Archive - May 3, 2012

In this final part of the four-part series from The Heritage Foundation, we look at the scale of the entitlement society we live in relative to the Federal Budget. Medicare, Medicaid, and Social Security spending is set to explode, placing enormous pressure on other priorities such as defense and the rest of the budget.

As Oilprice.com embarks on its Top 5 series, we thought it expedient to begin with our take on the key figures shaping and influencing U.S. renewable energy efforts, not least because the issue of energy security is being prioritized in campaigning ahead of U.S. presidential elections. In considering from the numerous choices for these top five slots, we take into account a number of variables, including investment in renewable energy, the ability to influence policy and shape public opinion, and advocacy efforts. This goes well beyond simply counting coin – it is about innovation, imagination, vision, risk and patience. Arguably, these people will play an important role in your life and leisure, for better or worse.

Excessive spending has created record levels of debt and deficits, and the worst is yet to come, threatening opportunity and prosperity for younger generations. In these 10 charts, via The Heritage Foundation, we highlight the third (and arguably most frightening) in our four-part series on the Federal Budget - Debt & Deficits.

In 2006, Michael Pettis (one of the best known on-the-ground academic-and-practitioner experts on China) started making a number of predictions based on what he thought was the necessary and logical development of China’s growth model. Some of these predictions seemed fairly outlandish, especially to China analysts – Chinese and foreign – who had very little knowledge of economic history or other developing countries, but many of them so far have turned out quite well. As more and more analysts are beginning to understand the constraints of the Chinese growth model he thought it might be useful to list some of these predictions to get a sense of what might be still to come. Hold on to your hard-landing hats.

In this second part of the four-part series describing the state of the Federal Budget, we present 10 charts courtesy of The Heritage Foundation on Federal Revenues. America’s growing tax burden is a drag on the economy and will reach record levels without policy changes.

Nut cases. That’s what they are. And if you take an interest in them, you are a nut case, too. That’s the consensus among credentialed economists who describe advocates of a return to the monetary regime known as the gold standard. In fact, the economic pack will marginalize you as a weirdo faster than you can say "Jacques Rueff," if you even raise the topic of monetary policy in relation to gold. If we are going to speak of consensus, let’s not forget one that is truly universal: Our economic system stands a good chance of breakdown in coming years. The only way to limit damage from such a breakdown is to ready ourselves to choose other models by learning about them now. Not to do so would be nuts.

In a four-part series, on the premise that a picture paints a thousand words, we present, via The Heritage Foundation, everything you wanted to know about the Federal Budget - In Charts. We start with Federal Spending - which is at record levels and is still growing, threatening economic freedom.

Munch's "The Scream" may be all the rage today, but to Jim Grant, in his latest interview on Bloomberg TV, the record price paid for the painting is not so much a manifestation of modern art as one of modern currency: "This is the flight into things from paper" . Thus begins the latest polemic by the Grant's Interest Rate Observer author whose topic is as so often happens, the Federal Reserve (for his latest definitive expostulatin on why the Fed should be disbanded and why a gold standard should return, delivered from the heart of Liberty 33 itself, read here). The world in which we invest is a world of immense wall to wall manipulations by our friends in Washington. And people get off on Goldman Sachs because it has done this and this, it is pulling wires... The Federal Reserve is the giant squid of squids, it is the vampire squid of vampire squids."

If the greatest trick the devil ever pulled was convincing the world he didn’t exist, the greatest trick our central bank ever pulled was convincing the world we couldn’t live without it. For most of that past twenty years, that PR campaign has been centered on the Great “Moderation”, so called because it apparently represented the full embodiment of economic management – a period of unparalleled prosperity, a Golden Age of soft economic central planning. Give the central bank enough “flexibility” and it will produce unmatched economic and financial satisfaction.

WTI Crude dropped its most in almost five months today, losing around 2.5%, beginning its descent after Draghi somewhat disappointed a hungry markets this morning (after better-than-expected claims data). Silver (which recoupled with Gold today) and Copper also started their drops at that point and extended the losses after the ISM Services miss. Gold leaked lower (though not as much as the rest of the commodity complex) even as the USD (which had been following its typical path of strengthening through the EU day session) dropped as an expectant EUR popped on no rate cuts. Stocks started their slide at the same time but broad risk-assets were in general leading equities lower (more carry FX and commodities than Treasuries today). We had a little bounce in stocks into the European close (up to VWAP) but that quickly fell back, lost today's lows, then broke yesterday's lows heading for one-week lows and the S&P 500's 50DMA. AAPL lost its 50DMA and closed there for the first time since earnings. After some noise around the macro data (and Draghi) this morning, Treasuries were extremely flat - trading in a very narrow range all afternoon - as did FX in general but AUD kept leaking lower (down 2% on the week now) and JPY stable on the week. Equities and credit re-converged today and late in the afternoon as ES (the S&P 500 e-mini futures) caught up to the downside of broad risk assets and stabilized in the late day ahead of tomorrow's noisy and meaningless NFP print. ES volume was average as it traded closest to its 50DMA in a week (and dropped the most in 8 days today closing near its lows of the day) and VIX, while off its highs of the day, closed above 17.5% - its highest close in over a week. While stocks are short-term in line with risk-assets, over the medium-term they remain notably expensive (especially to Treasuries since last week).

One of the best definitions of fascism – the one used by Mussolini himself – is the “merger of state and corporate power“. We’re pretty much there …

Facebook has just released a revised S-1 filing (link) which list additional information on the IPO. Among the details:

• The IPO would value the company at as much as $74.8 billion, based on a total of 2.138 billion Class A and B shares outstanding after the offering, assuming a $35 share price. Wasn't this supposed to be $100 billion?
• Total shares offered wil be 337,415,352 at a proposed price range of $28-$35 (mid point of the range is $31.50)
  • Primary shares (proceeds going to company) will be 180 million
  • Selling stockholders shares will be 157.4 million: these proceeds will not go to the company
• Facebook estimates: "We estimate that our net proceeds from the sale of the Class A common stock that we are offering will be approximately $5.6 billion, assuming an initial public offering price of $31.50 per share, which is the midpoint of the price range on the cover page of this prospectus"

While much of the panel's discussion is the somewhat typical growth, recovery, global diversification mantra of a homogenized investment community, The Milken Institute's 'Reading The Tea-Leaves' panel was dominated by some deeper thoughts from John Rutledge of Safanad SA. John sees the world not as a series of equilibria like any and every mainstream economist but the exact opposite with earthquakes and tsunamis capable of occurring at any time. In three-and-a-half minutes, Rutledge analogizes investing today as "living on the crust of a molten marshmallow" and notes that 'investing' to him now is "trying to figure out situations in which some stupid policy has created a big wedge between returns on different assets that causes people to redeploy capital" and that is what moves prices. Claiming that the two most destructive inventions of the twentieth century were Modern Macroeconomics and Modern Portfolio Theory (which have caused more loss of wealth than anything else he knows), the optimistic father-of-six goes on to discuss the three storm systems that must be navigated in the world currently: 1) Europe; 2) China's growth; 3) the extraordinary growth of Central Bank balance sheets. He concludes with some insights into why not to own bonds and what bonds say about scarcity of future cash-flows, and sees the greatest risk today is that "investors are mentally unprepared for the world we invest in"