Archive - Oct 2013

We identify the six investment themes that look likely to generate alpha over the coming decade.

"The commonalities of global integration mean that diverse hazards may lead to common shock consequences. The systems that transmit shocks are also the systems we depend upon for our welfare and the operation of businesses, institutions and society... One of the primary consequences of a generic shock is an interruption in the flow of goods and services in the economy. This has diverse and profound implications - including food security crises’, business shut-downs, critical infrastructure risks and social crises... More generally it can entail multi-network and delocalised cascading failure leading to a collapse in societal complexity.... This is a complex society’s equivalent of a heart attack. When a person has a heart attack, there is a brief period during which CPR can revive the person. But beyond a certain point when there has been cascading failure in co-dependent life support systems, the person cannot be revived. The extent of our contemporary complex global system dependencies, and our habituation to a long period of broadly stable economic and complexity growth means a systemic collapse would present profound and existential challenges."

The current market environment of increasing event risk (suppressed by the all too visible un-tapering hand of the Fed) and slumping earnings expectations has had little to no effect on either the US equity market nominal level or the commission-taking asset-gatherers pitching the "long-term" buy that the market always is. Through the magic of multiple expansion, stocks remain at all-time highs and are pitched as "cheap" because multiples can still get bigger - remember March 2000 25.6x P/E... There is only one thing wrong with that dream. No matter how hard the Fed tries (mistakenly as we noted here) to pump the "economy" full of money to make consumers feel good, Consumer Sentiment has hit a wall...

Bank of America's latest forecast on the resolution, or lack thereof, of the government shutdown, which now seems virtually certain to last at least one week into Monday night, when the House and Senate return to work, is hardly encouraging. The bank's base case now calls for "either a two-week shutdown or for multiple shutdowns." Additional, BofA has now cut its Q3 GDP forecast from 2.0% to 1.7% and from 2.5% to 2.0% for 4Q. It gets worse: "Much worse outcomes are possible. In our view, agreement is almost impossible as long as the Affordable Care Act is on the table." Finally, and what ties it all together, is that as a result of the lack of "government data", BAC now expects the Fed to delay tapering to their January meeting, or later. Which may well have been the much needed alibi all along to delayed tapering until 2014.

While it is not surprising to see the apparent supreme dominance of Google and Facebook on the Web, the more important question is global data privacy and the related measures.

David Stockman, author of The Great Deformation, summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank...

What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut...

He calls this condition "Sundown in America".

It took just four days before the Federal government caved to Congress and admitted that it can't even operate in a partial, "non-essential" shutdown. A few short hours ago Defense Secretary Chuck Hagel ordered 400,000 furloughed Pentagon civilian employees - or about half the total defense employees - back to work. it is also roughly half of the total employees furloughed since the start of the government shutdown, which is now in its fifth day, and since both the House and the Senate are now gone until Monday afternoon, it appears the shutdown, even if now at half mast will continue for at least a week.

Presented with little comment but to ask what next? The New York Mediums? The Oakland Privateers? The Cleveland Beiges? The Atlanta Cowards?

Yesterday we described the various scenarios available to Treasury in the next few weeks should the shutdown and debt ceiling debacle carry on longer than the equity markets believe possible. As BofAML notes, however, the most plausible option for the Treasury could be implementing a delayed payment regime. In such a scenario, the Treasury would wait until it has enough cash to pay off an entire day’s obligations and then make those payments on a day-to-day basis. Given the lack of a precedent, it is hard to quantify the impact on the financial markets in the event that the Treasury was to miss payment on a UST; but the following looks at the impact on a market by market basis.

The last few days have been punctuated with fearmongery from Alexander and Clapper over the shutdown's impact on the NSA and the increased threat of terror this generates. However, as the Washington Times reports, things are a little different in reality. Pressed by the Democratic chairman of the Senate Judiciary Committee at an oversight hearing, Gen. Keith B. Alexander admitted that the number of terrorist plots foiled by the NSA’s huge database of every phone call made in or to America was only one or perhaps two — far smaller than the 54 originally claimed by the administration.

The irony of Jesse Ventura calling for a new "American Revolution" in a conversation with Brit Piers Morgan is not lost on us but the former Governor of Minnesota asks some awkwardly open questions in this 'colorful' interview. Ventura asked if the government's shut down, "That should mean we shouldn't have to pay any taxes, right?" He called for another American revolution to push back against the "corrupt system" created by Democrats and Republicans in Washington. He told Morgan the two-party system has legalized "bribery" for access, suggesting he's fed up enough to actually run for president in 2016. Ventura called both parties "gangs," and Morgan admitted he had to agree, adding that they're "overpaid, underworked children!" The discussion then veers from Obamacare, Ventura's run for President, and the JFK conspiracy.

It is seriously 1999 all over again here in the Silicon Valley. There's the revival of Kozmo (OK, that's in New York, but still.......), the comic run-up of TWTRQ yesterday, and now, right across the street from where I am sitting, there is Draper University.

In a tragic development, the unidentified man who set himself on fire on the National Mall at about 4:30 p.m. on Friday in between the Air and Space Museum and the National Gallery, and who sustained burns to 80% of his body, has died. AP reports: "A District of Columbia police spokesman says a man who set himself on fire on the National Mall has died his injuries. Officer Araz Alali says the man died Friday night at a hospital where he had been airlifted. He says the man was so badly burned that he will need to be through DNA and dental records. The man poured a can of gasoline on himself in the center portion of the mall Friday afternoon. He then set himself on fire, with passing joggers taking off their shirts to help douse the flames." As AP adds, Police are investigating the man's possible motives for doing so. They will hardly find any, as the last thing the Obama administration needs right now is to start explaining why D.C. has become ground zero for America's own Arab Spring. Especially, if in a country in which fomenting class and social hatred once again boils down to racial characteristics.

Here's a new and very bizarre entry for the annals of "the dog ate it" excuses. According to Reuters, Montana man Wayne Klinkel, who last year pieced together the remnants of five $100 bills eaten by his one-eyed golden retriever, Sundance, is sporting a $500 check he says he received this week from the U.S. Department of the Treasury to replace the digested funds. Sundance sniffed the wad of bills out of a car cubby space while waiting for Klinkel and his wife to return from lunch, and the canine made the currency his lunch.

Technically, the dollar is looking a bit better.  Here is our assessment.