Archive - May 2013 - Story

Perfectly summarizing the cognitive dissonance of the mainstream media (and their drone-like viewers), this duel of the Soft-Money-Honey Maria B and Hard-Money Golden Boy Peter Schiff was a tragic farce. Maria comes out swinging, "whether this is a manufactured market or not, you've got no alternative but stocks - where's my yield?" Schiff counters, "there are alternatives" - summarily scoffed at (a-la his housing appearances in 2006/7) by Maria - "we have a completely phoney economy driven 100% by cheap money; the minute you take it away, the whole thing implodes." And while the 'fight' moves on, we are left thinking they are in two different rings since whatever point is made by Schiff is summarily ignored for the status quo. "QE will be here until we have a USD crisis and the Fed can't get away with it anymore," Schiff reminds, adding, "There is no exit strategy... the Fed is bluffing; exit is impossible." The glancing blows continue deep into the late rounds. "The reality is we are living in a bubble; and all bubbles burst," (reminding us of Sam Zells' comments to the very same CNBC anchor a few weeks back), "it's unfortunate we didn't learn that lesson in 2008 but we're about to learn a much bigger lesson." Disingenuous laughter follows at Schiff's suggestion at holding Gold with Maria's anchoring bias loud-and-proud - "I'm looking for alternatives to stocks, and I can't find any."

For 727 editions, and nearly 30 years, Bill Buckler, the "captain" of the free market-praising Privateer newsletter provided a welcome escape from a world overrun with "free-lunch" economists, "for-hire" politicians, "crony-capitalist" oligarchs, "heroin-addict" bankers, "the-solution-to-record-debt-is-more-record-debt" Keynesians, and all those other subclasses of that species which Einstein, or whoever, described so aptly in saying that they all expect a different, and happy, outcome when applying the same flawed methods over and over. And for 30 years, Buckler's steadfast determination and adherence to his arguments, beliefs, reasoning and ironclad logic brought him countless followers, all of whom are now able to see past the bread and circus facade of a world every day on the edge of political and social collapse. Sadly, all good things come to an end, and so does The Privateer. We are delighted to celebrate its illustrious memory by presenting to our readers the final, must read, issue of the newsletter which encapsulates the philosophy and ideology of its author - a man much respected and admired in the free market circles - and thirty years of objective, unbiased market and economic commentary, best of all.

The world is awash in contradiction with stocks rising to new highs as interest rates reflect a slowing economy. It is an upside down world according to PIMCO's Mohamed El-Erian. As Lance Roberts annotates, the moustaced maestro explains individuals are both excited and anxious. They are excited by the rally in the markets as they see their portfolios increase in values but at the same timed overwhelmingly concerned about the economic future. It is a world with an enormous contrast between the markets and the real economy. That is the world we are navigating and it is incredibly unusual. This is why it is an unloved rally. His discussion at the recent Strategic Investment Conference is about a simple framework to reconcile these issues. The long term view matters greatly - but the short term matters also.

If there is any market that demonstrates the complete and total misallocation of capital that results from Banana Ben Bernanke’s money printing and artificially low interest rate policy, it the latest phony American housing bubble. With a record numbers of citizens on the food stamp electronic breadline, with unemployment stubbornly high no matter what data you use, billionaire financial oligarchs are running around bidding up “homes for rent” and pricing out the random average person that actually has the capacity or desire to bid. What follows below demonstrates the degree of insanity that has now been unleashed upon the streets of Las Vegas - in their QE-forever induced delirium, homebuilders have gone Chinese and in Las Vegas "permits for new home construction are up 50 percent, twice the national average."

You know the market is frothy when the greatest concern among professional money managers is "Asset Bubbles." As interest rates rose in the early part of this year, the 'great rotation' - with outflows out of bonds and in to stocks - was heralded by many as ammo for the next leg higher in stocks; now over a quarter of investors - a share that rose 100% since BofAML's previous (March) survey - believe 'the great rotation' will never happen (only another 73% to get to reality). Instead, there are increasing concerns about inflows leading to bubbles – mainly in high yield, where investors appear uncomfortable with flows-driven spread tightening without fundamental improvement and higher interest rates (and implicitly the linkage between equity valuations and credit bodes ill for the latter, as opposed to supportive). In fact, asset bubbles now rank as the number one concern on investors’ minds, while a slow recovery moved up into second spot. So despite the best efforts of the 'marketing' arms of the big sell-side shops (so-called 'strategists'), the professional buy-side is not 'adding' at these highs, but becoming increasingly skeptical.

While Harvard historian Niall Ferguson's off-the-cuff remarks during the Q&A were in his words "as stupid as they were insensitive", the core message of his presentation was clear: the party of the last 20 years is now over and the longer we fail to address the real issues the bigger the hangover will be in the future. The central question Ferguson asks is whether our institutions, corporations and governments, are degenerating. As Lance Roberts of Street Talk Live notes Ferguson believes that without addressing the structural problems that plague the economy from production to employment – stimulus will fail. The reality is that the 'punch bowl' won't fix employment growth, economic growth or the rule of law.

"Where do multinationals pay taxes and how much?" Gaining insight from international tax experts, this excellent documentary takes a look at tax havens, the people who live there and the routes along which tax is avoided globally. As we have previously discussed in great detail, those routes go by resounding names like 'Cayman Special', 'Double Irish', and 'Dutch Sandwich' amid a financial world operating in the shadows surrounded by a high level of secrecy where sizable capital streams travel the world at the speed of light and avoid paying tax. 'The Tax Free Tour' explains the systemic risk for governments and citizens alike. Is this the price we have to pay for globalized capitalism? At the same time, the online game "Taxodus" provides an interactive guide to hiding your company's cash. In the game, the player can select the profile of a multinational and look for the global route to pay as little tax as possible.

When it is on the receiving end of coure.

For those following Bitcoin, this interview with Gavin Andresen, the 46-year-old lead software developer for the Bitcoin project in today’s Wall Street Journal should be of interest. The chief scientist for the digital currency talks about its appeal - and pitfalls - in a world of fiat money. Politicians and their appointees are entirely cut out of Bitcoin’s monetary loop, Andresen explains, adding that "Bitcoin or a similar technology could threaten the power of not just central banks, but banks, period." It is perhaps the coder's parting words that are most insightful, "I tell people it’s still an experiment and only invest time or money you could afford to lose. If only investors could as easily follow that advice with fiat currencies."

Across the five valuation methodologies that Goldman's David Kostin uses to consider the S&P 500's richness, the current price (around 1600) represents the average. While the Fed Model (bond vs stock value) is the one significant 'framework' suggesting upside potential but as Kostin notes, it is bonds that are more mispriced than stocks and the gap could close from bond side (significantly reducing the upside potential of this model). His macro-valuation framework, as well as the ROE vs P/B relationship and the Discounted Dividend Model all suggest year-end 2013 fair value at around the current price (i.e. 0% upside). And remember, as we noted recently, this 'expectation' still relies on the H2 2013 rebound in GDP and implicitly EPS (+28% in Q4 2013!) that is so hoped for.

The economy has changed in structural ways; preparing for the old economy is a sure path to disappointment. Millions of young people will be graduating from college over the next four years, and unfortunately, they will be entering an economy that has changed in structural ways for the worse. It's easy to blame politics or the Baby Boomers (that's like shooting fish in a barrel), but the dynamics are deeper than policy or one generation's foolish belief in endless good times and rising housing prices.

A. Gary Shilling's discussion of how to invest during a deleveraging cycle is a very necessary antidote to the ecstacy and euphoria that surrounds the nominal surges in risk-assets around the world sponsored by central banking largesse. Shilling ties six fundamental realities together: Private Sector Deleveraging And Government Policy Responses, Rising Protectionism, the Grand Disconnect Between Markets And Economy, a Zeal For Yield, the End Of Export Driven Economies, and why Equities Are Vulnerable. The risk on trade is alive and well - but will not last forever. We are still within a secular bear market that begin in 2000 with P/E ratios still contained within a declining trend. Despite media commentary to the contrary - this time is likely not different.

The bespectacled Robin to Buffet's Batman is at it again. After casting disparaging remarks about the hard-money fanatics of the world with his "only old jews like gold" comment last year, in a brief interview on CNBC today, Charlie Munger explained how "bankers should not be trusted" adding that "they are like heroin addicts." He was reflecting on the debacle that occurred in Cypriot banks of course - but his perspective is likely useful for a broader remit of investment professionals with endless fungible free money as their backstop. So that's the pair; hard- and soft-money partakers be damned. The irony of his firm reporting dramatically better-than-expected profits on the back of a surge in insurance-selling (not at all like CDS) is not lost on us.

The world's central banks have printed unimaginable amounts of money in recent years - "these guys are really more powerful than the government." Neil Macdonald explores what this means for the global economy and for your financial well-being - "can you imagine if the American public knew there was this 'club' that met secretly in Switzerland and made decisions that dramatically affected their lives, but we're not going to tell you about it because it's too complicated." This brief documentary should open a few eyes to the reality behind the world's most powerful (and real) cabal.

The pricing of 'safe' assets reflects the ongoing uncertainty in a world that is in the grip of the lunacy of policymakers who have seemingly lost all sense of perspective and are engaged in a huge gamble. This essential fundamental backdrop has not changed for the better lately, but for the worse. What this once again demonstrates is that intervention by central banks is creating incentives for many institutional investors to take inordinate risks in the name of preserving the purchasing power of the savings that have been entrusted to them. The problem is that the gains of today are absolutely certain to become the losses of tomorrow for investors taking the bait, as the echo bubble created by loose monetary policy is fated to turn into a major bust once the boom has played out. When the tide is going out, a great many naked swimmers will be revealed.