Falcon

Events are rapidly unfolding in Europe which may bring something more than the “blink, wink and nod” of the famous children’s poem to the forefront of everyone’s thinking. There is great wisdom in Pinocchio actually beyond what is generally known. At one point the puppet heads into the “Field of Miracles” where he plants his gold and waits for it to grow. Pinocchio then heads off to “Catch-fools” which is a place where everyone has done something exceedingly foolish and suffers as a result. The world presently believes that there is no “event risk” and upon this foothold and the money poured into the streets by the central banks the markets rest in peace. Roads do not go on forever, the day eventually fades into the night and the peace of the morning is often shattered by the shrill cry of the dove being attacked by the falcon. The Great Game is not “Toyland” and great care is now called for before we awaken to find that we have turned into donkeys, or worse, ourselves.

The center cannot hold because it has failed the nation by defending the Status Quo kleptocracy. As a case study, let's look at Greece, a nation that is the leading-edge of Status Quo delegitimization and destabilization. As the Status Quo fails to protect the national interests and the citizenry from the neofeudal kleptocracy, faith in the political center fades. What happens when people lose faith in the financial institutions and their coercive "fixes"? They move their capital to less-risky, more productive climes. In other words, capital flight is another positive feedback: as people move their capital out of the country, then there is less available per capita for productive investment. The same holds true for every nation ruled by kleptocratic Elites that has attempted to "grow our way out of debt" by piling debt on debt. Doesn't that include Spain, Italy, China, the U.S. and a host of other nations?

Lately, it has become particularly fashionable to bash private equity, especially among those workers in the employ of the state. The argument, in as much as capitalism can be summarized in one sentence, is that PE firms issue excess leverage, making bankruptcy inevitable (apparently those who buy the debt are unaware they will never get their money back), all the while cutting headcount to maximize cash flow (apparently the same PE firms don't realize that their investment will have the greatest terminal value to buyer if it has the highest possible growth potential, which means revenue and cashflow, which means proper CapEx investment, which means streamlined income statement, which means more efficient workers generating more profits, not less). The narrative ultimately culminates with some variation on a the theme that PE firms are responsible for offshoring jobs. While any of the above may be debated, and usually is especially by those who have absolutely no understanding of finance, one thing is certain: when it comes to bashing PE, America's public workers should be the last to have anything negative to say about Private Equity, and the capital markets in general. Why? Because when it comes to fulfilling those promises of a comfortable retirement with pensions and benefits paying out in perpetuity, always indexed for inflation, and otherwise fulfilling impossible dreams, who do America's public pension fund administrators go to? The very same private equity firms that have suddenly become outcast number 1.

Six weeks ago we detailed how watching intra- and inter-asset-class correlations can tell investors a lot about what is behind market movements and as Nick Colas, of ConvergEx, highlights in his monthly review of asset price correlations - it reveals a key feature of the "Mystery Rally of Summer 2012."  The move from the early June lows for U.S. stocks has come with increasing correlations across a wide array of asset types and industry sectors.  That's unusual, because rising markets over the past three years more commonly bring lower correlations.  For example, the rally from January to early April of this year saw industry correlations within the S&P 500 drop from +95% to 75-80% as the index went from 1270 to 1420 (a 12% return).  Conversely, the move from 1278 to 1400 (early June to present day) has come with increasing industry correlations – 82% in May to 86% currently.  To us, that's an important "Tell" about what's been taking us higher – hopes for further Federal Reserve liquidity at the next FOMC meeting in September and ECB liquidity to support the euro.  The rest of August will likely feature the kind of light-volume tape that loves to drift higher, but increasing correlations represent a flashing yellow light signifying the need for caution in trading over the balance of the month.

A Guide for Those with Much Money and Very Little Patience Whom Want to Prepare for Zombie Apocalypse But Are Afraid to Google It For Fear of DHS Labeling Them A Terrorist.

And what rough beast, its hour come round at last, Slouches towards Maiden Lane to be reborn?

The 4th of July is a fitting day to ponder the reality that we are at Peak Government, and the Savior State is unsustainable. This is a matter of accounting: no nation can spend more than it generates in surplus real output forever. What goes unremarked is the intrinsically destructive nature of our rising dependence on a Savior State. In his book Collapse of Complex Societies, anthropologist Joseph Tainter identified two causes of economic collapse: investments in social complexity yield diminishing marginal returns, and energy subsidies, i.e. cheap, abundant energy, decline. In my terminology, the dynamic he describes is one in which the cost structure of a society continues rising due to “the ratchet effect” but the gains from the added expenses are increasingly marginal. At some point the additional costs, usually justified as the “solution” to the marginal returns problem, become counterproductive and actually drain the system of resilience as dissent and adaptability (“variation is information”) are suppressed. This feeds systemic instability: on the surface, all seems stable, but beneath the surface, the potential for a stick/slip destabilization grows unnoticed. Cheap, abundant energy offers a surplus of value that can be invested in social complexity and consumption. Once the cost and availability of energy declines, then that surplus shrinks and can no longer be used to support the high cost structure. The U.S. economy has clearly been driven to the cliff edge of instability by both dynamics: the cheap, abundant energy which enabled fast growth of consumption and high cost social complexity is vanishing, and the cost structure of the economy has ballooned far beyond sustainability.

There is no pleasure in "I told you so" when things fall apart. Many of us recognized the artifice and folly of the credit-housing bubble "Bull market" as early as 2004, but few cared to listen because they were deeply complicit in the Status Quo's legerdemaine: their home was rising in value, their pension fund was being fattened, their sales were rising on the onrushing tide of abundant, cheap credit, their tax revenues were soaring, and their benefits/perquisites were notching higher with every tick up of the stock and housing markets. Faith in a centrally planned economy operating under the flimsy guise of cartel-State "capitalism" was supreme, as were greed, self-absorption and an overweening sense of entitlement to consumerist "prosperity." Both corrupt political parties enthusiastically embraced the bubble-culture of fraud and speculative excess, for they too benefited from the illusory glow of "permanent economic growth" and the ever-richer contributions from the fiefdoms, cartels and Financial Elites who gained the most from the credit-based frenzy. The "prosperity," "growth" and "wealth" were all illusory, but the pain is real. Hardworking, dedicated, smart, experienced people are being laid off into an economy with few prospects. Young people are graduating from university into the same bleak atmosphere of a paper-thin facade of magical thinking and propaganda finally crumbling. Things are falling apart because the economy has been undermined by financialization and the extreme concentrations of capital and State power. I think these charts tell the story rather well...

As if adding insult to injury each and every day with wave after wave of POMO, even as the criminals on Wall Street continue to go about their business, collecting record bonuses, without even the remotest threat of prosecution, wasn't enough the US Mint is now openly micturating in the face of what little is left of US middle class with the issuance of the "Peregrine" Paulson (3 inches) bronze medal. That's right: starting today, everyone can own a tiny 3 inch piece of Hank: the same man who in October 2008 barged into congress with a three page proposal demanding Congress give him supreme dictatorial powers over this country, and to dispense an uncapped amount of money in rescuing his former company and anyone else he saw fit. The description of the reverse: " The image of the peregrine falcon represents Secretary Paulson’s commitment to conservation and his long-time interest in birds of prey." Wouldn't it be more fitting to find a creature celebrating Hank's commitment to fraud, communism, bail outs, and the Goldman way? We eagerly await William Banzai's take on the Silver Vampire Squid Paulson coin which, if we find an appropriate dealer, we would be happy to sell directly to readers (if there is any physical silver remaining of course). Failing that a coin showing Blythe Masters on the front and Gary Gensler on the back would be a perfect substitute...

"In Friday’s Comments, we wrote that the napkins suggested support in the S&P was “way down around 1058/1063”. The sharp opening selloff took the S&P to an intra-day low of 1062.97 before they circled the wagons. For today, we’ll stick with the 1058/1063 support. Resistance looks like 1083/1088 and then 1093/1097. The dominance of the dollar was so evident that I was stunned from time to time to see brokers getting calls from trading desks inquiring “what turned the market?” Talk about not seeing the forest for the trees. The Dow closed two-thirds off the lows. That allowed the first up week in the last five. Not quite a resounding victory for the bulls, but a welcome respite at least." - Art Cashin

The fallout from the recent investigations by the Attorney General into the New York Pension Fund system will be the likely topic of numerous analyses for months to come as details of more impropriety are uncovered. In the meantime, we would like to highlight to our readers some of the more recent recipients of New York State's generosity, which in acting as a Fund of Funds for New Yorkers, continues investing capital in numerous Private Equity and Hedge Fund firms, as well as directing real estate investments.

Not if you believe Reuters, but where there is smoke there is usually fire. According to an earlier report by ABC News, the house of Dimon was fully intent on shaming Vik's Cititanic and his meager attempt to buy one lowly Dassault Falcon, by purchasing not only two Gulfstream 650 jets but also a hangar in which to house these new acquisitions at Westchester airport! The total cost: $138 million.

Hot on the heels of its sale leaseback transaction, the NYT, in a mad dash to generate any possible cash, has disclosed it is now selling its corporate jet next.

Yes, this guy is small time, ripping off people for "only" $6.5 million, but his approach is unique.

After Vikram's Falcongate incident, and of course the CEOs of the Detroit aka Default-3 companies making quite a PR splash in D.C. begging for bailout money after a cushy two hour flight in ultraluxury, the entire private jet industry will likely be under massive scrutiny with the resulting fallout likely to result in many new companies inducted into our Death Watch list.