Archive - Oct 2010

My take on the election and what it might mean.

The fact that robots are POMO juicing AAPL's shares and Google also has grand designs on the mobile/smart phone space, shouldn't detract from one simple fact, Apple designs and manufactures great products many of which happen to be game changers.

It appears that the one topic pundits have the most problems grasping is the spread between the segregation of traditional and shadow monetary aggregates, overall economic deleveraging and aggregate monetary velocity, and how all that impacts GDP. A summary which confirms just how prevalent the confusion is, is this terrific post by the Kalafia Beach Pundit, terrific not because it is even remotely correct (the post is so blatantly wrong - one wonders if Western Asset Management even expects its current and former asset managers to count beyond 2... M2 that is), but because it demonstrates how self-professed "pundits", whether of the beach variety or not, don't have the faintest grasp of more than merely trivial monetary topics.

A Fed paper released in September, which we luckily missed as otherwise it would have led to the collective death through uncontrollable foaming in the mouth of the entire Zero Hedge staff, was "Oil Shocks and the Zero Bound on Nominal Interest Rates", in which author Martin Bodenstein (an econ Ph.D.) argues that oil price shocks (i.e., surges in the price of oil such as the one we are about to experience courtesy of a fresh trillion in liquidity about to be unleashed by the Fed) are... wait for it... beneficial to GDP and stimulative to the interest-rate sensitive parts of the economy. To wit: "In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion.". Yes you read that right. The Fed is stealthily floating the idea that a surge in oil prices will be for the greater good. In essence, the Fed is telegraphing that while it acknowledges that oil is about to jump to over $100, it won't be as bad as those with a functioning brain dare to claim. And, as we show below, it will actually be a very good thing! While we would probably get a massive lethal subdural hemorrhage if told to argue a view so blatantly and stupefyingly demented, insane and, simply said, wrong, as that espoused by Bodenstein, we are glad that Sean Corrigan of Diapason has gone the extra mile to not only expose the Fed charlatans for their voodoo gimmickry in this narrow topic, and brings up an even more critical idea, which is that the Fed "actually welcomes the current surge in the prices of many of the staples of everyday life; that it actually exults in the drain being exerted on family budgets; that it revels in the squeeze on profit margins being suffered by already-struggling small businesses, because it imagines this will serve to lower the reckoning of the ethereal construct of a generalized, future real interest rate and that this alone will serve to shower riches upon all who are presently suffering, in comparison for the present woes." That nobody has reached this conclusion before is explainable - it is something only the brain of an illogical, demented, perverted genocidal madman's brain can come up with. Which is why we are now convinced the Fed is hoping for not only mild inflation, but an outright surge in prices.

The Irish National Pensions Reserve Fund (NPRF) was up 1.9% in Q3, but has suffered a loss of €400m on the investments it was forced to make in Bank of Ireland and AIB.

Democrats--"sadly enough"--would get a shot at still retaining the majority, which would mean the monetary and fiscal policy will most likely stay on its current course. Meanwhile, the 0.25% interest rate hike effective Oct. 20 by the PBoC is "meaningless," because of skyrocketing property prices, and the cost of living inflation has gone up much more than the official figure.

So much for the 3D TV craze... and for overestimating the indiscriminate purchasing power of the US consumer. After much fanfare, and visions for record sales, TV makers such as Sony, Samsung and LG have gotten reacquainted with gravity, and are now gearing up for a "miserable" Christmas as an all out price war confirms the US consumer, even if not paying mortgage bills, refuses to purchase indiscriminately. The result: price drops of over 25% for the upcoming holiday season, huge margin cuts for already margin lite retailers (read Amazon), and an increasing reliance on corporate sales to pick up for the sudden and dramatic consumer slack. But the biggest hit will be to Japanese and Korean exporters, who will soon need to add to a dramatic decline in end demand, such factors as a ramp in Rare Earth Minerals: a key component to flat screen TV production, and, of course, record expensive currencies. All in all, it is shaping up for a miserable existence for the Japanese export economy, and we are very confident that a tsunami of export-led anger is about to be unleashed on Kan's government, demanding to at least moderate the one variable that is under Japanese control: the FX rate. Which means that many more USDJPY interventions are coming as soon as next week, when the Fed's QE2 announcement is sure to send the FX pair far below 80. In other words, QE2, in addition to confirming that the Fed cares little about the dollar's purchasing power, is about to set the FX, and trade wars, into overdrive.

And since I was with the Fed,--I could take off my head--To recite Keynesian quotations--No banksta nor PhD could babble like I could...

This is the Death Spiral of Democracy. The way to increase the concentration of wealth is to partner with the State so the Central State functionaries and agencies funnel ever-larger shares of the national income to your cartel or quasi-monopoly while the State suppresses or marginalizes potential competitors. The more wealth you concentrate, then the more political power you can purchase. Indeed, the involvement of the super-wealthy causes the costs of campaigns to rise to levels where politicos have no choice but to become dependent on Power Elites to fund their campaigns. You see how the feedback works: greater concentrations of wealth creates greater concentrations of political power, and just as importantly, increases the dependence of the political class on the Financial Power Elites and fiefdoms for their very survival.

Rough rice has skyrocketed by 50% since July, to $14.50 a hundred pounds. Rice is the primary food stuff for 3 billion of the world’s 7 billion population. Many of the disaster scenarios for the global food supply revolve around Asia. Crisis shortages will hit the rice markets there first, then spill over to other foodstuffs here. (CORN), (WHEAT), (SOYBEANS), (AGU), (POT), (MOS).

In his weekly "kickstart" piece, Goldman's David Kostin shares a glimpse of how portfolio strategists view the impact of QE2 on UW equity market fundamentals. In a nutshell, per Goldman bulls cite 20% upside to Fed model and a lower equity risk premium. Goldman is far less optimistic: "We believe QE2 is unlikely to change our sales or margin forecasts, so return prospects become a valuation debate. Our targets imply less upside, given 13.5x P/E is consistent with prior 1-2% real rate regimes." Furthermore, Goldman's economic team has already priced in $1 trillion of QE2 in its 2011 GDP forecast of 1.8% (below consensus of 2.5%), meaning at worst the overall economy will continue to operate at negative growth rates, once Q3 GDP is revised lower and Q4 GDP found to be negative following the inventory crunch. As Kostin puts it: "The US has a demand, not a supply, problem." Alas, the Fed is completely unable to grasp this. And the more it tinkers with the market, and the more fundamentals are disconnected from reality, the less Americans will trust the economic situation and retrench even more, leading to an even more pronounced demand "problem." As for markets, AJ Cohen's successor hits it right on the head: "We believe the forward path of stocks will be determined by potential asset allocation shifts by owners of 70% of the US equity market. Individuals own in aggregate 53% and pension funds own 17%. Shares will trade sustainably higher if these investor groups decide to re-risk from bonds to stocks. Any shifts most likely will be gradual." In other words, unless investors regain their faith and confidence in stocks, the market will merely trade on Fed liquidity and not on anything resembling fundamentals... or reality.

Prosecute or perish ...

The Commerce Department's Bureau of Economic Analysis (the uglier, less douchey stepsister to the B(L)S) released their first take on Q3 GDP this morning and it was unsurprisingly relatively more benign than a testicular mole or even Henry the IV of France.

If you are sick and tired and need somewhere to go, here is the place...

Hundreds of thousands of Britons have taken a holiday from their personal pension contributions, in further proof of the severity with which household budgets have been squeezed by the economic downturn.