Archive - Jun 28, 2010

Some Fed economist (with a hard-earned Ph.D mind you) named Kartik Athreya (who lasted at Citigroup as an associate Vice President for a whopping 7 months before getting sacked in 1998 only to find solace for his expiring unemployment benefits in the public sector) has written the most idiotic "research" piece to come out of the Federal Reserve since 1913, and the Fed has written a lot of idiotic research since then - after all you don't destroy 98% of the dollar's purchasing power in 97 years with non-idiotic research. But this just takes the cake. In "Economics is Hard. Don’t Let Bloggers Tell You Otherwise" Kartik says: "I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contribute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public." Alas, all Kartik achieves is to convince the general public that feeding Fed "economists" alcohol after midnight and letting them directly upload their resultant gibberish to the Fed's broad RSS feed the second they think they have a coherent thought , is generally a disastrous idea. In his piece, which has no other intention than to discredit and outright malign bloggers such as Matt Yglesias, John Stossel, Robert Samuelson, and Robert Reich, Athreya says: "In what follows I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy. This sounds mean-spirited, but it’s not meant to be, and I’ll explain why." Instead in what follows, the Fed presents 4 pages of thoughts so meandering, that the author's blood alcohol level must have certainly been well above the legal norm for the duration of the writing of this ad hominem pamphlet.

• Asian stocks fluctuate; Japanese banks decline on Mizuho's share-sale plan.
• Caribbean storms strengthen, may head for oil spill.
• China sets the exchange rate for the yuan at its highest in five years.
• China shares fall on concerns Agricultural Bank of China’s IPO might depress market.
• China, as part of fuel efficiency measure, to shut down small thermal power units totaling 10 million kilowatts in capacity this year.
• Consumer spending in US probably little changed in May as incomes rose: Survey.
• Dubai port operator DP World cancels plans for London stock listing until at next year.
• Group of 20 Nations agree on higher bank capital to avert financial crisis.
• Romania said it would raise taxes to shore up state finances.

Last week we pointed out that the CHF could be quickly becoming at least a figurative reserve currency. With it promptly approaching parity with the USD (1.0840), and hitting new all time highs against the Euro, the market may have just taken such musings seriously. Regardless of where this slide ends, all it shows is that ever more deposits from across Europe keep getting shoved into Swiss banks - can you spell ongoing, behind-the-scenes, European bank run?

As for the forced return to the gold standard, that is continuing as planned: gold is back to just off all time highs.

We have already had our say about Denmark's World Cup performance. It was not lost on Erik Nielsen. It has not had as much of a dire impact on his outlook, as his European round up is summarized: "that’s the way Europe looks from my unbelievably green garden on this gorgeous afternoon. I shall now pour myself some sort of chilled and lovely summer drink and turn to my favourite book." Something tells us this is not Hayek. More importantly Erik points out why Wednesday will be a very important "micro event" day for Europe: the ECB's 12 month LTRO, whose impact on Libor and Euribor we discussed previously, matures on the 1st, and also on Wednesday "Greece formally falls out of the indices because of their downgrade. How much selling will that cause? I have no clue, but I would fail to understand why investors would have waited till the last day to get rid of their Greek bonds when they have known about the issue since June 15." Yet Erik points out something curious: "the Greek governments intends to roll over 3, 6 and 12 month treasury bills maturing in July; a total of about €3.5bn. Auctions are expected on Tuesday 13th and on Tuesday 20th July." And he wonders:"Why are they doing it? Could it be that they are responding to demand from banks and other investors who have started to appreciate that a debt restructuring the next 12 months is very unlikely and therefore looking for high-yielding assets? If so, this would be a mis-guided move, in my opinion, and – frankly – I hope the IMF and EU would tell them to back off." Looks like yet another shoe in the European collapse may be due to drop this week.

The culmination of several man/months of short research has whittled a pool of 1,800 companies down to just 10, half of which appeared on our short scan list in 2008. You can guess how profitably that ended. Now that the "Great Melt-up of 2009" seems to have run its course, these companies are poised to fall back down to earth - and fall relatively hard at that. I have featured one particular company herein, closely tied to housing, construction and CRE, three of the worst sectors for a weak balance sheet to be in right now.

At least back in 2009 the most promising targets for damaging the Iranian nuclear program, specifically the weapons related development, were Plutonium production facilities (characterized primarily by the Plutonium Production Heavy Water Nuclear Reactor in Arak) and facilities critical to the "Nuclear Fuel Cycle" (most obviously the Uranium Enrichment Facility in Natanz and the Uranium Conversion Facility in Esfahan).  The Center for Strategic and International Studies' Abdullah Toucan released a detailed report comparing the mission requirements of strikes on these (and other) facilities with Israel's capabilities and concluded the mission was within Israel's grasp operationally.1  Normally we would call this report a "must read," but instead we've read it so you don't have to, as well as added some of our own research and secondary sources.  The report also examined the ballistic missile strike option and delved into some of the political and instability costs that an attack would extract (which we ignore for the purposes of this discussion).  Those sections are well worth reading, even if the political reality on the ground has changed since early 2009.

• 1. Abdullah Toukan, "Study on a Possible Israeli Strike on Iran's Nuclear Development Facilities," Center for Strategic and International Studies (March 16, 2009).

This is Part 3 of a major four part series dealing with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics.