Archive - Nov 2010

Other than THAT, everything is hunky-dory...

It might go down like this...

The following is the first installment of a 5 part interview with Buffett biographer, Alice Schroeder, who gives us never before released intimate details about Warren Buffett. Pay special attention to parts 2-4 highlighting Buffett's personal side.

By now it is more than obvious except to a few economists (yes, we realize this is a NC-17 term) that QE2 will be an absolute and unmitigated disaster, which will likely kill the dollar, send risk assets vertical (at least as a knee jerk reaction), and result in a surge in inflation even as deflation on leveraged purchases continues to ravage Bernanke's feudal fiefdom. So all the rational, and very much powerless, observers can do is sit back and be amused as the kleptogarchy with each passing day brings this country to final economic and social ruin. Oddly enough, as Paul Farrell highlights, the list of objectors has grown from just fringe blogs (which have been on Bernanke's case for almost two years), to such names as Buffett, Gross, Grantham, Faber and Stiglitz. And that the opinion of all these respected (for the most part) investors is broadly ignored demonstrates just how unwavering is the iron grip on America's by its economist overlords. Which brings us back to the amusement part. Here are Farrell's always witty views on the object which very soon 99% of American society will demand be put into exile: the genocidal Ph.D. holders of the Marriner Eccles building.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/11/10

The market is once again getting plain retarded. One look at what is happening in Europe should be sufficient for every self-respecting investor to throw up all over this bullshit and quit the business forever. 10 Year Irish bonds have just hit an all time wide spread to bunds of just over 480 bps, a jump of 100 bps in a week, as Irish bonds are essentially bidless. And as this is happening, the EUR is pushing north of 1.40, and stock markets everywhere are gunning for new 2010 highs. This is the kind of central banking-cum-centralized planning garbage that can make people plead insanity after a period of brief ultraviolence.

S&P has released its first official estimate of what it believes the cost of Donk will be on the Too Vampiric To Fail. In a nutshell, the range of various costs could be as high as $22 billion, due to a drop in debit fees, lower derivative income, FDIC DIF replenishment, prop trading, and new compliance expenses. Additionally S&P expects another $85 billion in additional required Tier 1 Capital (which is a joke compared to its Tangible Common cousin). One thing is certain: just as Grayson yesterday said that nobody has any idea about what the charges associated with foreclosure and MERS-gate, and all are merely guessing, the same thing can be said of S&P. It is without doubt that the final outcome of Donk will either cost nothing or infinitely more. Yet for some reason this report made the headlines, so we present it for those 3 readers who actually care what S&P has to say.

In The Seven Fat Years, the classic account of the U.S.’s economic revival in the 1980s, the late Robert Bartley addressed the economic hardship experienced in the 1970s, and specifically spent time on the oil spikes that occurred during the lost decade. Of great importance, Bartley made sure to put “spikes” in quotes when describing the major run-up in oil prices.

And it's not even November 5th yet...

One of the most idiotic decisions of 2010 will be the NBER's choice to pick the summer of 2009 as the end of the recession. As every upcoming quarter will confirm, GDP will decline more and more, and previous GDP numbers will be revised lower and lower, until it is confirmed that not only was the Q3 GDP substantially lower than expected (as the inventory boost is revised markedly lower), but that future periods will see flat if not negative economic growth. But even if one does believe the GDP number (which most do not, and certainly not David Rosenberg... who, nonetheless, does give credit to the PCE deflator...hmmm), the reality is that even at that growth rate, the current "recovery" which should now be 1.5 years in, is underperforming the average 2nd year recovery by over 50%. In other words, we continue to exist in a no-man's land of economic development, in which an outright collapse is solely prevented by the $3 trillion in monetary and fiscal stimuli to date, which tomorrow will grow to over $4TR. The second this Keynesian heroin is taken away, it is guaranteed that the economy will crash and burn, and the true GDP will manifest itself as it promptly catches up to where it should be: roughly 5-10% lower... and if the contraction in the shadow banking system persists, all the way up to 30%. Watch out below.

While traditionally wrong conventional wisdom expects that tomorrow's QE2 will be great for stocks, and the more the better, that may well not be the case. In fact as BofA's Hans Mikkelsen points out, while a "High Case" announcement, or one in which a $1 trillion program is disclosed, will certainly wreak havoc on the dollar, it is this case that will likely have an adverse effect on risk assets: "A less positive reaction than the base case as it would make equity investors worry if things are worse below the surface, "what does the Fed know that we don't know"." The honest answer is, of course, nothing - the Fed is so clueless, it takes its cues from the PDs. But we already discussed that. What is important, is that the Fed likely knows this feedback loop as well, and since it wants to avoid breaking the dollar-risk assets inverse correlation, it is almost certain that any massive QE amounts will be avoided (which is not to say that the final outcome won't be the Goldman estimated $2 trillion - it will be). It does, however, mean that the Fed will seek to achieve a goldilocks outcome: not too low ($100 billion incremental program), or the high case: something "inbetween." Below is a handy matrix for all to use and program into their HFT algos in advance of tomorrow's 2:15pm decision, together with some broad observations on why getting the QE2 number just right is so critical for Bernanke.

As I peer through the fog and attempt to see visions of things to be, I see nothing but pain ahead. Anyone who can look at the following chart and not conclude that there is much pain ahead for this country is either a Goldman Sachs banker, a Federal Reserve Governor, or a bought off politician in Washington DC. It is no coincidence that after Richard Nixon closed the gold window in 1971 and allowed the Federal Reserve to “manage” our economy that total debt outstanding in the US surged from $2 trillion to over $50 trillion. GDP has risen by 1,300% since 1971, while total US debt has risen by 2,600%. Now for the kicker. Real GDP has only gone up by 292% since 1971. This means that 1,000% of the increase in GDP was from Federal Reserve created inflation. Over this same time frame, real wages have declined by 6%, from $318 per week in 1971 to $299 per week today. Inflation has been the American drug of choice to commit suicide over the last 40 years. It is stealthy, seemingly painless, and deadly. Inflation is the “painless” method through which the Federal Reserve has decided this country will commit suicide.

On October 31, we highlighted a rapid and dramatic move higher in the JPY crosses, the day after it closed at the all time high against the dollar, which lasted for a few minutes, and which was later sourced to a technical glitch and not to actual BOJ intervention. Perhaps the fact that the half life of the intervention was negligible is why no central bank would ever care to admit it was their doing, especially not the pedantic and results-focused BoJ. The story was promptly buried. Yet as Barclays' Masafumi Yamamoto points out, after digging through BoJ current account source data, there is a conspicuous Y0.6 trillion hole that can not be explained otherwise except by attributing the Halloween JPY spike to a stealth BOJ intervention. If that is indeed the case, it highlights something very troubling: namely that not even $5-6 billion dollar intervention purchases stand a chance of pushing the FX needle much in any direction, if at all. Which is to be expected: after all, the other side of the trade is about to see $1,000 billion in dollar selling courtesy of the Fed, which drowns out any BoJ noise. But what is more worrying is that having seen the disastrous impact of its stealth intervention, the BoJ may be dissuaded from intervening in the FX market any more, as it would be loath to lose any more credibility in the FX markets. Nonetheless, as the USDJPY is about to breach all time low supports once again, it should be obvious to confirm or deny if the BOJ has given up in its attempts to diffuse an armed, strapping and dangerous chairman.

Prices aren’t going down forever. The good news is that the next bull market in housing starts in 20 years. That’s when 85 million millennials, those born from 1988 to yesterday, start competing to buy homes from only 65 million gen Xer’s. By then, house prices will be a lot cheaper than they are today. The next interest rate spike that QEII guarantees will knock another 25% off prices. Think 1982 again. Fannie Mae and Freddie Mac will be long gone, meaning that the 30 year conventional mortgage will cease to exist. Just remember to sell by 2060, because that’s when the next intergenerational residential real estate collapse is expected to ensue.

Created by The Applied Finance Group, The Economic Margin (EM) Framework was developed to evaluate corporate performance from an economic cash flow perspective and is an alternative to accounting-based valuation metrics. EM measures the return a company earns above or below its cost of capital and provides a more complete view of a company’s underlying economic strength.