Monday, April 30, 2012
Global financial assets, as a group, will be more valuable in 20-30 years than they are today.
This assumption is very unlikely to be true.
We are living through an era of decline and turbulence.
The global system is failing and the magnitude, scale, and frequency of future disruptions (due to inevitable financial, environmental, etc. trends) will be greater than anything we have ever experienced historically.
As a result, it’s very unlikely that global scale financial assets will be more valuable in 20-30 years than they are today.
Impeccable logic. Assume the consequent, throw in some assumptions ("inevitable trends"!!) that already prove what is to be proven, then BAM!! Q.E.D.
Dear Readers...whenever you see the word "inevitable" please raise your Bovine Scatology meters (in classic "Spinal Tap" style) to 11 before concluding what you just read was either true and/or informative.
Readers here will note my differences with Niall Ferguson, and once again I must take issue with his line of thought.
In a recent interview, he puts forth the disconcerting notion that America is drifting toward a Welfare-type state where risk-taking is frowned upon and incentive structures are tilted toward general poverty. He bases his conclusion on a series of anecdotes and analogies from the past.
In addition to the above conclusion-based arguments about the future of the United States, he proceeds with the following:
"It would be very surprising if Brazil was to fall back. The costs of being Venezuela or Argentina are too obvious to anybody in the region, and the benefits of being Brazil are even more obvious. Not only for Brazil, but quite a substantial number of the Spanish-speaking countries—Peru, Chile, Colombia, Mexico—the picture is sustained institutional improvement, with a long way still to go. Compared with where these countries were 20 years ago, they are closer to rule of law. If you had invested in those countries 10 years ago, you would be in a much better place than if you had invested in North America. I'm cautiously optimistic about the region."
This is a curious statement. While it is true in a strict sense that Peru, Chile, Columbia and Mexico have experienced good returns in the past 10 years. In the past 5, they have not gone so well, and going forward, where is capital likely to flow? And, given Mr. Ferguson's penchant for historical citation, how many examples in history can be recalled with a similar sequence of "sustained institutional improvement"?
As for Europe, I increasingly believe that it must fight a war (either civil or against some other country or bloc of countries) to gain any legitimacy or engender some spirit of solidarity among its incredibly varied citizenry. Doubtlessly, the Kakistocracy has thought of this, and this remains one of my concerns going forward for regions adjacent to the EU area.
Meanwhile, Japanese and U.S. bonds continue to strengthen, in complete contradiction to Mr. Ferguson's continued calls for a "debt crisis" that relies on the same incorrect model of National Accounts being equivalent to Household accounts. Any analysis that does not acknowledge the crucial nature of sovereign currency issuance will be doomed.
Oh well, I Suppose I should expect nothing less given the less than critical nature of this interview...with hardball inquiries that focus the mind like this:
Can you liken this to anything in history?
Saturday, April 28, 2012
Friday, April 27, 2012
Once the Great Rate Compression unwinds and capital costs return to historical levels, it will be akin to witholding a drug from a group of addicts. You quickly see who enjoys a stronger will and stronger physical constitution. The coming years will test every government and culture on the planet.
Within the decade, we should see the first proxy wars in Africa. Most likely, they will be waged between the United States and China, but Russia is also a possibility. Businesses that specialize in weaponry, transportation, logistical assistance, etc. should do very well given newfound interest in Sub-Saharan Africa. In a gold rush, it is better to sell shovels to the prospector than engage in prospecting, and the U.S. understands the Achilles heel of all developing nations: raw materials. Guaranteeing access to these markets and providing security services for same remains a growth business for able sovereigns.
I can't stress this point enough: the only nation on the planet who can provide these services for anyone and anywhere at any time is the United States. In times of economic stress (and the conflict that comes with it) these services increase in value. Ask yourself, dear reader: Are the coming 10 years likely to be more peaceful than the previous 10 years?
The U.S. should sharpen its "Obama Doctrine" with respect to Latin America after Obama's victory in October. This strategy synergizes well with U.S. African interests and prohibits any ideological (read: Communist or the quasi-pseudo faith worshipped in the PRC) discord in its geological neighborhood. I have no doubt the current administration will have a far larger Foreign Policy presence in its second term.
The U.S. practices a military policy of "stratego-diplomacy" and "optical containment" by demonstrating its military capabilities from Australia to the Malacca Straights to the South China Sea while simultaneously employing a liberal trade policy. This will eventually neutralize the China threat entirely because China is competing on one metric (cost). However, in the short term China remains an emaciated junky that consistently runs to its dealer when it needs a fix. As for regional conflicts, North Korea is an easy target for China. The ideological currency gained from "freeing one's communist brethren" would do wonders to satiate an angry and skeptical domestic populace. It would also save the embarrassment (and threat) of a united Korea.
France faces a difficult time. With regional rivals quickly reverting back to historical "normalcy", its ability to legislate and demand asymmetric terms out of proportion to its importance is coming to a close. This may change, if France sees itself as a security guarantor for Eastern Europe and the Caucasus. Providing regional services would be of great benefit to that nation, especially considering Germany seems unwilling to engage in one of its traditional national pastimes.
So, we do indeed live in interesting times. Emerging Markets will become squeezed by more aggressive nations until the security contractors arrive. The U.S. benefits from all this and will not experience the inflation that so many have called for. Other developed nations (the entirety of the EU without Germany, who will most certainly leave the Euro) most certainly will.
April 27 (Bloomberg) -- The Bank of Japan expanded its plan for government-bond purchases by 10 trillion yen ($124 billion) after the world’s third-largest economy showed signs of slowing and lawmakers pressed for more aggressive steps.
The BOJ will boost its asset-purchase fund to 40 trillion yen by June 2013, compared with the previous target of 30 trillion yen by year-end, it said in a statement today in Tokyo. A separate central bank program providing funds to banks was pared by 5 trillion yen amid lackluster demand for loans.
Governor Masaaki Shirakawa was under pressure to act after a group of lawmakers proposed overhauling the BOJ’s governing law to ensure steps to end the deflation afflicting the nation for more than a decade. The BOJ today said today its 1 percent inflation goal will be achieved before too long, a prediction of victory that undermines the impact of today’s stimulus, according to Credit Suisse Group AG’s chief Japan economist.
“The effect of these positive actions could be completely erased,” said Tokyo-based Hiromichi Shirakawa, who worked at the central bank before joining Credit Suisse. “It’s like the BOJ said it’s going to press on the accelerator and they suddenly hit the brake hard.”
Thursday, April 26, 2012
..."Stratego" was an early gateway into more challenging strategy games for many youths (myself included) growing up in the 1980s, and involved moving chess-like pieces in a fairly straightforward manner to destroy your opponent. Lying and cheating are somewhat encouraged in the game and "disagreements" occur often given the rules of the game and the average age of its participants.
Wargames have always been a part of play for young people, but in today's world of nuclear weaponry and intercontinental missile systems, there is a diminished respect for the subtleties of troop movements and logistical reconnoiter.
So, enter the "Naval Exercise" or modern day wargame as a means of effective communication to an adversary as to your intentions with reasonably peaceful effects.
I would be remiss in not bringing the most expensive wargame ever to your attention and its political uses (in light of the initial spectacular disaster).
In any case, here we are, playing Stratego once again. Full article here.
Vietnam and the United States on Monday began their annual naval exchange near a former U.S. army base in Danang city amid mounting tensions over competing sovereignty claims in the South China Sea.
With salvage and disaster training as well as a performance from the military band, the schedule of events seems harmless enough. However, some observers say the activities are an intrinsic part of a delicate diplomatic balancing act over contested territory in the South China Sea.
This year's event is larger than in 2011, with 1,400 personnel and three ships, including a guided missile destroyer, said Lieutenant Commander Mike Morley who attended the opening ceremony
Officials believe they have enough legal leeway to relax budget deficit targets for eurozone states without violating the Stability and Growth Pact, though the plans risk a serious showdown with Germany. "The Stability Pact is not stupid. There are elements of flexibility when growth is lower than expected," said a senior Commission strategist.
Monday, April 23, 2012
Sunday, April 22, 2012
A major debt crisis may be hiding behind China's speedy economic growth and could cause its economy to collapse, warns a chief economist at Shanghai Securities Co, saying the central and local governments in China have incurred enormous debts. If these hidden debts are taken into account, total debt could be 68.33% of China's gross domestic product, higher than the alarm threshold of 60% set by the international community.
A Shanghai Securities Co research report said China's cumulative internal and external national debt was 6.75 trillion yuan (US$1.07 trillion) at the end of 2010, while its hidden debts were 10.94 trillion yuan (US$1.73 trillion).
Hidden debts refers to debts for which governments assume responsibility of repayment in case of default. For instance, debts incurred by the Ministry of Railways, shortages in social insurance funds, and nonperforming assets of state-owned banks and financial institutions are typical hidden debts.
Thursday, April 19, 2012
Judging from a recent series of scathing speeches by one of the PLA's top generals, details of which were obtained by , it can't: The institution is riddled with corruption and professional decay, compromised by ties of patronage, and asphyxiated by the ever-greater effort required to impose political control. The speeches, one in late December and the other in mid-February, were given by Gen. Liu Yuan, the son of a former president of China and one of the PLA's rising stars; the speeches and Liu's actions suggest that the PLA might be the site of the next major struggle for control of the Communist Party, of the type that recently brought down former Chongqing party boss Bo Xilai. Liu is the political commissar and the most powerful official of the PLA's General Logistics Department, which handles enormous contracts in land, housing, food, finance, and services for China's 2.3 million-strong military.
Wednesday, April 18, 2012
WASHINGTON (Reuters) - The United States on Wednesday threw its support behind a bid to boost the International Monetary Fund's financial resources, signaling greater satisfaction among Group of 20 nations with Europe's efforts to resolve its debt crisis.
The U.S. government will not chip in more money of its own, but warm words from Treasury Secretary Timothy Geithner for commitments by others may clear a path for G20 nations meeting this week in Washington to agree on a way to bolster the IMF's war chest.
The idea is to bulk up so the Fund so it can aid non-European countries that get caught up in the maelstrom emanating from the euro zone.
Monday, April 16, 2012
April 16 (Bloomberg) -- Treasury 10-year note yields dropped below 2 percent for a second day amid mounting speculation the European sovereign-debt crisis is intensifying, increasing investor appetite for the safest assets.
Yields on the benchmark note touched the lowest level in more than five weeks even as a report showed retail sales in the U.S. rose more than forecast in March. Spanish bond yields reached a four-month high before debt auctions this week. A separate report showed manufacturing in the New York region expanded in April at the slowest pace in five month
Saturday, April 14, 2012
Now, 10 months on from the beginning of our conversation, we have plenty of evidence on my side of the ledger. The question is, where does the capital flow now, and what are the effects? Forget China overtaking the United States by 2030...I doubt it will remain a "Country" by then.
We must think in variant terms here. It is during these times in history that the political geography re-forms form from economic tectonics.
The People's Republic made the same mistake Russia did. They tried to compete myopically in an arena where they enjoyed a temporary competitive advantage. This advantage faded over time and caused more and more destabilization.
In the U.S.S.R.'s case, it was nuclear and conventional armaments using a surplus of Physics genius. In the P.R.C., it is Economic development via low labor costs and zero respect for engineering rights and intellectual property laws.
But we see the destabilizing effects once these advantages are ameliorated...we also see the danger of myopically pursuing the same strategy after your competitors have altered their own behavior. The U.S.S.R. continued to invest in nuclear weaponry while its populace was miserable. The P.R.C. continues to practice a mercantilistic "export, export, export our way to growth!" while its populace grows miserable.
They share similar processes in strategy formation. They will also share similar fates.
Wednesday, April 11, 2012
…In the United States, foreign investors have dominated the market for U.S. Treasuries in view of its large size and depth and its high perceived degree of safety. However, post crisis monetary stabilization efforts increased the prominence of the Federal Reserve as a holder of government debt.
In Europe and Japan, domestic banks have played an important role as sovereign debt investors, in each case accounting for about 25 percent of outstanding sovereign debt (Figure 3.6). In the United Kingdom, insurance companies and pension funds have been traditional holders of government securities, although the Bank of England and foreign investors assumed a more prominent role after the global financial crisis.
Tuesday, April 10, 2012
LONDON (Dow Jones)--European stock markets tumbled on Tuesday, as Italian and Spanish stocks posted steep losses and the government bond yields of both nations continued to surge on the back of rising sovereign-debt concerns.
The Spanish IBEX 35 index dropped 3% to 7,433.60, its lowest closing level since March 2009, as growing fears about the country's budgetary situation dampened investor sentiment. The Italian FTSE MIB index sank 5% to 14,458.88, which was the biggest one-day drop since the beginning of November. The pan-European Stoxx Europe 600 index closed 2.5% lower at 252.57.
TORONTO (Reuters)—Sino-Forest, the Chinese forestry company whose stock collapsed after a short-seller's fraud accusations, said on Monday [April 9] that Canada's top securities regulator found that its conduct ran afoul of sections of securities law pertaining to fraud.
The Ontario Securities Commission made its findings known to Sino-Forest by serving the Toronto-listed company and some of its current and former executives with enforcement notices, the company said in a statement.
Sino-Forest provided few details about the notices but said the matters in question were "of a serious nature." It signaled the OSC was considering formal allegations pertaining to false or misleading statements and possible fraud.
The case is the most prominent among a spate of accounting scandals that have tainted the image of Chinese companies listed in North America. The accusations have prompted trading halts, delistings, lawsuits and regulatory probes in both the United States and Canada.
Monday, April 09, 2012
“The relative risk of emerging markets compared with developed markets has changed,” said Campbell R. Harvey, a professor of international business at Duke University.
The average debt level of emerging-market countries like Brazil and China is far lower than that of developed ones like the United States and Japan, Professor Harvey said. In addition, emerging economies have continued to surge, even as much of the developed world keeps struggling with the aftermath of the 2008 financial crisis. Today, emerging markets represent about one-third of world G.D.P., and that share should increase in coming decades, he said.
On Wednesday, U.S. government lawyers filed an "amicus curiae" or friend-of-the-court brief, asking that the 2nd U.S. Circuit Court of Appeals reverse Griesa's rulings, according to documents obtained by Reuters and reported in the Argentine media on Friday.
The judge's orders "could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises," U.S. lawyers wrote.
Griesa accepted an interpretation of the "pari passu" clause included in many bonds that NML's parent company, Elliott Associates, used to disrupt a Peruvian debt exchange in 2000.
Friday, April 06, 2012
Thursday, April 05, 2012
Wednesday, April 04, 2012
Tuesday, April 03, 2012
Monday, April 02, 2012
Federal regulators are facing opposition from business groups as they try to develop a system to ensure that large institutions do not cause another financial crisis.
At issue is how regulators will determine what financial firms deserve the title "systemically significant." Lawmakers developed the designation after the financial crisis, when a chain reaction among financial firms nearly sparked a global panic.