Archive - Jun 2013 - Story

Survivorship bias helps us understand why success stories are not what actually helps us succeed. We know that we learn from mistakes and failures, yet the study of failure is never recorded or saved unless the company or individual "came back from the dead," for example, Apple after Steve Jobs returned to lead the company from the abyss in 1996. Survivorship bias is a profound insight into how we confuse the known unknowns and the unknown unknowns.

The espionage scandal that keeps on giving has released its latest installment, once more courtesy of the Guardian, which on the eve of tomorrow's starting G-8 meeting reveals that foreign politicians and officials who took part in two G-20 summit meetings in London in 2009 had their computers monitored, their phone calls intercepted, and fake internet cafes were set up on the instructions of the British Government Communications Headquarters (GCHQ), the sister organization to the US NSA. Naturally, it wasn't just the GCHQ - according to the Guardian, during the 2009 G-20 meeting there was an NSA attempt to eavesdrop on then-Russian leader, Dmitry Medvedev, as his phone calls passed through satellite links to Moscow. And while broad espionage allegations can be deflected by pretending by the rhetoric-endowed and teleprompter-aided that only terrorist threats were targeted, it will be very difficult to explain why the national information super spooks used every trick of the trade to spy on the so-called leaders of the developed world.

In the six weeks since the last FOMC meeting there has been almost uninterrupted relatively 'hawkish' chatter from Fed members. However, the consensus remains convinced there will be no 'Taper' anytime soon - as somewhat evidenced by the following summary of FOMC expectations from Goldman's Jan Hatzius. So the question is - if, based on the 'economy' there is a belief that no Taper will occur - why has the Fed been so 'hawkish'? We suspect, as we have noted numerous times, the decision to 'Taper' (or at least jawbone 'Tapering') is not economically data-driven but more a growing concern over technical impacts on the Treasury (fails and excess ownership) and mortgage (non-economic spreads crowding out private money and huge build in convexity) market and the bubble-like rational exuberance across every asset class that they have created.

In the wake of the recent news revealing the extent of the NSA's level of citizen surveillance through supernetworks like PRISM, Peak Prosperity's Chris Martenson speaks this week with Mark Skousen, former CIA agent turned founder of FreedomFest, one of the countries largest "gatherings of free minds". Mark argues that in this case, technology has advanced at a far faster pace than our culture's ability to understand how to use it effectively, responsibly, and how to regulate it... "...its like the Pentagon papers back in the early 70’s where we definitely need to tell government "You’ve overstepped your bounds"... The invasion of privacy is growing faster in technology than the privacy protectors... they’re just using this as a ruse and excuse to use this new technology."

Now that China's economic slowdown is official, and in the aftermath of the Q1 trade data embarrassment Chinese GDP may have no choice but to print at a sub-7% annualized rate (especially if the PBOC continues to stubbornly refuse to inject liquidity in the financial system), it is no surprise that Emerging Markets around the world have seen a furious smack down in the past several weeks, with many markets now outright negative for 2013. At the same time corporations, trading in still buoyant markets, which have extensive exposure to China on both a top- and bottom-line basis, have managed to avoid the beatdown due to their presence in liquidity-friendly regimes. But how much longer will central bank beta float all boats burdened by increasingly heavy (lack of) alpha? And which companies are the most exposed to China's, and broadly Asia's, consumption slow down? Below, we present the answer for companies that have both a discretionary and staples exposure to the China and the Asia (ex-Japan) markets.

While the world awaits Russia's formal response to last week's US escalation in Syria (as Putin demonstratively arrived an hour late for talks on Syria with UK PM David Cameron) another country: Iran - fresh from an election in which moderate candidate Hassan Rohani became the new president - is taking matters into its own hands. The Independent Reports that "a military decision has been taken in Iran – even before last week’s presidential election – to send a first contingent of 4,000 Iranian Revolutionary Guards to Syria to support President Bashar al-Assad’s forces against the largely Sunni rebellion that has cost almost 100,000 lives in just over two years.  Iran is now fully committed to preserving Assad’s regime, according to pro-Iranian sources which have been deeply involved in the Islamic Republic’s security, even to the extent of proposing to open up a new ‘Syrian’ front on the Golan Heights against Israel."

More confusion, or just more lies? You decide.

If Obamacare's stated goal was to broaden the health insurance market, give more options to consumers, and generally lower the cost of health insurance, courtesy of the IRS' flawless execution of yet another unprecedented government expansion, it may be in for a tough time. Because while on paper every statist plan of centrally-planned ambitions looks good, in reality things usually don't work out quite as expected. Case in point the news that Aetna will stop selling health insurance to individual consumers in California at the end of 2013, in advance of Obamacare's complete transformation of the insurance market: a transformation which just incidentally may see most private health insurance firms follow in Aetna's steps and the emergence of a single-payer system along the lines of the British National Health Service. A government-mandated and funded system which, needless to say, crushes private enterprise, and ends up costing far more for all involved than an efficient market based on individual wants, needs and capabilities constantly in flux. But that's ok - there is an administration which is smarter than the entire market, and a Federal Reserve which will monetize any deficit funding, and the only trade off is making the already ridiculous US federal debt ridiculouser.

Whether as the basis for the monetary unit of a country, or in its role in comparison to the currency of other assets, the price of gold has long been a subject of great interest to both the scholar and the general public. MeasuringWorth has created a multi-century time series of the barbarous relic's USD price. From the penny, the crown, the rose ryal, the guinea and the sovereign coin, the question of "what was the price then" is answered combining a number of sources and Visualizing Economics compares the 'real' price of gold since 1791 to GDP, wars, US presidents, and inflation...

Things have been a little erratic lately here in US, but not really headline-worthy. The economy continues to grow, sort of, houses continue to sell and stock and bond prices fluctuate but can’t seem to follow through in either direction. We are not, in short, engulfed in any kind of crisis. But out in the world, especially in once-hot emerging markets like Brazil and China, the story is very different. So can the US stay placid when the rest of the world turns chaotic? Highly doubtful. There’s a market phenomenon in which one investment play blows up and forces those on the wrong side of the trade to dump their liquid assets to raise cash. Which causes the high-quality assets to fall as much or more than the junk. As Noland notes, the world’s premier liquid asset is the Treasury bond. If the developing world’s need to raise cash is a factor in the recent spike in US interest rates, this implies a feedback loop in which rising US rates further destabilize emerging markets, forcing the sale of more Treasuries, and so on.

In UBS' view, 1994 is critical for guiding investing today. The key point about 1994 was not that US bond yields rose during a global recovery. But that the leverage and positioning built up in previous years, on the assumption that yields would remain low, then got stressed. The central issue, they note, is that a long period of lacklustre growth, low rates and easy money induces individual investors, funds, non-financial corporates and banks to reach for yield. In many cases, they gear up to do it. And as Hyman Minsky warned; in this way, stability breeds leverage, and leverage breeds instability. It is much less likely that we see the US enter a ‘high plateau’ of growth as we saw from 1995-98, where the US saw a powerful productivity & credit fuelled boom while the emerging markets deflated. And it makes it more likely that the US stays on a lower trajectory, interspersed with periodic recessionary slowdowns in the years ahead. The point at which the market realises this would likely herald a significant risk-off event.

Americans who disapprove of the government reading their emails have more to worry about from a different and larger NSA effort. As the AP reports, the program, that snatches data as it passes through the fiber optic cables that make up the Internet's backbone, which has apparently been known for years, copies Internet traffic as it enters and leaves the United States, then routes it to the NSA for analysis. As the name suggests, Prism is merely the intelligent filter, finding discrete, manageable strands of information within this much more massive data stream that is being collected and stored. Prism makes sense of the cacophony of the Internet's raw feed. What is unclear, as more details, interviews and documents become available, is how Prism fits into a larger U.S. wiretapping program in place for years (know as 'Hoovering' at one major internet company). In the meantime, as one former NSA official noted, "You have to assume everything is being collected."

With the world seemingly of the belief that the US is the cleanest dirty (it is not), we thought it might be useful - should you have money burning a hole in your sidelines pocket that 'needs' to be invested in stocks - to at least comprehend how rich or cheap the rest of the world is. UBS global equity strategy heat-map below identifies the most expensive (red) and cheapest (blue) sectors across 20 regions (and the aggregate) in one easy pocket-size cocktail-party-usable cheat-sheet. The US currently is most expensive and intriguingly Australia the cheapest relative to their own historical valuations.

As we rapidly approach the 100 year anniversary of the Federal Reserve (signed into law on December 23, 1913) and the 16th amendment (ushering in that IRS favorite - the income tax) a question arises: what was life like a century ago? Conveniently, the following infographic breaks down some of the main ways in which life has changed in the past 100 years: from life expectancy, to marriage, education, employment, wages, entertainment, sport, and shopping (we finally find a time when JCPenney was actually popular), all the key ways in which the world and life in the US has changed in the past century are mapped out.

Back in May 2012, when we were making fun at the latest iteration of the now fatally discredited European stress tests, we took the first of many jabs at the what may currently be the world's most systematically important, and undercapitalized, bank in the world, Deutsche Bank, which was so bad that it wasn't even allowed to appear on a screen of Europe's most undercapitalized banks - and we helpfully pointed out its true capital ratio of just under 2%, and an implied leverage of 60x! Fast forward 13 months to a Reuters interview with former Kansas City Fed president and FOMC dissenter and sole voice of reason at the Federal Reserve, and current FDIC Vice Chairman Tom Hoenig, who confirmed that once again Zero Hedge was just a year ahead of the curve: "It's horrible, I mean they're horribly undercapitalized," said Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig in an interview. "They have no margin of error."