Thursday, April 24, 2014

The supply of collateral

The Fed must taper at this point, given the lack of available collateral (and the decline in issuance of Treasury and "safe" Agency securities).  We are indeed in strange times, as if the black hole of QE and associated bond purchases is beginning to eject matter via the quasar of Fed tapering.  The consumption, storage, and ejection of all this financial matter is one of my major interests at the moment.

The interesting part is defining what the "matter" is...a zero interest note (dollars) or some "debt instrument" that accrues dollars via some future rate schedule?

Once of the themes of this blog is "what ramifications are produced when a world is run by a fiat currencies".  This is an unpredecented experiment in geo-political cooperation, and can be generally thought of as a treaty between the G20 nations.

Of course, treaties are always broken.

Billions and Billions...indeed.

Tuesday, April 22, 2014

The Crossfit Bubble

As a student of financial bubbles, I also seem pre-programmed to study the causes and effects of cultural, technological, political, intellectual, and environmental bubbles as well.  A "bubble" can be loosely defined as any function where outputs suffer marginally decreasing returns from inputs.  Put another way, a model cannot be sustained from increased effort and becomes inherently unstable.   Examples in unsustainability are all around us, and while the inputs and outputs may vary wildly through the spectrum of life, the causes and effects are quite consistent.

One example of an unsustainable growth model has to be the branded commodity called "Crossfit". This is an exercise program which emphasizes semi-random, extremely intense workout sessions.  I have tried Crossfit.  It is certainly challenging, but the emphasis here is not to argue about the merits of Crossfit as a training regimen, but rather investigate how sustainable it will be as a cultural and business phenomenon.  I have also attended the Crossfit Games ("The Games") in an effort to further understand the cultural sustainability aspect of Crossfit.

For the sake of Brevity, let me state that Crossfit  is most certainly an unsustainable cultural and economic bubble.

By emphasizing "elite fitness", and marketing the accomplishments of highly trained and physically gifted individuals, it naturally creates a division between patrons who are competing for the Crossfit Games and those who are "merely" there to exercise.  This was demonstrated in the cultural response to "registration" for the The Games whereby anyone with $20.00 to spend could post their results for several "open workouts" that would qualify them for competition.  Many elite competitors found it silly that novice athletes would attempt to qualify for one of the most strenuous contests of human work output on the planet.  But of course, this is the result of Crossfit attempting to grow by exploiting more revenue streams from its members.  A registration fee of $20.00 for, say, 300,00 members equates to $6 Million in profits with a cost basis of a spreadsheet program and associated webpage maintenance.  Not a bad take.

Also, the sheer number of Crossfit gyms (I live in New Orleans and there are now 3 within walking distance) has all the classic signs of a bubble.  Rapid expansion to capture the primary revenue stream of Crossfit (the sale of certification classes to teach Crossfit) has resulted in a glut of Crossfit gyms whose marketing materials state they "forge elite fitness".  If Crossfit wishes to continue this marketing image, and it must be understood that the marketing component creates much of the worth of the Crossfit brand, then diluting this image by catering to a mass audience will only serve to alienate Crossfit's core community.  Becoming the McDonald's of fitness does not enhance their brand.  It is a marketing tightrope walk that is unsustainable.  The core membership will fracture into several different types of branded fitness outlets, and the Crossfit brand will be hollowed out.

Speaking of competition, there is already exogenous competition in the form of athletic clubs and the like as well and endogenous competition in the form of Crossfitesque gyms  Again, this is branded exercise and there are no barriers to entry.  The Games themselves have a new competitor in the National Pro Fitness League.  This is reminiscent of the many "Texas Hold'em Poker" T.V. shows that proliferated in the early and mid 2000s before disappearing en mass.  All of this activity further erodes the branded fitness sector that Crossfit has come to dominate, and this dilution will cause crossfit gyms to compete on pricing alone (the fate of a commodity) and the bubble will burst.

The above analysis does not even take into account the possibility of even further brand erosion once Crossfit enthusiasts understand that competitors in The Games follow wildly different training programs than the rank and file members of individual Crossfit gyms.  But again, I don't want to get into efficacy arguments about the Crossfit regimen.  It is intense physical training.

I give this particular bubble 3-4 more years before the stresses due to an unsustainable model begin to challenge the brand and the entire business model.   I am not saying it will disappear completely.  People still watch Texas Hold'em poker shows...but viewship, prize money, and registration to major events are all down 30-50% from their peaks.  The inputs and outputs are different, but the causes and effects are the same.

The most interesting slow-motion bubble popping...

...continues.  We note many sources (in an informationally "centralized" country) "leaking" bad economic figures, in a deliberate attempt to manage the inevitable.  However,  this is not a case of legitimate numbers being reported...but rather an effort to buy time in the hopes global demand picks up.

It also buys time for the elite party members to move assets and family members to safer locales, or at least have a plan to do so at a moments notice.

From Bloomberg:

China’s bad-loan ratio rose “significantly” in the first quarter, increasing risks for the nation’s banking industry, according to the nation’s largest manager of soured debt.
The business environment this year has been “grim and complicated” as lenders face pressures on asset quality, liquidity and lending margins, China Huarong Asset Management Co. Chairman Lai Xiaomin said during an internal meeting on April 15, according to a statement today on the website of the Beijing-based company.
China’s slowing economy has made it tougher for borrowers to repay debt, driving up banks’ sour loans for a ninth straight quarter as of December to the highest level since 2008, data from the banking regulator show. New nonperforming loans amounted to more than 60 billion yuan ($9.6 billion) in the first two months of this year, compared with 100 billion yuan for all of 2013, China Business News reported on April 9, citing people it didn’t identify.
“The economic indicators we’ve seen so far are quite disappointing and repayment risks are rising across sectors from property to small businesses due to weak demand,” Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp., said by phone. “Banks will be hit in such an operating environment but managers of bad assets like Huarong and China Cinda Asset Management Co. stand to benefit” because they can accumulate more sour loans, she said.

Wednesday, April 16, 2014

Pulled Pork

Being a resident of the great city of New Orleans (the only city in the U.S. that feels to an American as though you are treaveling abroad), I am exposed to more than my fair share of great cuisine.  And I must say the roast beef and pulled pork here is also delicious just about anywhere you go...any meat that becomes so juicy than you can "pull" it apart is bound to be wonderful.

So speaking of meat that can be pulled apart, the U.S. is faced with a myriad number of challenges.  It is as though the pack of wolves that is the rest of the world collectively smells the blood trail of the a mighty wounded bear.

The Ukraininan/Russian situation is providing all sorts of cover (several reports indicate an Al-Quieda backed attack on Baghdad itself) for operatives around the world to probe, test, and evaluate if they can break from cover and seize interests.

An interesting time, and I half expect a missile test from North Korea right...about...

Wednesday, April 09, 2014

The levers of Power.

As sure as justification follows action, apologists follow the levers of power.  The neo-classical model of economics sprung Athena-like out of the head of industrialization in the same fashion as scholasticism forming the bedrock for feudal-monarchy relationship of past centruries.

But systems change, and the neo-classical model is not quite as relevent anymore, is it?

The Recapitulator is actively seeking what alternatives are out there, and which is likely to be the winner, thus forming a new set of apologists who will declare "system x, and only system x" to be the most efficient way extant of governing humans, gathering their collective talents, and providing "fairness" and "justice" to all.

Like a wise economist said with respect to opportunism in the market of ideas:

“Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”

Was this quote by Saul Alinky or some similar "radical"?  No.  It was by Milton Friedman.