Thursday, May 31, 2012

Tails I win...

...heads your GDP falls...

Detractors of United States policy must be crestfallen with its stubborn adhesion as world hegemony.  It seems as though the U.S. is always ascendant regardless of economic and political cycles, and each time the U.S. appears on the verge of being suitably chastened, it once again ekes out victory.

The “decoupling” intellectual exercise that posited Emerging Markets as being on the verge of dominance is now exposed for its weakness.  Without increasing GDP, these countries quickly fall from grace as their institutions lack the capacity to handle any amount of social disorder.

With the recent GDP print of Brazil and associated rate cut, we are now seeing the next step in the development of country-formation and the fruition of the Obama Doctrine fully developed in the Antipodes.

One of the important observations to note is that global interest rates are the lowest in history (per capita if not on an absolute basis) and yet the globe is mired in deflationary pressures, contrary to classical economic theory.

With Argentina, Ecuador, Venezuela, Mexico, etc. destabilizing quickly, a region with a historically communist/socialist bent will experience a resurgence of such activity.  In a previous post, I opined that the U.S. activities with respect to the drug war have anticipated these events and have built a network of partners in order to guarantee stability in the area.

The economic pressure building in locales that have little experience or expertise in dealing with financial calamity and wealth destruction is enormous, and provides the U.S. with an once in a millennium opportunity to cement its position.

All the King's horses...

...a continuing series...

With GDP down, employment stagnant, housing flat, etc., etc., someone should declare the death of doctrine of "accommodative monetary policy" being a palliative measure of any substance.

Oh wait, maybe I just did.

The sound...

...of crickets chirping in the night.  All those fearless pundits who proclaimed the end of low rates and the flight of capital away from U.S. assets should be re-evaluating their assumptions regarding the global economy.  All this useless talk about America "printing money" is certainly not showing up in the yield curve.

More of the same...

"Financing" the budget deficit?  How long are we going to be saddled with this line of thinking?

TOKYO—Bank of Japan policy-board members expressed concerns that the central bank's massive purchases of government debt could be seen as financing the budget deficit, eroding confidence in fiscal policy and bringing about unwanted jumps in bond yields.
But meeting minutes from April 27 released on Monday also suggest the central bank may not have many alternatives to buying the government bonds—with little room left for purchases of riskier assets as it tries to pump more money into the economy in a bid to end deflation.

Vendor Finance... get the idea...

The drop in China’s exports caused by Europe’s debt crisis may affect whether Moody’s Investors Service raises the nation’s sovereign debt rating, said Tom Byrne, a senior vice president at the company.
Moody’s raised China’s foreign- and local-currency debt ratings to Aa3, the fourth-highest out of 10 investment-grade rankings, in November 2010. It is the only one of the three biggest credit-rating companies with a “positive” outlook, an indication the rating may be raised usually within two years.
“If you get a slowdown in exports, it feeds into domestic employment, into wages, into investment, so it would have wider ramifications,” Byrne, director of analysis for Moody’s sovereign risk group in Asia and the Middle East, said at a press briefing in Beijing today. “That’s the source of our new concern: What are the long-term implications of the continuing economic stress in Europe on China?”

Meanwhile... Zimbabwe...

ESIGODINI — Zimbabwe National Liberation War Veterans’ Association leader Jabulani Sibanda has vowed to take his campaign for Zanu PF to all the country’s 10 provinces despite protests by other political parties that he is promoting violence.
Sibanda, who is currently in Hurungwe, Mashonaland West Province, said his “revolutionary programme” was aimed at defending the country’s sovereignity.
“So far I have met over eight million people,” he claimed.

“The revolutionary programme is continuing and at the moment I am in Hurungwe. I will go around all areas in the country.”

Sibanda has been accused of harassing and intimidating opposition party supporters since the launch of his campaign two years ago in Masvingo.

But he denied the charge, saying: “It is a programme to defend the country’s sovereignty, and ensure quality development of people’s lives.
“You will notice that a large chunk of the country’s resources are currently controlled from outside by foreigners.

Falling on deaf ears...

...the lessons of broken monetary policy channels have not deterred Brazil it seems.  As discussed here on numerous occassions, such moves are deflationary and destroy yield income and associated marginal income.

Brazil's central bank cut interest rates on Wednesday for the seventh straight time to a record low 8.50 percent, moving into uncharted territory in a bid to shield a fragile recovery from a gloomy global outlook.
President Dilma Rousseff has made lower interest rates one of the top priorities of her government which is struggling to steer the economy back to the 4 percent-plus growth rates that made Brazil one of the world's most attractive emerging markets in the last decade.
The central bank's monetary policy committee, known as Copom, voted unanimously to lower the benchmark Selic rate 50 basis points from 9 percent, in line with market expectations.
"At this moment, Copom believes that the risks to the inflation outlook remain limited," the bank said in a statement that accompanied the decision. The statement used the exact same language as the previous statement when the bank cut the Selic rate in April.

Thursday, May 24, 2012

On The Law...

...about those balancing interests...I will have to delve into this a bit further, but the first reaction to a retrenchment of double jeopardy is not a positive one.  This example dovetails nicely with my previous discussion two posts ago. 

Once gain, bad facts probably make bad law.

WASHINGTON — The Supreme Court ruled on Thursday that a criminal
defendant may be retried even though the jury in his first trial had
unanimously rejected the most serious charges against him. The vote
was 6 to 3, with the justices split over whether the constitutional
protection against double jeopardy barred such reprosecutions.

Wednesday, May 23, 2012

The Return Chasers

"Storm chasing" has something of a cult following in the United States.  Every year, adventurous thrill-seeking people jump into heavily armored and modified vehicles for the express purpose of attempting to experience some of the most volatile weather the world has to offer. 

I have no idea what would cause a person to “want” to get as close as possible to a violent tornado system whilst still adhering to “safety standards”. 

We see the same thing with investors who pour over 1, 3, and 5 year returns from various funds.  This type of analysis is among the worst you can possible do given the mean-regressive nature of the vast majority of funds, and also because the business of mutual funds is structured to deliver benchmark beating returns.  Investors who do this are going right precisely where its most dangerous for future returns…they are The Return Chasers, and I have no idea what would cause a person to chase the self-published returns that suffer from “adverse selection” problems either.

On The Law

From Nebuchadnezzar to Gaius and Justinian, to the Napoleonic Code, to English Common Law, Germanic Codification, and all the way to present day U.S. jurisprudence, The Law is now experiencing another “epoch age”.   Questions about its purpose, source of legitimacy and structure of accountability will shape its future.  At this moment, however, Authority is the largest challenge to the rule of law.

And when I say “Authority” I mean people as opposed to laws.   One of the guarantees of Order is a lack of arbitrary and capricious enforcement of The Law.  Equality under The Law was certainly one of the original precepts guiding the Framers of the Constitution.

U.S. Jurisprudence dominates the world, providing security and order for millions of business transactions.  It serves as the “interpreter of last resort” with regard to most of the important laws on the planet.  It also serves as the repository of “Order” for much of Western Civilization.  The majority of business transactions on the planet takes place in U.S. currency and are guided by U.S. law.  U.S. military personnel protect the transport routes. 

With this awesome influence and power one would expect a symmetrical structure of accountability and responsibility, but unfortunately this is not the case.  Instead, we see a larger build-out of unrequited power by the Executive, with a legislative and Judiciary taking lesser roles.

But The Law’s ability to enhance private lives has taken on enormous new powers due to technological improvement and information technology.

So I anticipate The Law becoming more arbitrary and capricious in the future, as it is now even more inextricably linked to the political process.  The sheer volume of statutes, coupled with the futility of codification (due to a “balance of interests approach utilized by the SCOTUS and exploited by the Executive) provides a rich environment for political abuse and expansion of power.

One of the specific instances involves the current imbroglio over Argentinian Bonds issued under U.S. Law.  Several vulture funds have pounced and are attempting to attach assets or cash flows in order to satisfy their presumed status as “parri passu” non-subordinated debt holders.

Of particular interest to me is an Amicus brief filed by the State Department which introduces a balance of interests approach and seeks to include measures of these balances that satisfy their prerogative.  Specifically, it cites a “Foreign Policy” interest that, if satisfied, would effectively bring all international contracts under the auspices of the State Department (quite the power grab for the Executive) 

I expect this process to replicate itself throughout the world.  No force on earth moves opinion like economics (aggregated self-interest) At this very moment, anarchists and communists are attempting to assuage the populace of Greece that they have been bamboozled by usual coquetries of capitalist pigs and collaborative politicians.  Populism gives easy, packaged and replicable answers to problems.    Its simply the shape of the object they pick…the form does not change.

And so, with the Grand design experiments of Eurocrats proving once more that a nation creation is futile (I have argued privately that the Euro experiment mirrors that of The Berlin Conference…the artificial boundaries that “created” modern Africa have failed in a similar fashion to the artificial attractors that “united” Europe), we will see much more aggressive behavior concerning atavistic nationalistic concerns.  For example, the Falkland Islands are certainly at play.   This will be about assertion over any issues that are perceived as holding some national character.

In challenging times, men fill the resultant vacuums of power.  We have seen that this is a dangerous environment for The Law and its processes.  And one must observe that if The Law is only followed and enforced during times of calm, and jettisoned in times of calamity, what purpose does it really serve, and to whom’s benefit?


Readers here will note this process began years ago and is now bearning fruit.  The new competition for Africa is heating up.  From a recent report from a large American Investment Bank:

In the early 1990s, few European or American companies would have been quizzed on their strategies for China or Asia. Now it's often the first item on the agenda. Our investigation in this edition is into Africa, and it might provoke déjà vu: is now the time for multi-nationals to be investing in Africa? In short, our conclusion is yes. Africa's exceptionally robust growth over the last decade is probably understated (informal parts of economies are very big), but not being able to measure this growth precisely shouldn't detract from Africa?s potential, which is about much more than resources as it evolves and climbs the consumption, urbanisation and perhaps industrialisation curves that the BRICs have climbed. We believe meaningful opportunities for western consumer companies exist as Africa?s household consumption grow s rapidly (it is already greater than some of the BRICs) and that failure to invest now will see others rush in. Capital flows and trade flows into Africa are a microcosm of the changing world, with the BRICs already there, notably in commodities. We have interviews with investors and Standard Bank and Tiger Brands that paint a picture of rapid and misunderstood change, and pieces from our consumer staples, mining and insurance analysts that reinforce this

Inquisitorial Power

The Spanish Inquisition was one of the more ignominious moments in history, both for its brutality and its arbitrariness on behalf of the “State” and certainly demonstrates the folly of granting broad powers a State enforcement apparatus.  That The Inquisition was itself a pretext for removing undesirables from the population is well known.  What is not usually discussed, however, is why the mechanisms that granted The Inquisition “legitimacy” are very similar to the “legal process” that provides the social Order we experience in present times.

Today, we have something similar.  The physical damage (in the form of torture) has been replaced by a more “civilized” process of permanent removal from society.  Unwanted folks are simply processed out of existence, unable to affect the normal flow of commerce, and certainly not in a position to challenge the status quo, commercial or political monopoly, etc.  Foucault examined this phenomenon extensively.

The point that notions of “due process” are tenuous at best, and easily jettisoned if fear rules the mob.  The definitions underlying such notions can be easily circumvented.  In the case of The Inquisition, a confession was sufficient to “save” the condemned (regardless of physical damage dealt or the wether or not severely coercive techniqes were employed).  Today,  its “helping law enforcement” or “saving the children” that serve as catch-all legitimizers of ever-expansive authority.

And so it goes with the “War On Drugs”.  With the United States effectively acting as license grantor and as the local Pinkerton agency against would-be competitors (such as the current and present danger of medical marijuana growers in California and other places…a class of vermin that surely must be eradicated lest The United States of America cease to exist)

My stance on Drugs is fairly well known to readers here.   I put greater emphasis on freedom than on “public safety”.   However, the central question of the Drug War must be this:  Whom do you wish to make rich given a constant and immutable demand for drugs?  Americans or folks from other locales?  And why would you want to propagate this set of relationships?  Is this a national security issue or some more parochial problem? 

The apparatus of Government involvement in the “war” has taken a time-honored and predictable trajectory.  Mission creep and expansion of powers have succeeded in obviating some treasured constitutional protections (that whole “due process” and “trial by jury” nonsense have been ejected in the hallowed name of expediency.  Now, agents can seize an individual’s property indefinitely on mere suspicion of dealing or trading in drugs.   The inertia builds.

And so it goes.  The U.S. has over 250,000 people held in prison for drug charges.  Since the majority of them are felonies, they have been effectively removed from the system, unable to vote, obtain employment with a reasonable opportunity for pecuniary gain and career advancement, etc.

The Dungeon is less organized.  Torture (at least the physical kind) is less effective.  At least that sometimes ended with a confession.  This organized processing of people who follow different rules is an order of magnitude different.


...organized religion competing for influence and defending itself from political interference.  Not surprising to readers here and much more of this to come across the world.

Dozens of Catholic universities, dioceses and other institutions filed lawsuits in courts around the country on Monday (May 21) in a coordinated effort, spearheaded by the U.S. hierarchy and Catholic conservatives, to overturn the Obama administration’s contraception mandate plan.
The 43 plaintiffs, which include 13 dioceses and the University of Notre Dame, say the mandate forces religious employers to provide contraceptive and sterilization services to employees that violate their beliefs. They say that infringes on First Amendment religious freedom protections, and charge that the federal government’s exemption for religious organizations is too narrow.

Tuesday, May 22, 2012

Credentialism and supplication

I have attempted on this blog to, amongst other things, provide a healthy respect for the complexity of the world.  Not even I, your (sometimes) humble blogger will attempt to hold a monopoly on truth or accuracy.  Most outcomes derive from random processes.  This has changed to some degree with coming of the information age, but that itself produces its own randomness.

Into this stark reminder of man’s limitations, steps modern media to fill the void.  Providing simple, easier to understand, remember, and replicate to others, these explanations of things that have already occurred almost always wrong.  A perfect, accurate, and timely explanation to an event is an extremely rare event.

Credentialism is another form of granting explanation to events that have random generators.  People give credence to “experts” because they are well educated or have rubbed shoulders with “deciders”.  Now, I gain from this genuflection to some degree, having a Law Degree and an MBA from respectable institutions…but what is truly valuable in the context of investments and policy formation probably cannot be gained via external sources. 

I grew up, like everyone else, with certain gifts and certain limitations.  These were in turn reinforced by certain environmental effects.  But one of my “core” tendencies is to always be aware of crowds, how they act, what they do, how they behave, and where they form.   I don’t think this temperament can be “taught” in any academic setting.  It is a perspective, a fundamental way of looking at things.

One of my friends recently obtained the CFA (“chartered financial analyst”) designation.  This is a wonderful designation to hold, since it really does provide the holder with a good set of evaluation tools for investment purposes.  But it is neither necessary nor sufficient to be the best investor from this designation.  Name your “top” investors and Hedge Fund managers.  Few, if any, hold the CFA. 

What creates “value” in an investment thesis starts and ends with a raw idea.  The analysis only shapes it into something workable and actionable.