Archive - Feb 17, 2013 - Story

At this point everyone in the world knows what a drone is: some have been bombarded by one, others, thousands of miles away, have done the bombardment, and everyone else is split whether or not this remote-controlled form of international retribution and global Pax Americna should be allowed over the territory of the US - either for purely peaceful, or outright military, as was the case with the Chris Dorner manhunt, purposes.  And as with most issues that polarize US society, the approach is one of form opinion first, and investigate the underlying facts later. To that end on Friday, the Government Accountability Office, or GAO, issued testimony on Unmanned Aircraft Systems (UAS, or also Drones), titled "Continued Coordination, Operational Data, and Performance Standards Needed to Guide Research and Development" which while full of largely useless information, does have an informative section detailing which entities received Certificates of Waiver or Authorization (COA) or said otherwise "permissions to drone" for a period , from the FAA, which is the ultimate authority granting UAS flyovers in the US. Among the agencies seeking and being granted such permissions are all domestic military; public (academic institutions, federal, state, and local governments including law enforcement organizations); and civil (private sector entities). So which entity engaged most actively in US-based droning in 2012? It will come as no surprise that of the 391 COAs issued in the past year, the Department of Defense accounted for 201 or, well over half of all authorized droning operations. One can rest assured that America is truly well defended, if mostly from enemies domestic.

With the G-20 (and G-7) concluding with what appears to be a slap on the wrist and a wink-and-a-nod to Japan, it seems the game of competitive devaluation will continue. Much pixel and ink has been spilled the 'potential' winners and losers in such an evolving game, but as Bloomberg notes, there has been one winner in the last 10 years each time the world has fretted over "currency wars". As fear (and actuality) of currency wars flares, the USD has borne the brunt of the buying. From 2004's JPYtervention to Mantega's 2010 comments and each time in between, when competitive devaluation is on the world's lips, then the USD is implicitly bid as the currency du jour is offered to any and every willing carry trade riderthere is. The trouble is - for the lowly US investor - each time the USD is bid, so the US equity market has hit an FX-translated earnings hump and fallen back. So while talking heads will exaggerate the nominal performance of Japanese and British equity markets as their currencies free-fall, perhaps the US investor should be careful what they wish for.

We recently introduced the four main candidates in the 'how easy can we be' glamor parade that is the BoJ Governor race. With Abe potentially set to name his nomination as early as this week, the rhetoric is heating up. Citi grades the BoJ governor candidates on a scale of 1 to 5 from the perspective of JPY bullish/bearish. Mr.Kazumasa Iwata will be the most JPY bearish candidate as he is a proponent of the BoJ’s foreign bond purchase. On the other hand, Mr.Toshiro Muto is the most JPY bullish candidate among the big three but he would still be far more dovish on monetary policy (and JPY negative) compared with Shirakawa, the current governor. The third candidate Kuroda will be middle between Iwata and Muto. Also, we need to pay attention to who shall be the deputy governors with USDJPY projections from 90 to 100 depending on the combination.

Economist Vilfredo Pareto's (1848 - 1923) data-driven discovery that 80% of the land in Italy was owned by 20% of the population led to the Pareto principle, known as the 80/20 rule. Research has turned up an astonishing range of natural and social examples of the 80/20 rule: fixing 20% of software bugs eliminates 80% of the tech support calls, 20% of the customers are responsible for 80% of the complaints, and so on. The 80/20 rule can be further reduced (80% of 80 is 64 and 20% of 20 is 4) to a 64/4 rule: the 4% "vital few" have outsized influence on the "trivial many" 64%. We can see the rough outlines of this distribution in income and taxes: The top 1% of taxpayers reported almost 17% of all taxable income and paid 37% of all income taxes; the top 5% reported 32% of all income and paid 59% of the taxes, and the top 10% earned 43% of the income and paid 70% of the taxes.

Who says Barron's covers are only good for timing contrarian market inflection points to the millisecond? In this specific case, we learn that all hope and change roads (soon to be de-potholed following another trillion in road renewal stimulus, aka ARRA 2.0, spent shortly and paying a minimum wage of $9.00 to the depotholers) lead to, where else, Greece.

It would appear that the hopes and commissions of each and every talking head wealth manager and/or central banker has been dashed on the rocks of 'fiscal cliff' tax-hike front-running and a citizenry who remain far more cognizant of the unreality of the real world than the reality being preached by the market. There were some fund flows this week into equity funds (the lowest in six weeks) but, as Reuters notes, it was all into international funds as domestic funds saw outflows and domestic bond funds once again saw inflows. As Goldman Sachs' funds flow and positioning monitor shows - Rotation, Over.

While the G-20 and the G-7 haggle among each other, all (with perhaps the exception of France) desperate to make it seem that Japan's recent currency manipulation is not really manipulation, and that the plunge in the Yen was an indirect, "unexpected" consequence of BOJ monetary policy (when in reality as Richard Koo explained it is merely a ploy to avoid the spotlight falling on each and every other G-7/20 member, all of which are engaged in the same type of currency wars which eventually will all morph into trade wars), Europe's energy powerhouse Norway quietly entered into the war. From Bloomberg: "Norges Bank is ready to cut interest rates further to counter krone gains that interfere with the inflation target, Governor Oeystein Olsen said. “If it gets too strong over time, leading to inflation that’s too low, we will act,” Olsen said yesterday in an interview at his office in Oslo.

Jobs! President Obama has set a record. In his speech to Congress on Tuesday, he uttered the word "jobs" more than in any of his previous four State of the Union addresses. His 45 mentions were more than double the references to any of the other policy ambitions encapsulated in his speech by such words as health, education, immigration, guns, deficit, debt, energy, climate, economy, Afghanistan, wage, spend or tax (the runner-up). If only the president's record on unemployment were as good. After four years America remains in a jobs depression as great as the Great Depression.