Archive - Oct 30, 2012 - Story

With the US elections approaching next week, as well as the threat of another fiscal cliff showdown looming, we look at how the expansive Central State has come to dominate both private society (i.e., the community) and the marketplace, to the detriment of the nation’s social and economic stability. We examine six critical dynamics that will lead to the devolution of Peak Government. "Governments, desperate for more revenues, ignore public resentment and loss of trust, which only deepens the disconnect between those in government and the public.  And the private citizenry sees a lack of accountability, soaring public debt, accounting trickery, political dysfunction, and mal-investment of public funds as the hallmarks of their government."

Defending the indefensible? In the past weeks, there has been a 'revival' of news related to high-profile inside trading cases. Insider trading is accurately pictured in that great movie called "Wall Street", by a famous line of Gordon Gekko to Bud Fox. Gordon said: "If you’re not inside, you are outside". Gordon was right. If only people understood that this is just a natural thing... It has nothing to do with ethics. Yes, we know that there is something in our argument that may not make sense to you... and we dare to guess that it is because you expect fairness when you invest your savings in a public security (i.e. a stock or a bond). But in all honesty…have you ever asked yourself why you expect fairness? We are not implying people should not trust those who issue or market these securities. But if they do, they should recognize that there is the risk that they may suffer a loss due to insider trading. Public securities, ceteris paribus, should trade at a discount to private securities, to compensate for the risk of lack of control and transparency. Yet, today, the opposite applies.

In a stunningly accurate prediction of what to expect from a 100-year storm, the following 2011 report assessing the 'risk increase to infrastructure due to a sea level rise' provides everything you did not want to know about just how bad the situation is with recovery from Sandy's damage but were afraid to ask. Based on extrapolations from storm surge heights, the authors see a 'perfect storm' of this magnitude likely creating a total loss between $50 and $100bn. As Atlantic Cities notes, citing the report: The researchers also estimate that... it could take the subway system about 21 days to get working at 90 percent functionality. If all potential damage is considered, ...that timeline could increase to several months, and that "permanent restoration of the system to the full revenue service that was previously available could take more than two years."

From the first divide in Congress between supporters (right) and opponents (left) of the Washington Administration to the latest record-breaking level of polarization in the House and the Senate, this stunning visual guide to the right- and left-leaning partisanship and ideology of our politicians over the last 224 years is spell-binding. We particularly enjoyed the chaos in the 1820s as the dominant parties fractured - rang an odd bell.

What is really causing the economic malaise that the U.S. faces today?  Most economists believe that it is the lack of aggregate demand that is causing the problem which can be rectified by continued deficit spending.  The current Administration believes that it is simply the lack of the "rich"  not paying their "fair share" and that a redistribution of wealth will solve the issue.  Romney believes that his 5-point plan will create 12 million jobs in the near future.  All are wrong.  

While much of New York City and Westchester remain 'dark' thanks to Sandy; it seems across the pond, the government of Valencia has gone dark due to stupidity. As El Economista reports, several departments of the Generalitat Valenciana have remained without power Tuesday after a power cut ordered by Gas Natural Fenosa, trading company that supplies electricity to the regional administration. The reason, well it's not clear, but reading between the lines of the comments of one politician "disastrous [government] policy has left the box empty so there's no point to pay for electricity," suggests a combination of lack of funding and a need to 'bite one's own nose off to spite the face'. The 'incomprehensible and inconceivable' temporary cessation of power has apparently been restored - after the government 'satisfied payments to the company'. Perhaps this anecdotal snafu explains why Spanish bonds have been bleeding higher in yield when all we hear from talking heads is that all is well - and deficits will be better next year.

The hurricane water surge has come and gone, devastating downtown New York, but one place, the one that represents the deepest hole burrowed south of Houston street and literally lies on the New York bedrock 80 feet below street level, is safe and sound. The place, of course, is where over 20% of the world's tungsten gold is stored. Especially that of Germany (wink wink). And Germany, whose central bank was recently caught in a series of official disclosure faux pas as described here in regards to its official gold holdings, can rest assured that nothing that hasn't already happened to its gold, happened last night.

The choice of the word “unadulterated” is not accidental.  There were many different kinds of gold standard, including what we now call the Classical Gold Standard, the Gold Bullion Standard, and the Gold Exchange Standard.  Each contained flaws; each was adulterated.

With US equity markets closed for the second day in a row, we remain at the whim of either wishful-thinkers on TV or pragmatic realists looking at other markets for clues. Guessing at tomorrow's cash open (or this evening's futures open) is a coin-toss. Gold's move today implies stocks open down around 1%; Treasury Futures imply stocks open down very modestly; the Canadian equity market indicates stocks open up around 1%; and EURUSD (and EURJPY) suggest equities open down slightly from this morning's closing level of 1411.25. So take your pick - up 1%, down 1%, or unch? Or all at the same time as the algos go full Baumgartner. S&P 500 futures will re-open at 1800ET.

Just when you thought the Star Wars sexalogy had three horrifying episodes too much, here comes Mickey Mouse to buy the HoldCo (for $4 billion) and make sure that even more atrocious dancing takes place on the grave of the science fiction movie that defined a generation. That, and a whole lot more Lando Calrissian action figures. Because how does one know Hollywood has officially run out of ideas? Like this: "Star Wars Episode 7 is targeted for release in 2015, with more feature films expected to continue the Star Wars saga and grow the franchise well into the future." Surely Star Wars 7 will have a Retina Display, but if young Skywalker relies on Apple maps to get to Tatooine we will just wait for part 9 (not to be confused with how many inches the maxiPad will be). What we are most excited about, however, is Indiana Jones 7 - Raiders of the Lost Wheelchair. And the renaming of Star Wars IV, of course, to "A New Hope and Change."

On the heels of Mr. Tilson's missive, we thought this brief clip might help. Voting well is not about being properly hydrated, reaching the polling booth on time, and placing your ballot slip (hanging chad-less) in the slot (without touching the sides); it is about removing your inherent cognitive biases and going with the facts - or trying to discern the facts - as much as possible. Making well-informed decisions with the cloud of spin and uncertainty that constantly bombards us is hard but as Jason Brennan notes in this brief clip, starting by recognizing our natural biases might help. By outlining the four common biases that tend to affect our voting (think back to 'The Other Side' post and how real it was!), he offers five suggestions that can lead us to be better voters.

Whitney Tilson, who needs no introduction given his omnipresence on the business media and anti-omniscience (e.g. the Anti-Tilson ETF here) when it comes to stock-picking, may just have put the final nail in the coffin of Obama's chances of winning the election. Via the quill of the man that top-ticked NFLX, "Why I'm Voting for Obama Again":

In virtually every area – the economy, jobs, social issues, foreign affairs, etc. – I think Obama has done well in his first term (and am optimistic that he’ll be even better in his second term), and going forward I believe Obama and the Democrats have a more clearly defined, realistic, better plan for our country than Romney and the Republicans.

Update: 15 seconds later, all open Per Se reservations had been taken. Better luck after the next hurricane.

New York is back, baby. Best way to check? Restaurant reservations. And the best cross referencing place for that these days is OpenTable. A cursory check shows that of the 616 restaurants indicating availability for tonight, many already have the much desired 7:00 pm slot already booked up. Among these are such bastions of haute gourmet as Asiate, Rouge, Cipriani Caravaggio, Ouest, Felidia, Triomphe, and of course Dorsia Per Se. Which means only thing: New York has picked itself up, brushed off the rain drops from its $10,000 fitted Zegna suits, and is back to eating. The good news: Per Se still has a 6 PM opening (although probably not for long after this post).

Readers of Zero Hedge know well that one of the most abhorred (by us) accounting gimmicks employed by banks each and every quarter over the past 3 years to boost their bottom line, is to engage in loan-loss reserve releases: a process which has absolutely no associated cash flow benefit, but merely boosts EPS for GAAP purposes. In some cases, like this quarter's absolutely farcical JPM earnings release, the abuse is beyond the pale, as the offending bank releases reserves even as it reports surging non-performing loans: two processes which in a normal world can not coexist. Yet quarter after quarter banks keep on doing this, and in fact a big part of Q3's to date EPS outperformance is courtesy of financial company "earnings", of which, in turn, loan losses amount to about 50% of the entire blended financials bottom line. Yet while we can rage and warn, nothing usually happens until there is a market crash due to the gross manipulation of reality that such an activity entails. Luckily, this time someone with more clout in the legacy establishment has now stood up to warn about the mounting dangers associated with the relentless abuse of loan-loss reserve releases: none other than the US Comptroller of the Currency.

The US elections have the potential to have a significant impact on US equities and rates markets, according to a recent survey by Barclays Research. Investors seem to believe in a more promising growth outlook under a Romney win, in spite of their concerns about a likely tighter monetary policy stance. They favor long equities and short bond portfolios as the best way to express a Romney win. Under an Obama win, investors favor bonds and are divided about the direction of equities, but would choose bonds and equities over FX and commodities to express this scenario. Obama’s victory would likely be perceived as preserving the status quo (asset market moves are expected to be muted across the board), while a Romney win is more likely to suggest a change of direction to clients by way of a better growth outlook. Congressional deadlock remains the biggest economic/policy concern no matter who wins.