Archive - Jun 15, 2012

Though the November election will be hyped as two opposites squaring off against each other, both candidates are considered rather moderate compared to who could have been the nominees.

The question is, are Barack Obama and Mitt Romney really that moderate?

Let’s account for the similarity in policy of both.

News & headlines from the day

We're paid by investors, we have to earn our keep every single year. S&P and Moody's are being paid by the issuers of debt

Nerves are frayed, tempers flare, the euro teeters

What makes for a good investment is price. Price is everything. You need to receive value in excess of the price paid. An investment’s value is the amount of real cash its underlying assets can reasonably be expected to deliver to its shareholders in the future, discounted for its risk – period. The investment’s price will either be higher than its value (an uncompensated risk), the same as (neutral) or lower than its value (a compensated risk). But since value is an imprecise measurement, the best one can do is to build in a margin of safety by buying investments that are at deep discounts to a reasonable estimated value. Too many investors let an investment’s short-term price movements, or perceptions of short-term price movements drive their decisions. But since short-term price moves are unknowable, irrelevant and independent of investment merits, this is not worthy of any time spent analyzing. If short-term price moves were knowable, then a cadre of top-performing chartists and market technicians would have far greater net worths than Warren Buffett, Charlie Munger and the Saudi Royal Family. They would need only apply leverage to their process and repeat it a few times in order to accrue hundreds of billions of dollars. Question: How many market technicians occupy the Forbes 400? Answer: Zero. Why? Because successfully guessing future price moves based on charts, MACD indicators or tea leaves is not a repeatable process. Investors who do this generally have poor outcomes because they are pursuing answers to the wrong question.

The right question is: where is the value?

While the mantra "Don't fight the Fed" seems to ring true with investors, I am little less sanguine than most, and I have a hard time buying the accepted dogma.

What if nobody showed up at Armageddon?--CR Strahan

Don't read this if you have high blood pressure or if you are a client of MF Global's, whose money is still held by JP Morgan.

The pages of the financial press overflow with opinions on what targets would make the world safer: what ratio of risk-weighted-assets banks should target, what RoE targets they would be safe at, what inflation target the central bank should aim for, or what growth target is appropriate for China. When SocGen's Dylan Grice was asked if he was a fan of the idea of nominal GDP targets! He snapped he is not and thought it "a terrible idea". As he opines, today’s various issues – the euro, China’s economy, over-indebtedness – are the cumulative unintended consequences of such past targets, and the naïve presumption that complexity can be commanded. Even mildly complex systems, any outcome is the wrong thing to target, with the process being where the focus should be. Expressing how little time he has for macroeconomics, reasoning that it’s obsessed with the targeting of interest rates, GDP, inflation, unemployment, exchange rates, et cetera, as though such a thing was possible without unintended consequences; Grice notes that Austrian economists understood this too. Ludwig von Mises distilled social phenomena to the simple observation that "man acts purposefully".

Obama is about to address (as of 1:15 pm Eastern, so the sandtrap was obviously a monster) America's illegal immigrants, and critical Hispanic vote, advising them he has successfully avoided this pest known as Congress, and that henceforth not all of them will be deported. The immigrants that is, not Congress... although that too may change. Because remember: the only thing better than record part-time jobs is recorder part-time jobs. Also remember: one can't affix a price to securing the vote... of those who are ineligible to vote.

Yesterday's rumor that global central banks may, just may, respond to a Greek exit from the Eurozone, which would send the world into tailspin sent stocks higher. Because without said rumor nobody, repeat nobody would possibly imagine that there could be a coordinated response to an event that would send global risk down over 20%. Today, it gets even dumber:

• ECB MAJORITY SAID TO OVERCOME CONCERN ON CUTTING DEPOSIT RATE.
• ECB POLICY MAKERS HAVE OVERCOME A KEY CONCERN ABOUT TAKING THE BECHMARK RATE BELOW 1%

At least yesterday the source was some discredited G-20 member. Now it appears that the media has a front-row seat to ECB deliberations. Fascinating. And what is even more fascinating is that the market continues to fall for these rumors "breaking news" and rumors time after time after time...

For some reason, whenever people want to make a historical example of a hyperinflationary period, they always bring up the Weimar Republic, aka Germany in 1920-1923. Yet with a highest monthly inflation of just under 30,000%, Weimar was a true walk in the park compared to the 309,000,000% monthly inflation in 1992-1994 Serbia, but especially to the 12,950,000,000,000,000% inflation that Hungarians had to deal with in the aftermath of WWII. For these and more  comparative examples of hyperinflation, particularly relevant now that the entire world is rumored (for now) to be getting ready to print, see below.

It remains tough to handicap the results of this weekend's events - most notably Greek elections (though Egypt could be the blacker swan of the two). It seems New Domocracy has a slight edge on SYRIZA at the bookies in Europe but the most likely event remains that no single party would have a sufficient majority to forma government and coalition talks will be required. Barclays expanded decision tree is 'everything you wanted to know about European uncertainties but were afraid to ask' and along with our earlier note of what to expect from asset class returns in the various scenarios provides the key guide to positioning into and beyond the weekend.

Remember, both as my research and the past 5 yrs have made clear, counterparty induced banks runs are the most damaging and Spains banks are hit from both RE and Sovereign debt crises. Who wouldn't run from this?