Archive - May 2012

Dr. Paul Could Still Win ...

The trouble is that war is a great excuse for weapons contractors to make lots of money, and weapons contractors happily fund war-mongering politicians into power. That’s the self-perpetuating military industrial complex. So the problem then lies in differentiating the necessary actions from the unnecessary. I propose a simple heuristic for this purpose, one that if introduced would also render the war-mongering politician — the Congressman who votes to authorise, or the President who signs the authorisation into law — personally responsible:

If you start a war, you have to fight. If you cannot fight, then your nearest fit relative has to fight.

You just have to admire Ron Paul for his non-flip-flopping tenacity.

Believe what they tell you at your risk.

Charlie Munger: "gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939 but civilized people don't buy gold"

...and yet:

David Einhorn: "I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote for my portfolio. While I'd love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn't even have quarterly conference calls

Kyle Bass: "Buying Gold Is Just Buying A Put Against The Idiocy Of The Political Cycle. It's That Simple!"

The uncivilized people have spoken, and the winner is...

While Charlie Munger has so far to comment on the 24K content of made in the basement tribalware, he and his partner have made quite a few other statements on items ranging far and wide, during the annual Berkshire Omaha convention, which year after year represents the annual pilgrimage for thousands to a crony capitalist Mecca, and which with the passage of time, has become increasingly more irrelevant. Why? Because with a $58 billion bet (on $37.8 billion in cash and equivalents) that asset prices will go higher, it is rather clear on what side of the 'bail out' argument, and its 'all in' fallback: central planning, Warren Buffett sits. 

If history has taught one certain lesson, it is that the less fettered an economy, the better humankind is able to do what it does best: run from trouble and run toward opportunity. In this way mistakes are quickly resolved and progress assured. Conversely, the deeper the muck of regulation, mandates, taxes, subsidies and other bureaucratic meddling, the slower we humans are in following our natural instincts until the point that progress is slowed or even stopped. It is said that history doesn't repeat itself, but it often rhymes. In the current circumstances, it appears that enough time has passed that current generations have completely forgotten the critical connection between the ability of humans to freely pursue their aspirations and economic progress. You can see this ignorance in the popular demand for even more, not less, meddling in the affairs of humankind. Should this trend continue – and for reasons I will touch on momentarily, I firmly believe it will – then the aspirations of the productive minority will soon be dampened by ever higher taxes and other attempts to "level the playing field" and the global economy, already in tatters, will fall off the edge. There is no more timely nor acute example of this growing trend than what is currently going on in France. I refer, of course, to the first round of the presidential election process, scheduled for this weekend.

What me Munger?

Europe is about to begin its "Audacity of Hope" moment.  I'm not sure how markets will react on Monday to the various results.  My best guess is that after an initial sell-off we see a rebound.  European politicians will start to say the "right" things about working with the new governments.  "Growth" will be the most commonly used word.  Equities “LOVE” growth. If there is one thing equity markets love, it is the talk of growth, stimulus, of more money being spent. .. Why is everyone so willing to believe Europe can achieve growth?  Let's assume that no one ever tried for growth before (though seriously, most policies implement in past 15 years had growth as at least part of the rationale).  What experience does Hollande have in creating growth?  If growth opportunities are so easy to spot and identity why do we pay 2 and 20 to hedge funds and private equity?... That is the harsh reality.  Identifying opportunities just isn't that easy.  Figuring out what projects will generate returns that pay for themselves is difficult.  A political body with many competing agendas is hardly likely to do better than companies whose whole goal is to find growth opportunities.  Corporations have no shortage of cash right now, they have a shortage of growth ideas. .. "Growth" which is really just code for spending, will be a failure.  The credit markets will see it sooner than equities, but equities will eventually see it too.  Saying you are going to become an actress is really easy.  Moving to L.A. in an effort to become an actress is a bit more difficult but still relatively easy.  Becoming an actress is really hard!  Growth won't buy years.  It might not even buy months. Like so much else through the entire crisis, the markets are willing to suspend their disbelief on the back of attractive headlines.  In the end, the actual plans disappoint.  Not because the politicians aren't good at making plans, but because the original announcements never had a chance of being implement and the suspension of disbelief (or critical thinking) was the market's real mistake.

With earnings season now virtually over, it is time to ask why, despite a majority of the companies beating expectations, is the S&P inline with where it was when earnings season started. There are two main reasons why the market has not been impressed: the percentage of "beaters" is nothing spectacular on a historical basis as was shown previously, especially in the aftermath of aggressive cuts to Q1 top and bottom line forecasts heading into earnings reports; more importantly, even with Q1 earning coming out as they did, the bulk of the legwork still remains in the "hockeystick" boost to the bottom line that is completely Q4 2012 loaded, as bottom up consensus revisions to the rest of 2012 are negative despite Q1 beats. As Goldman summarizes: "1Q 2012 will establish a new earnings peak of $98 on a trailing-four-quarter basis. With 88% of S&P 500 market cap reported, 1Q EPS is tracking at $24.10, 1% above consensus estimates at the start of reporting season and reflecting 7% year/year growth." So far, so good. And yet, "Despite the positive surprises, full-year 2012 EPS estimates are unchanged relative to the start of earnings season, and currently stand at $105 vs. our top-down forecast of $100. Over half of consensus 2012 earnings growth is attributed to 4Q. Margins at 8.8% have hovered near peak levels for a year, but consensus expects a sudden jump in 4Q to a new peak of 9.1%. We forecast a further decline to 8.7%."

In this recovery consumer services bought/supplied have grown by 3.2 percent from their level at the end of recession as of the 33rd month of the expansion. It is the weakest performance we have seen by a long shot in the last eight recoveries that lasted this long. The previous low point at this point in the cycle was in the 2001 recovery at 6.5% before that it was the 9.2% rise in the 1990 recovery. In those comparisons you get the sense of structural change as it is in the most recent recoveries that growth has become progressively weaker. The average for this point of the expansion cycle would be an 11.4% gain in services output if we had normal service sector growth. IF we had that, we would have had 5.5 million MORE jobs even after discounting for productivity growth in the sector and the loss of goods sector jobs from that demand shift to services. That means about 165K more jobs per month than what we have had all recovery long. This not a trivial problem it is a huge problem. And no one seems to be thinking about it.

In no business schools, or economics departments, anywhere in the world, have suggested that such a thing should take place

Bloomberg viewers estimate that Ron Paul was the winner of the clash of the Pauls. But that is very much beside the point. This wasn’t really a debate. Other than the fascinating moment where Krugman denied defending the economic policies of Diocletian, very little new was said, and the two combatants mainly talked past each other.  The real debate happened early last decade.

While Becky Quick's CNBC interview with the Charlie Munger has a little for everyone to love and hate (from Keynesian-doctrine to easy-living-Greeks and Bad-trading-robots), Buffett's right-hand was particularly eloquent in his views (at around 9:08) on Einhorn's distrust of the Fed and buying Gold: "gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939 but civilized people don't buy gold - they invest in productive businesses." End quote.

If you want to know how weak the economy really is all you need to do is look at the 30-year bond. It is one of the best economic indicators available today. If economic conditions are robust then the yield will be rising and vice versa. What the current low levels of yield on 30 year bonds is telling you is that the underlying economy is weak. "The 30-year yield is not at these low levels DUE to the Federal Reserve; but in SPITE OF the Fed," Hunt said. The actions of the Federal Reserve have continued to undermine the economy which is reflected by the low yield of the 30 year bond. The "cancerous" side effects of nonproductive debt are being reflected in real disposable incomes. Just over the last two years real disposable incomes slid from 5% in 2010 and -0.5% in 2012 on a 3-month percentage change at an annual rate basis. This is critically important to understand. While the media remains focused on GDP it is the wrong measure by which to measure the economy. A truly growing economy leads to rises in prosperity. GDP does NOT measure prosperity — it measures spending. It is the measure of real personal incomes that measures prosperity. Prosperity MUST come from rising incomes.