Archive - Apr 18, 2012

Sometimes I ask myself why I chose to do this. I'm sitting here thinking about all the things I have to do and if I start writing, will I actually write anything that's going to make an inkling of difference. Let the politicians, Central Bank Governors and rating agencies fall on their own swords. The world will sort itself out without any feeble attempt you come up with under the circumstances to change it, undertheradar. You're getting yourself worked up for nothing, and that's going to cost you mistakes in the rest of your messed up life.

Within the last few minutes, Bloomberg has popped up a few rather disturbing headlines - that for all intent and purpose have been totally ignored by the trading public at large (we assume WWIII is priced in). So Asia in general is in major sabre-rattling mode tonight with the following comment: South Korea’s military will firmly and thoroughly punish North Korea for any reckless provocation, Yonhap cited Shin as saying. We choose 'not to play'.

• India Test Fires Long-Range Missile Agni-V, CNN-IBN Says
• *INDIA MISSILE TEST FLIGHT `IMMACULATE,' DEFENSE MINISTRY SAYS
• S.Korea Deploys Missiles in Case of N.Korea Provocation: Yonhap 
• *N.KOREA'S KIM JONG UN CALLS FOR STRENGTHENED MILITARY, NHK SAYS

"You apparently can survive betting against bull market irrationality if you meet three conditions. First, you must allow a generous Ben Graham-like “margin of safety” and wait for a real outlier before you make a big bet. Second, you must try to stay reasonably diversified. Third, you must never use leverage."...It is the classic failing of value managers (and poker players for that matter) to get impatient and bet too hard too soon. In addition, GMO was not always optimally diversified. We are generally more cautious (or, if you prefer, “more experienced”) now than in 1998 with respect to, for example, both patience and diversification, and at least we in asset allocation always stayed away from leverage. The U.S. growth and technology bubble of 2000 was by far the biggest market  outlier event in U.S. market history; we had previously survived the 65 P/E market in Japan, which was perhaps the greatest outlier in all important equity markets anywhere and at any time. These were the most stringent tests for managers, and we were 2 to 3 years early in our calls in both cases. Yet we survived, although not without some battle scars, with the great help that we did, in the end, win these bets and by a lot. Hypothetically, resisting the temptation to invest too soon in 1931 may have been a tougher test of survival in bucking the market. Luckily we, and all value managers, were not around to be tempted by that one.

Perfidy—as Target 2 balances balloon and risks spiral out of control

Decades of manipulation by the Federal Reserve (through its creation of paper money) and by Congress (through its taxing and spending) have pushed the US economy into a circumstance that can't be sustained but from which there is no graceful exit. With few exceptions, all of the noble souls who chose a career in "public service" and who've advanced to be voting members of Congress are committed to chronic deficits, though they deny it. For political purposes, deficits work. The people whose wishes come true through the spending side of the deficit are happy and vote to reelect. The people on the borrowing side of the deficit aren't complaining, since they willingly buy the Treasury bonds and Treasury bills that fund the deficit. And taxpayers generally tolerate deficits as a lesser evil than a tax hike. So stay up as late as you like on election night to see who wins, but the deficits aren't going to stop anytime soon. The debt mountain will keep growing. The part of it the government acknowledges is now approaching $16 trillion, which is more than the country's gross domestic product for a year. Obviously, the debt can't keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things.

The global reliquification continues:

• BRAZIL CENTRAL BANK DECREASES BENCHMARK LENDING RATE TO 9.00%
• BRAZIL CEN BANK SAYS RATE CUT PART OF CONTINUED ADJUSTMENT

First India, now Brazil (even if the move was largely expected). When are Russia and China joining the fray?

Post-illusion choices. 

The week ended April 11th is when equities finally rolled over. Which is why those curious how retail fund flows did in the past week will not be very surprised: if individual investors avoided stocks like Bernie Madoff Asset Management on the way up, there is no reason why they should change their mind on the way down. Sure enough, in the past week, $1.5 billion was withdrawn from domestic equities. Instead, cash, solely with the aim of capital preservation enter taxable bond funds, as it has for the past 3 years now. With the latest redemption, total 2012 flows to date are over $25 billion, or more than double the comparable amount in 2011. It appears that retail has seen right through the once in a lifetime opportunity, and is withdrawing money from stocks at the fastest pace ever, irrelevant of what the myth formerly known as the "market" actually does.

It has long been known that the United States Postal Service, in its current money-losing format, is unsustainable. The media has reported in the past that in order for this bloated government anachronism to be remotely competitive in the age of email and FedEx, it would need to cut hundreds of thousands of its workers. Even the USPS, via its largest union, the National Association of Letter Carriers, has admitted that the organization will need to undergo "tough sacrifices" although as the WSJ noted, "It didn't specify what concessions it would seek from members." And this is where it gets fun: because "just the tip", or even just talking about the tip, apparently is more than labor unions in this country can stomach. Enter Ron Bloom, Lazard, and the very same crew that ended up getting a taxpayer funded bailout for GM. From the WSJ: "The Postal Service's proposal to close thousands of post offices and cut back on the number of days that mail is delivered "won't work" and would accelerate the agency's decline, according to the six-page report by Ron Bloom, President Barack Obama's former auto czar, and investment bank Lazard Ltd., LAZ who were hired by the union in October." That's right: after all the huffing and puffing about "sacrifice" and austerity, the labor union took one long look at the only option... and asked what other option is there.

Contrary to BP's Happy Talk, the Gulf Ecosystem Is Being Decimated ...

Would taking dead deer out of my water be too much to ask?

Muppets have received a lot of bad press since Greg Smith realized that he is not, in fact, a one-percenter.  Fortunately Elmo’s back to reclaim his rightful place in the financial world:  Making the seemingly incomprehensible  comprehensible while politely pointing out what should be obvious to everyone not in diapers.  That’s not so easy when the economic views espoused by everyone from central bankers to TV talking heads can only be accurately described as infantile.

Greece was the first country to defect from the non-default game theory regime of the European Union (a move which ultimately will be in its great benefit, as it is forced, very shortly, to default higher and higher into the 177% of GDP secured debt, until finally even the Troika's DIP loan is impaired). It has also become the first country to demonstrate that people can, contrary to apocalyptic claims otherwise by the global banker consortium which realizes oh too well it will be its death if people stop playing by the broken rules, exist under a barter regime. The video below shows how the Greek town of Volos develops its own bartering system without the aid of the euro. Yes - it can be done, especially since one is forced to produce in order to consume, and borrowing infinitely from the future becomes impossible.

When thinking of Australia, one traditionally imagines a country that is nothing but a secondary derivative of China's trade surplus, and an unpegged currency that allows for more trading flexibility than the Yuan. As a result, recurring calls warning of a housing weakness in the country are often ignored as there always appears enough liquidity to mask the issue just long enough. That may all soon be changing. Earlier today, insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring. Unfortunately for GNW, and soon for the entire Australian financial sector, instead of merely blaming market conditions, in the IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013, GNW laid out a far more nuanced, and detailed explanation of what is happening. Alas, it also may be the canary in the coalmine that has been so long overdue in yet another regional, bubblelicious housing market.