Archive - Jan 23, 2013

Visualizing "Resilient Dynamism"

As you probably know, in 2010 the US government passed one of the most arrogant, destructive, poorly conceived pieces of legislation in history, now known as the Foreign Account Tax Compliance Act (FATCA). FATCA heaps all sorts of reporting requirements on US taxpayers with foreign financial accounts - in a mind numbing 544 pages... Here’s the bright side of all this nonsense: now that the rules are finally settled, it’s now going to be much, much easier for US taxpayers to open foreign bank accounts. Over the past three years, the opacity of FATCA was too risky for banks. Today, while the final rules are cumbersome, they’re at least settled. So the banks know how to operate. I’m hearing from a number of overseas banker contacts, from Singapore to Panama to Malta, that they’re once again opening their doors to US customers.

Some time ago when we looked at the the performance of the world's largest and best returning hedge fund, Ray Dalio's Bridgewater, it had some $138 billion in assets. This number subsequently rose by $4 billion to $142 billion a week ago, however one thing remained the same: on a dollar for dollar basis, it is still the best performing and largest hedge fund of the past 20 years, and one which also has a remarkably low standard deviation of returns to boast. This is known to most people. What is less known, however, is that the two funds that comprise the entity known as "Bridgewater" serve two distinct purposes: while the Pure Alpha fund is, as its name implies, a chaser of alpha, or the 'tactical', active return component of an investment, the All Weather fund has a simple "beta isolate and capture" premise, and seeks to generate a modestly better return than the market using a mixture of equity and bonds investments and leverage. Ironically, as we foretold back in 2009, in the age of ZIRP, virtually every "actively managed" hedge fund would soon become not more than a massively levered beta chaser however charging an "alpha" fund's 2 and 20 fee structure. At least Ray Dalio is honest about where the return comes from without hiding behind meaningless concepts and lugubrious econospeak drollery. Courtesy of "The All Weather Story: How Bridgewater created the All Weather investment strategy, the foundation of the "risk parity" movement" everyone else can learn that answer too.

The reliable data which policymakers and the public need if effective solutions are to be found is not available. As Tullett Prebon's Tim Morgan notes, economic data has been subjected to incremental distortion; Data distortion can be divided into two categories. Economic data has been undermined by decades of methodological change which have distorted the statistics to the point where no really accurate data is available for the critical metrics of inflation, growth, output, unemployment or debt. Fiscal data, meanwhile, obscures the true scale of government obligations. While he does not believe that the debauching of US official data is the result of any grand conspiracy to mislead the American people; he does see it as an incremental process which has taken place over more than four decades. From 'owner equivalent rent" to 'hedonics', few series have been distorted more than published numbers for inflation, and few if any economic measures are of comparable importance; and the ramifications of understated inflation are huge.

On January 22, 2012, candidate François Hollande called banks the “enemy.” Now you’d think he is being tutored by Jamie Dimon.

We all have inner maps that assign awareness, priority and importance to geographic features. For those who work inside the Beltway, Washington D.C. dominates their mental map of the world. Residents of Manhattan famously regard it as the center of the financial, art, fashion, etc. world. In the hipster techie mental map, Washington D.C. doesn't exist, and New York has a small tech innovation footprint. In this world view, politics, finance and fashion are not what changes the world for the better; only tech does that.

The run to 1500 for the S&P 500 is over, and these three tech companies are either complete no growth dogs, or over-priced retailers! 

Forget the Housing, Bond or Derivatives Bubbles ... Fraud Is the Biggest Bubble of All Time

In today’s climate of cell phone contacts, Facebook and LinkedIn, business cards may be becoming a thing of the past. Then again, they can still say a lot about you. Whether boilerplate or highly designed, staid or comical, FlavorWire has gathered twenty business cards of fascinating and famous people from Abraham Lincoln to Lady Gaga, Einstein to Lady Gaga, and from Houdini's triangular card to Marc Zuckerberg's "I'm CEO, Bitch!"

From a valuation perspective, Chinese equities do not, at first glance, look to be a likely candidate for trouble. The PE ratios are either 12 or 15 times on MSCI China, depending on whether you include financials or not, and do not scream 'bubble'. And yet, China has been a source of worry for GMO over the past three years and continues to be one. China scares them because it looks like a bubble economy. Understanding these kinds of bubbles is important because they represent a situation in which standard valuation methodologies may fail. Just as financial stocks gave a false signal of cheapness before the GFC because the credit bubble pushed their earnings well above sustainable levels and masked the risks they were taking, so some valuation models may fail in the face of the credit, real estate, and general fixed asset investment boom in China, since it has gone on long enough to warp the models' estimation of what "normal" is. Of course, every credit bubble involves a widening divergence between perception and reality. China's case is not fundamentally different. In GMO's extensive discussion below, they have documented rapid credit growth against the background of a nationwide property bubble, the worst of Asian crony lending practices, and the appearance of a voracious and unstable shadow banking system. "Bad" credit booms generally end in banking crises and are followed by periods of lackluster economic growth. China appears to be heading in this direction.

The ex-back of the envelope TARP calculation "chump" become wood-chopper, turned equity portfolio manager has gone full circle and decided his time is better spent serving the public good once again. As the WSJ reports, Neel Kashkari is considering running for office in California. The napkin-laden chrome-dome has seen his funds suffer from spotty performance since their launch - all underperforming the benchmarks. We can't help but think the timing of his announcement odd given his love affair with Apple and tonight's collapse but that would be harsh judgment on the always self-denigrating 39 year-old. Of course, we will hear the impressive nature of him leaving a well-paid job to run for office as his patriotism runs wild; we are less 'believer'. Still, managing to have your name turned into a noun and a verb is no easy task...

After digesting the opinions of the shills, shysters and scam artists, I am ready to predict that I have no clue what will happen during 2013. The fog of uncertainty is engulfing the nation, making consumers hesitant to spend and businesses reluctant to hire or invest. Virtually all of the mainstream media, Wall Street banks and paid shill economists are in agreement that 2013 will see improvement in employment, housing, retail spending and, of course the only thing that matters to the ruling class, the stock market. Even among the alternative media, there seems to be a consensus that we will continue to muddle through and the day of reckoning is still a few years off. Those who are predicting improvements are either ignorant of history or are being paid to predict improvement, despite the overwhelming evidence of a worsening economic climate. The mainstream media pundits, fulfilling their assigned task of purveying feel good propaganda, use the 10% stock market gain in 2012 as proof of economic recovery. The facts prove otherwise... Every day more people are realizing the con-job being perpetuated by the owners of this country. Will the tipping point be reached in 2013? I don’t know. But the era of decisiveness and confrontation has arrived. The existing social order will be swept away. Are you prepared?

Is Britain “drifting toward the exit”? 

Earlier today, we reported that "Assistant Attorney General Admits On TV That In The US Justice Does Not Apply To The Banks" when we commented on last night's PBS special "The Untouchables." Explicitly, we said that it was "Lenny Breuer who made it very clear that when it comes to the concept of justice the banks are and always have been "more equal" than others. He does so in such shocking clarity and enthusiasm that it is a miracle that this person is still employed by the US Department of Justice." As of minutes ago that is no longer the case as his employment contract has been torn up. The WaPo reports, that Lanny A. Breuer is leaving the Justice Department "after leading the agency’s efforts to clamp down on public corruption and financial fraud at the nation’s largest banks, according to several people familiar with the matter....It is not clear when Breuer intends to leave, nor what he plans to do once he departs, but it is certain that the prosecutor’s days in office are winding down, according to people who were not authorized to speak publicly about the matter."

I'll let the numbers and facts speak for themselves as the #FanBois grope for something to retort... It's "knowledge how", not "knowledge that"!!!