Archive - Jun 2010

Toroto's G-20 meeting is shaping up as the most impotent yet most confrontational of all recent summits so far.  As Bloomberg reports, "Group of 20 leaders will agree to targets to tackle deficits in their final statement without prescribing when nations should begin to move to balance their books, according to officials with knowledge of the document." Due to the escalating schism between US and Europe, or Geithner and Merkel (incidentally, for definitive proof Merkel is spot on, Argentina just joined the pro-Keynesian chorus saying Europe's focus on cutting deficits is "absolutely wrong" - and if anyone knows anything about top notch economic policy, it is surely Argentina), it is likely that neither will push their own agenda on others, and with the yuan's recent symbolic depegging, everyone will be able to go home pretending victory was achieved. Yet despite the complete lack of consensus, somehow the leaders have decided to cut deficits in half by 2013, even though this target is beyond ridiculous, coming at a time when the entire world is spending with a profligacy that would make a drunk sailor blush (even one that has access to Bernanke's printer). "The draft of the statement includes targets championed by Canadian Prime Minister Stephen Harper to have countries halve deficits by 2013 and start to stabilize their debt-to-output ratios by 2016, the officials said. There is a consensus to maintain stimulus now with the focus on deficits in the “medium- term,” Harper said in a June 21 interview." In other words, nothing will change, and eventually, when the entire world has over 5 times its entire GDP encumbered in real cash debt (as opposed to the $1.2 quadrillion in pseudo-metaphysical debt), and interest payments alone account for well over 30% or more of economic production, the G-20 might, just might, consider debt cutting approaches. In the meantime, initial protests which had been largely peaceful, quickly turned violent as over 30 arrests have been made in Toronto so far, coupled with burning police cars, the use of gas masks, and direct police-protest engagements.

Welcome to the new servers! We've upgraded hardware to help us through the next phases of development. As with any move of this size, there's bound to be (minor) issues; feel free to email us @tips if you notice anything -- we'll be working hard to get everything ship shape as quickly as possible.

Update: We really need to thank Portlane (portlane.com) for helping us make this happen; they're a phenomenal resource.

We appreciate your continued support!

-ZH.

Michael Hudson: "Europe is committing fiscal suicide – and will have little trouble finding allies at this weekend’s G-20 meetings in Toronto."

Economists are individuals who study the production and consumption of scarce resources amongst societies. They refer to marginal utility and subjective value theories in analyzing the choices individuals make in their patterns of production, consumption and exchange to arrive at conclusions about economic efficiency and the economic value of courses of action pursued by the various actors within an economy. Galbraith does none of these things. In fact, he explicitly discounts the value of studies of economic value, in favor of his "social value" and "social rate of return" on investment. Galbraith, then, is not an economist studying the economy but rather a socialist studying society and how it responds to the various arbitrary dictates of the political elite that have captured it. Yet, "study" is perhaps too kind a word to describe what Galbraith does on an intellectual level, because it implies something academic or scientific in nature when the truth is that Galbraith, as a socialist, is a politician, not a scientist.

The complete June edition of Sundaram BNP Paribas' monthly newsletter. A great compendium of the month's macro news with a useful slant on Indian economics and markets. (We are, of course, honored to have made the firm's Top 10 Must Read blog list).

Goldman's Andrew Tilton has laid out a useful framework of the most relevant factors to keep an eye on as the double dip unfolds in its entirety. While Goldman's bias is traditionally bullish, we are confident that as more and more economic indicators surprise to the downside (and June so far has been an unmitigated disaster - we will post Goldman's macroeconomic "surprise" tracker as soon as the latest version is released - it will be a bloodbath), which will eventually pull H2 GDP far below the administration's expectations for a number well north of 2%, and even Goldman's more tame forecast of 1.5%. Our thesis from the beginning of the bear market rally has consistently been that both the economic "rebound" and the market surge have all been a dollar for dollar translation of fiscal and monetary largesse, which in turn is just borrowing from future growth, via assorted credit mechanisms and an adherence to a Keynesian philosophy that eventually growth pick up will be large enough to overtake the incremental debt funding costs. We know from Reinhart and Rogoff's studies that this is no longer the case when you get into stratospheric sovereign debt levels. And as this is a closed loop, there is no way to get out of this Keynesian toxic spiral without inflicting terminal damage on the economy - perhaps in September 2008 there may have been a different outcome, but now it is too late. Which is why anyone looking for any modest economic bounce will be satisfied for only a quarter or two, as yet another greater stimulus flows through the economy. However, with the marginal utility of any new debt at or below zero, even the government's fiscal stimulus is now becoming useless (even when assuming a perfectly efficient distribution system, which in this corrupt political environment is a stretch). Which only leaves monetary stimulus as the last bastion of the reflation attempt, and we are certain it will be abused over and over by Bernanke, as America slowly careens to the unwinding of the current iteration. Which is why fiat paper will become increasingly worthless, and tangible, undilutable assets: vice versa.

Tropical Storm Alex has officially been promoted. According to the NHC, the cyclone, which is due to pass over the Yucatan Peninsula in 12-24 hours, and once in the Gulf of Mexico is expected to become a hurricane by the end of the forecast period. Trajectory projection maps are still inconclusive as to just how much of an impact the hurricane would have on BP clean up operations.The chart below provides a snapshot of the three major storms currently in both the Atlantic and Pacific, where both hurricanes Celia and Darby appear to be no major threat.

Is Goldman AJ Cohen-replacement David Kostin in need of a dosage increase in his daily hopium uptake? "The positive price action from the CNY revaluation announcement was fleeting as the market appears to have turned to more domestic concerns, with the Consumer Discretionary sector leading the way down. The fears seem to be well-founded as 1Q GDP was revised down today to 2.7% from 3.0%, primarily based on weakness in final demand, which came down to 0.8% from 1.4%." When even he can't spin the data positively, it may be time to buy... or at least do the opposite of his recommendations. To wit: "Our recommended sector weightings have generated -23 bps of alpha YTD. Our overweights (Info Tech, Energy, and Materials) generated -34 bps of alpha while our underweight Consumer Discretionary position is down 14 bp. Underweights in Health Care, Telecom, and Utilities have added +24 bps of alpha."

This is Part 2 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.

I lived in Chile during the Pinochet dictatorship—I can spot a fascist police-state when I see one. The United States is a fascist police-state. Harsh words—incendiary, even. And none too clever of me, to use such language: Time was, the crazies and reactionaries wearing tin-foil hats who flung around such a characterization of the United States were disqualified by sensible people as being hysterical nutters—rightfully so. A police-state uses the law as a mechanism to control any challenges to its power by the citizenry, rather than as a mechanism to insure a civil society among the individuals. The state decides the laws, is the sole arbiter of the law, and can selectively (and capriciously) decide to enforce the law to the benefit or detriment of one individual or group or another. In a police-state, the citizens are “free” only so long as their actions remain within the confines of the law as dictated by the state. If the individual’s claims of rights or freedoms conflict with the state, or if the individual acts in ways deemed detrimental to the state, then the state will repress the citizenry, by force if necessary. (And in the end, it’s always necessary.)

I think Obama and Geithner will get roasted up in Toronto this weekend. Does it mean anything to the dollar? We will see Sunday night.

Parliamentary pensions, a lavish Bastille Day garden party and ministers’ Cuban cigars are to be sacrificed in the name of economic recovery as the French government seeks to show that ministers are sharing the pain of their austerity drive.

In case you just can't get enough of of Barney Frank simply oozing truth, integrity and unbribable honesty (in other words, everything that defines the American Congressional way) in every interview he does, this Bloomberg TV clip is for you. It is also for everyone else who would rather not read the 2,000 pages of FinReg reform yet wants to get some sense if they will be sued next Monday for lifting a 5MM offer of UK CDS. Overall, Barney mumbles about this and that, discusses whether the bill will make banks less profitable (it won't), clarifies the 3% loophole for JPMorgan's investment in Highbridge,  notes the surprising $19 billion bank levy, yet runs like a scolded schoolgirl the second Fannie and Freddie (also known as the one biggest disaster of his career, and the only thing he will be remembered for) are mentioned. "My Republican colleagues like to forget the fact that during the 12 years they controlled Congress, they did nothing about Fannie Mae and Freddie Mac. When the Democrats took power in 2007, we passed a bill that gave them the power to put them into conservatorship. Fannie Mae and Freddie Mac today are not what they were, thanks to a bill passed by a Democratic congress…They are in conservatorship. The notion that we haven't done anything is a lie, and they know that." The more important thing Barney, is that the American are fully aware that any pretense of reform coming from you is a lie, and they most certainly know that.

Summary of the weekly's events and macro observations courtesy of RCS Investments

Several days after the Romanian parliament passed a law to cut pensions by 15% in order to qualify for a critical $20 billion IMF loan, the Romanian Supreme Court found this law was not only unconstitutional, but unappealable (along the lines of what our own SCOTUS will do once the Fed's transparency appeal gets to the very top, resulting in confirmation once and for all that American laws are only made for the benefit of the Federal Reserve). The decision was reached hours after dozens of Romanian citizens stormed the presidential palace "to get an audience with President Traian Basescu." As a result of the Constitutional Court's decision, the IMF loan "may now be delayed, and this will be a big blow to the government of Prime Minister Emil Boc, the BBC's Nick Thorpe reports." Also as a result, Romanian (and by association, neighboring Bulgaria) CDS blew up today and closed +30 to 410 for Dracula's host country, and +20 to 360 bps for the country that served as the reverse engineering center of the former Communist Bloc.