Thursday, November 29, 2012

The Pendulum...

...is 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.

Distraints...

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...

...as 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...

...no-one 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...

...is 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.