, February 23, 2012

The paucity of definition...

"Capitalism" is described in part by Wikipedia thusly:

There is general agreement that elements of capitalism include private ownership of the means of production, creation of goods or services for profit or income, the accumulation of capital, competitive markets, voluntary exchange and wage labor.[3][4] The designation is applied to a variety of historical cases, varying in time, geography, politics and culture.[5]

Does this sound like the current or any former system that ever existed on this planet? It does not to this humble blogger. Private gain is inextricably aligned with public systems, especially with those of security and property rights. Arguing how powerful "Capitalism" is a model strikes me as silly. Its utility is ensconced within a context.

Capitalism, like "the rule of law" is a wonderful idea that is a useful fiction, and the Occam's razor that eviscerates these concepts is simply put: Power.

The transition from agrarian systems where wealth was based on territory to modern industrial systems accounts for all of the present changes we have seen (from use of violence, to technological advancement, governmental expansion, etc.) in the past 1000 years.

But technology moves quickly, which produces one of the ironies I see as a probable outcome for the next 200 years: The Internet and instant connectivity eroding sovereign nations and the globe reverting back to more "familiar" historical models for Power: that of Religion.

Religion holds the MASSIVE advantage over modern governments of not needing (as much) force and threat of force to coerce its members. It also does not need arbitrary geographical lines to exert influence. A perfect match for modern connectivity and it will compete very well against the sovereign nation-state dominance of the previous 300 years.

Don't they have children?...

...a continuing series. The FT reports the snippet below. This will not work, and is one of those "decaying ultimatums" that we have heard so often during the "negotiations" with Greece. It will be ignored in a month, forgotten in a quarter, and will never be heard from again in a year. All entirely rational. Next week we will hear of more Chinese "investments", designed to ensure there is at least one region in a plenum world that can act as vacuum.

to quote Machiavelli once again with regard to promises by sovereigns:

"The promise given was a necessity of the past, the word broken is a necessity of the present"

European creditor countries are demanding 38 specific changes in Greek tax, spending and wage policies by the end of this month and have laid out extra reforms that amount to micromanaging the country’s government for two years, according to documents obtained by the Financial Times.

The reforms, spelt out in three separate memoranda of a combined 90 pages, are the price that Greece has agreed to pay to obtain a €130bn second bail-out and avoid a sovereign default that the government feared would throw Greek society into turmoil.

Don't they have children?

The Recapitulator is, inter alia, a father, and wonders aloud if the ECB and various putative rescuers of all of the Grecian problems have children.

Giving special rights and privileges to one child among many only fosters resentment, jealousy, and imitation by the others. Other EU nations that are/will have solvency issues will demand the same treatment. So simply allowing Greece to haircut debt obligations without much in the way of consequence (save an austerity program that will force a drag on nominal and real GDP for perhaps a decade or more) only invites similar strategies from other nations. Its entirely rational.

No mere "optical backstop" will prevent such a cascade of events. The ECB and related parties must shower a Vesuvian equivalent of liquidity upon the Mediterranean (and Iberian, for that matter) peninsulas or be faced with petrified members that are frozen in time and unable to prevent social unrest.

Initial claims...

...come in well above the EOTers ("End Of TIme") estimates, causing a veritable avalanche of countervailing numbers that seek to dissuade the pubic falling prey to the lies and propaganda fostered by the government and other nefarious groups.

Charts that depict some indicator that, once before, portended doom and massive market declines will be supplied to the EOTers as succour for their ailment.

Once again, this is not to say some serious declines are ahead, but the reality that uncertainty is abating, that the world is re-capitlizing, and that economic conditions are slowly but surely improving seem lost in translation.

Wednesday, February 22, 2012

About that Global Warming...

...pride and prejudice on full display for all the world. I have written about Global Warming previously (I am not that well-versed in the literature, I only comment on its rather obvious place among the pantheon of intellectual bubbles) and this Gollumesque behavior of holding onto the "precious" no matter the costs rings just as true across the full spectrum of bubbles we encounter.

In a sensational public confession a leading climatologist, Peter Gleick has admitted to taking part in a high-profile climate emails forgery that has backfired; says it was done to intentionally injure skeptic foundation.

Britain’s pro-green national daily, ‘The Guardian’ was the first major newspaper to break the news that Dr. Peter Gleick had confessed to unlawfully libeling the prominent climate skeptic supporter, the Heartland Institute (HI). Heartland is a 28-year-old national nonprofit organization with offices in Chicago, Illinois and Washington, DC. Its mission is “to discover, develop, and promote free-market solutions to social and economic problems.”

Stopping short of specifically admitting he was the author of the faked Heartland Institute document, Gleick nonetheless spilled the beans that he was a co-conspirator, via the Huffington Post late last night (February 20, 2012). Gleick admits that his political bias on climate catastrophism led him to commit “ a serious lapse of my own and professional judgment and ethics.”

Scraping the bottom...

...of the economics barrel for additional justification for large deficit spending. A card carrying member of the Eunuch class argues that Federal spending should maintain is present course and speed by anchoring economic prosperity with overall life expectancy. This is tantamount to asserting taking a certain course in the Atlantic works equally well in the Pacific.

The line of thought is extremely disingenuous and speaks volumes about the "conclusion first, add premises as needed" thought processes that plague this and every other Eunuch class throughout history.

It begs the question of under what circumstances and data sets would increased Federal spending not be justified?

Economics is morphing into the modern corollary of the eugenics movement from the previous century. Proving everything, but falsifying nothing and enjoying a safe ontogeny in the womb of "official" policy. Let us hope they also share similar fates,

QE is dead, Q.E.D.

I think we have won here. Bond yields continue to remain low, inflation (ex-commodities, which is an entirely different problem) is subdued, and growth is slowly resuming. QE has done what I have said here from the beginning: zero. Simple asset swaps between zero coupon notes (cash) and low and declining notes (short-term treasuries) does not add net financial assets to the economic system.

Of far greater import are the collateral posts and various vehicles where illiquid (and that is taking a charitable view of them) asset are parked.

Tuesday, February 21, 2012

Moneyball and the Markets

I have seen recent writings drawing comparisons between investment activity and the actions which form the basis of the movie “Moneyball”. Much of these comparisons make sense: the search for metrics that accurately reflect reality instead of some cacophony of hunches driven by intuition and superstition.

However, the primary lesson to be learned from the book (or the movie, but as the saying goes, “the book was better”) is that ever-changing cycles move the “right” metrics so that most participants over-pay for the privilege of owning them.

For example, Billy Beane (the GM of the Oakland Athletics) used On Base Percentage as his governing metric and built a team that enjoyed massive success relative to its meager payroll. But, as competitors recognized something was afoot, his methods were quickly found out and he had to find different metrics that were undervalued just as On Base Percentage was becoming overvalued. Thus, Mr. Beane moved his value-finding operations to defensive metrics and purchased players accordingly. Competition had moved the game, raising the price of OBP and lowering the relative price of other abilities.

The same can be said regarding NFL receivers. The current meta of the game reinforces tall, large framed wide receivers such as Calvin (“Megatron”) Johnson of the Detroit Lions. These players have indisputable impacts on the game, but are becoming more and more expensive for teams to purchase. The value of their physical characteristics are becoming overpriced. Clones of Mr. Johnson (he is 6'5" and 240lbs.) will be found given current prices. They have to be. Supply is irresistably attracted to high demand and high prices.

Conversely, the leading wide receiver in the NFL in terms of catches actually caught, Wes Welker , fills out the uniform at 5'9 and 185 lbs and was paid $2.15 Million in 2011. His physical characteristics, and those receivers who are like him, are currently undervalued. How undervalued? Mr. Johnson was paid $8.75 Million in 2011, 4 times as much as Mr. Welker. Thus, teams now in the NFL who will be successful in the coming decade will begin to purchase smaller, more agile players who will gradually become more and more important to the NFL meta game until they become overpriced again and the cycle is reset.

In addition, these changes will effect defensive personnel as well. Tall cornerbacks are in huge demand at the moment to defend the latest influx of tall and physically imposing receivers and they have met with success. Once again, the supply will be found and the effectiveness of tall wide receivers will diminish. The best run NFL teams realize this already and will begin to outfit their team with smaller players that will simply be too agile for larger cornerbacks to contend with. (or explore other means to fatigue the larger players, such as No-Huddle offenses)

And so it goes with investing. By the time anyone reads in popular newsprint about the “newest” way to value stocks, it is too late. Moreover, this “new” metric is invariably just a re-packaging of something used many times in the past, to say nothing of the fact that often times they are floated by larger fish that wish to sell what is now overpriced. It was always thus.

The move.

The Recapitulator has moved his headquarters from Chicago to more tropical climates (whilst still being in the United States). More posts to follow after this week's celebratory parades and assorted revelry comes to a close in my new adopted city. It is Carnival, you know.

Thursday, February 09, 2012


...In Argentina, the "irregularity" of cash use in the economy must be addressed. Never a good sign.

The government will restrict daily cash transactions to 1.000 Pesos
(231 US dollars) per person, down from 10.000 Pesos, according to a
statement in the Official Gazette. The measure affects activity in the
stock and bond markets, investment funds and in the futures markets.
Operations above the limit will have to be done through Argentine bank
accounts that are authorized by the central bank.

“They are forcing a higher level of formality in the economy, as cash
transactions allow more irregularities,” said Felipe Hernandez, an
analyst at RBS Securities Inc. in Stamford, Connecticut. “This is in
line with other measures to prevent money laundering, for which the
government has been under a great deal of pressure.”

Monday, February 06, 2012


...were those carrier groups at again?



...capitulation is never a good sign, no matter what bias (bearish/bullish/neutral) you have. The next two months look set for a return of volatility.

Strategists at the biggest banks are capitulating on their bearish
forecasts after the best start to a year for global stocks since 1994
and gains of more than 7 percent in emerging-market currencies.
Just two weeks after saying that investors should “remain cautious,”
Larry Hatheway, the chief economist at UBS AG (UBSN), raised his
recommendations on global shares and high-yield bonds in a Jan. 23
note to customers entitled, “Wrong, but not too late.” Royal Bank of
Scotland Group Plc (RBS), and Benoit Anne, the global head of
emerging-markets strategy at Societe Generale (GLE) SA, said their
estimates for developing nations were proven wrong.

Kindly move your export demand meter...

...a continuing series...

Feb. 6 (Bloomberg) -- Chinese Premier Wen Jiabao raised the prospect of contributing to the euro-area’s bailout programs, telling Chancellor Angela Merkel that China may be prepared to assist in resolving its debt crisis.
The Chinese government is considering funding options for the temporary European Financial Stability Facility and its permanent successor, the European Stability Mechanism, through the International Monetary Fund to help stabilize the monetary union, Wen said yesterday after meeting Merkel in Beijing. China has previously said that it needs more detail on any plan to contribute funds to the euro area.

Thursday, February 02, 2012

Kindly move your export demand meter...

...back to its previous setting.


Wednesday, February 01, 2012


Given the size of government that we have (theoretically at least) "agreed" to. This is a drag on aggregate demand that we certainly don't need right now.

If current laws remain unchanged, federal revenues will grow by almost
10 percent in fiscal year 2012, to a total of about $2.5 trillion, the
Congressional Budget Office (CBO) projects. Those revenues will equal
16.3 percent of gross domestic product (GDP), substantially above the
range of 15.1 percent to 15.4 percent of GDP seen in the past three
years, though still well below the roughly 18 percent of GDP that
revenues have averaged over the past 40 years (see Figure 4-1). Almost
all of the projected growth in revenues relative to GDP in 2012 comes
from changes in tax rules that have already occurred or that are
scheduled to occur this year under current law. The most notable are
the acceleration of businesses' tax deductions for the depreciation of
new equipment into 2011 and 2012 (which reduced revenues to a greater
extent in 2011 than it will in 2012) and the scheduled expiration at
the end of February 2012 of a 2 percentage-point reduction in the
payroll tax rate for Social Security.