Wednesday, December 17, 2014

America, democracy and torture

Did you know that in a recent Poll (yesterday) 78% 59% (if you exclude -- sometime justified) of Americans thought that torture was A-O-K! Jack Bower proved that torture is a righteous tool!  That it works and it should be used.  That its OK for ordinary people to be killed by drones (even though their only crime is to be live in country that are not America).

Across gender, race and income levels Americans are pro-torture!

Right now its foreigners (mostly) that get tortured, but how long will that last, when will it become ok to torture an guy so that he tells you who were his accomplices in a bank robbery (still no problem).  How about we torture a couple of bankers to tell us how the made sure their deals would fall apart... how about then.

How about when Americans protest about their civil rights... a OK turns out they don't care about that either.



Rouble is back... for now, and other news

(1)  Less than 24 hours after the Russian Rouble became unconvertible its back.  Again, this could be temporary, this could be permanent, but its clear that the world's central banks decided that the impact of having the Rouble out of the equation was not acceptable.  

Will it last, don't know

(2)  Yesterday Greece (a non-consequential country) continues to play its political games, the opposition announced that if elected they will repudiate parts of its foreign debt (that's more like it).

(3)  This morning inflation numbers came in (USA) and they are -0.3% for the month; that a 3.4% deflation rate on an annual basis -- fuel cost have half, and fuel is core to the inflation calculator

Where we go from here?  Don't know

(4) Christmas is around the corner, trading (for real accounts and not algo) is about to collapse -- cause the punters are full of turkey.


(5) Heavy oil (Canada) is in the low $40 -- we are close to variable cost of extraction in Canada for the Tar sands.

My gut feeling -- stay away from the trading desk, square your positions the Gremlins have the upper hand here there is no glory in guessing.


Tuesday, December 16, 2014

Could this be it?

I've often said (in this blog) that when the end comes it will come from an unexpected direction.  First off, those who are losing in the oil price "war" are producers - they are many, but they are still far fewer than consumers.  So this correction left a lot of very big losers and many many small winners. This morning the Russian Rouble ceased to be convertible, and "trades" will be unwound.

Russia was always on the edge, its been playing political hard ball for some months/years now. Russia has been funding its world stage presence with oil at $105/bbl.  As the saying goes: "being elegant is expensive", but being a bully even more so!  Especially when a oligopolistic business system is driven by high borrowings -- driven by a desire to limit dilution, but also driven by a junk bond market primed for risk and yield -- in a world of very low yields junk bond financing is attractive.  Russia borrowings were not cheap before -- the prime rate was around 6% a few weeks ago, it jumped to 10% about 6 weeks ago, when the run on their currency started, yesterday they went to 17% in a "shock and awe" exercise -- that failed (it was a good try).  Now short term loans are priced at 19% -- impossibly expensive for a very leveraged economy.

This morning, the Russian rouble ceased to be convertible -- this may be temporary, but it complicates things immensely; lenders have made loans in Euro or US dollars (they didn't want to take any currency risks), with conversion out of the door, these loans/bonds are in technical default -- as the borrowers cannot repay their loans in foreign currency.

My guess is that some "Megabanks" have taken on some massive swap exposure (between the bond holders and issuers) taking-on that Rouble risk (as a nice little earner).  Don't know how this will work out for them?  The biggest derivatives players are: Citibank, JP Morgan, and Deutsch Bank (no position).  Others will also have played -- and lost, but it will take a while for the dust to settle -- trust me it took months for my gang to figure out the "hurt" when Lehman went bust.  The easy part is the banks' mark to market reaction (try to delay).  I have no idea how these exposure will play out -- the real issue is that I am convinced that the senior management in each of these three institutions are equally clueless -- its just too complicated  -- also we are going to witness some massive imbalances in the derivatives books.  The Chinese proverb "may you live in interesting times" would seem to apply here.

It is amusing that Congress passed a new law last week to make derivatives trading even easier and less regulated, timing sometimes is everything.

So, what happens next, don't know (anyone who says otherwise a $#@&% liar), but we can make some broad assumptions:
  1. De-risking is on the cards 
  2. Yields (see one above) are certain to rise -- even for the best credits
  3. You sell what you can, not what you want
  4. Everyone is going to slow down its credit approval process
  5. The banks are going to be looking at where from the bad debt could emerge 
  6. This could slow down economic activity
Again, this could be very local (I doubt it) it could be a short term shock (I hope so) , but it could be something else.  So far the North American markets have been taking this whole thing as "not about us", but I doubt that this will continue, I could be wrong, but this is a massive change, Russia has zero good will in the West, and has even worked hard at making the west look like aggressors.

December 2014 could be a very interesting month -- stay tuned! 



Wednesday, December 10, 2014

First comes the reassurance, then the penny drops

Soooo!

GS says that the extraction costs for Bakken fields (fracking oil) are in the low $40s.... at most.  Well that sounds not right.  First off, this stuff is deep, so deep that at times radioactive waters are extracted at the same time -- the oil has to be heated out of the rock, and then cleaned from all the chemicals used to extract and make it more viscous.  All together this is not a simple process, or inexpensive.

GS is the same gang that says that oil extraction in Libya (where the stuff is almost lying on the ground) is very expensive, but the "North American deep and expensive wells costs are around $40" is their new song -- why?

The reason is that GS is well aware that lots of investors (in the junk bonds they issued over the past few years) are starting to either (a) read the prospectus they were given, and (b) are just starting to panic -- and are thinking the worse case scenario.  Now, I am certain that GS is not lying (hey they know how to be "economical with the truth", but that's not lying) so investors will think (or hope) that its not "their junk bond that's in trouble" maybe its even time to buy some more as "other investors" panic and sell at a discount.

Now, I'm not an E&P guy -- my interest is marginal but there are a number of truism that you must follow for valuations:

  1. Fracking is an expensive process
  2. The wells are deep and require lots of horizontal drilling
  3. Chemicals have to be used to "loosen" the oil from the rock
  4. The oil is considered "synthetic" and sells for less than "light and sweet" from the Gulf
  5. Frackers (not the best term) have used massive amounts of debt (leverage) so as to improve their returns
Dont' forget that GS are the guys who were confident that gold was on its way to sub $1,000 from $1,200 -- of course gold is still around $1,227, so that was not the best call in the world, but within the standard of investment banks absolutely within the standard of protecting their market.  They are probably right there are ways of calculating the extraction cost of Bakken fields at around $40 -- my guess is that you have to make some aggressive assumptions on production yields...

Anyway, this morning WTI went as low as $62.00 -- the ride continues!



Tuesday, December 2, 2014

Oil price, elasticity winners and losers!

Sunday night I began writing on the astounding drop in the oil sector, at the time (Tokyo time 9am Monday) the price of oil was on its way to $64/bbl down from $105 in January -- this is a 39% drop in price -- a singularly important component of the world economy, just became much cheaper. Since then oil prices have risen back to the $67/68 range, so crisis averted...

The retracement in the oil market is natural, a function of properly working financial market.  My guess was that at $64.55/bbl we were looking at a massive natural barrier to further drops, there's a futures market out there, and for the players there are "natural" inflection points.  Now these are usually technical (rules of thumb) issues, but it remains that they are real for the market.  What is happening is "consolidation", the market overshot and now its finding a new (maybe temporary) equilibrium.  Oil prices are not independent, they are a transfer of wealth between the user and the supplier.  Lower oil prices means that the users retain more of their wealth, and the supplier have less to spend.

The big losers:  Countries such as Saudi Arabia that have variable costs of maybe $10/bbl are still doing well, although I understand that to justify the country's "living expenses" $70/90 per barrel is really much more comfortable.  Watch this year -- Saudi Arabia's government will have a sizeable deficit.

The big winners are massive consumers:  China, most of South America, the US (they still import) and Europe.  the big losers:  Russia, Canada, Middle East -- Far East (Malaysia & Indonesia).  So there are winners and there are losers too.

Capital markets will probably not be very happy.  A substantial portion of the junk bond market has financed oil and gas project -- some of these are fine, others not so much.  The real problem is that with the hedge fund industry all bets are off, what in the past would have been a technical default with a covenant renegotiation can become a drawn-out battle for control.  Those who have a small position can easily be crushed by these big players -- logic has little to do with these instruments.

We have witnessed a major shift in the oil&gas segment.  At this stage it is unclear where all this is going; there is no doubt that at $105/bbl there was lots of money hunting new finds.  At $60/70 per bbl there will be less money hunting for new oil finds.  Already certain Canadian oil sands projects are hitting the wall -- at $55/bbl (heavy crude is discounted against the WTI) the economics are just not there anymore.  projects that are already up and running (when the heavy Capex has already occurred) continue to operate, at least as long as the variable covered.

Canada is one of the losers (well Alberta and Saskatchewan the big producers) are hurting, budgets will have to be revised, since the province (where there is no provincial income taxes) lives of the royalties from its oil and gas finds -- very little of Alberta's oil revenues have been saved for a rainy day, mainly because the size of the oil sands (a few hundred years).

So what's the big takeaway here:  First the 35% drop in oil price has transferred wealth from some parts of the world to others -- China, as a massive oil importer, just saw its production costs drop, Russia is not finding this very amusing -- although its production costs are low, but the size of the transfer just dropped.

Green energy solutions were kicked in the teeth, at $105 solar pannels are nearly competitive -- and once you take into account the fixe/variable cost analysis -- solar energy was basically on par with oil.  Now they are 40% more expensive.  This price drop is almost certain to reduce the attractiveness of all green energy projects.

The concern by economist is that everyone has been cooking the books -- just a little; the problem is not the rise in supply but the fall in demand (we now know that Europe's growth last summer was virtually inexistent) we are talking 0.1%.  Although the ECB has targeted inflation rates of 2% -- the numbers are far low (and now with a massive drop in the cost of energy) inflation numbers could go negative -- deflation could be here.

Japan is a mess, China may see some hope out of the lower oil price but as a massive exporter of goods and where its markets (Japan, Europe and the US) are either in recession, near a recession or suffering from low growth -- despite very stimulative policies it may be that its not only the supply side that is a problem, but more fundamentally the demand side of the equation...





Friday, November 14, 2014

Japan quantitative easing and trade wars?

My favourite flavour has always been geo-politics, I was never comfortable with pure economics, because economics is not really a science (sorry dad & Sis and mom too).  Using complex model that make massive behavioural assumption is a recipe for disaster...  case and point Japan.












Over the past 24 months the Japanese government has begun a massive inflation drive, and a massive devaluation push.  The Yen went from 90 to 110 to the dollar, but the impact on regional currencies has been even more dramatic.  Japan's objective is to create inflation -- so far its been unsuccessful. The means has been massive quantitative easing (e.g. government prints money) and with this cash they have been buying assets -- lots and lots of assets; MBS, bonds (short and long) stocks in a nutshell the Japanese government has depressed the printing button and have been printing Yens like crazy.  In the past 12 months they have issued $750 billion in new money - slightly more than what the US treasury did in 2008, but Japan's economy is a fraction of America's.  Its as if, every year, the US treasury injected US$ 3 trillion per annum.  The idea is that all this money will create inflation -- yes inflation did occur in May 2014 -- but 100% of this rise has been due to rise in sales taxes!! So that policy has not worked.

However, this massive cash injection has done three real things -- it has weakened the currency, its has increase government deficit and it has lead to a massive rise in the value of stocks.  For traders and investors this has been a one way sure thing.  The dominant trade of 2014 is"long Japan short yen" -- it has been one of the most profitable trade of all time.




Now, the impact to the real economy is something else.  First, as the region slows down (demand for goods produced in Japan -- or elsewhere) has slowed.  Excess labor in Japan -- despite a rapid population aging (and the corollary drop in working age population) has generated under-employment and income collapse, over the past 12 months income has shrunk by nearly 6%.



Despite the weaker yen (about 25%) industrial production is in free fall, because Japan's largest and most consistent market for goods and products is:  JAPAN!  A collapse in income means that demand has fallen.  The three pillars of Prime Minister Abe's have worked to weaken demand.  In a nutshell aside from traders and investors this strategy has been not only unproductive but has destroyed real economic value in Japan.



The prime minister's action were driven by a desire to re-create the Japan of the 70s where, like China, Japan's economic growth was driven by exports -- a cheaper yen and loose monetary policy should have been helpful, except that its target markets (Asia) have identical strategy -- grow through exports.  Despite what many commentators say, its impossible for everyone to be a net exporter.  The regional consequences here could be severe;  The risk here is to currency war and possibly a trade war.

That's serious



Thursday, October 30, 2014

Impact of lower oil prices -- its not all good, right?

First off, understanding the impact of dropping oil prices is complex, because the law of unintended consequences applies.  There is no doubt that falling oil prices is good for business and good for consumers.  Because it increases, directly, income (and profits), so the impact at first blush is positive.  At the end of the day, the impact of oil price drops is good in terms of inflation expectations (down) and to growth to the economy.

The fall in oil prices is caused by a change in the supply demand equation (either figure can shift):

  1. First, the supply picture has changed enormously over the past decade.  In 2004, fractioning margin (refining process) carried negative price.  Oil company could not pass on the cost (necessary) of refining the oil they produced.  The impact was under-investment that has translated into compressed supply (at the very least limited search for new oil reserves).  The massive boost in price from $35/bbl to $100/bbl had the obvious impact on supply -- it rose. America today produces more oil and gas than it did at any other time (we are going back to the 1950s here!!!).
  2. Demand has shifted over the past few months.  Starting in 2013, Europe's growth started to falter -- the periphery first (not talking about Greece here) but now more central with France and Italy in recession and now even Germany feeling the impact.   Japan's experiment with "new economic theory" is failing (spectacularly) with both consumption and income dropping, and China is finally facing the reality of large numbers -- its a lot harder to grow at 10% when you are the world's second largest economy.  So growth everywhere is slowing. 
The juncture between supply (that has risen) and demand (that has slowed) is for marginal price to drop -- oil supply is, in the short term, very inelastic.  So prices dropped from 105 to 80 in 160 days!  

Now, for producers (especially the new guys on the block -- like Shale oil) the $80 price is bad news, because extraction cost are high.  At $105 this was a profitable endeavour, at $80.89 (price of WTI light and sweet) the price of synthetic oil (which is what is produced by shale oil) is much lower, and the break-even level is close by -- some would say that break even is around $85/bbl. 

That means less exploration -- no doubt that fields are that are already operating will keep on going but new stuff will be delayed -- that will result in a future shift in the supply complex.  

For producing countries that situation is entirely dependent on where they stand in the price complex. Saudi Arabia -- considered the cheapest producer at $20/bbl has the most latitude -- they have recently reduced production -- keeping their oil in the ground for when price rise again (banking into the future the profit from sales).  But for countries like Venezuela the drop in oil prices is nothing short of catastrophic.  Their oil revenues are fully spoken for in terms of government expenditure.  Venezuela one of the largest producers in the world is facing massive dislocation.  Canada is a middle ground player.  With oil sands and classical oil (less now), but the new finds are expensive -- news should transpire soon on "delayed" projects.  The impact on those economies could be important.  After all, its their core growth that is affected.

For Canada, a weaker economy and a weaker currency -- will be harsh on Canada's 2014/15 prospects.  But and this is important the global commodity market is in a slump, and has been for the past 12 months.  Since about 1/3 of Canada's economy is ressource driven... its a problem. Politically, its also a problem for the sitting government that will see election in Q2/2015 -- by law!  It may be tempting (despite the recent poor polling) to go a get a new mandate before the economy slows more dramatically.

For renewable energy, the drop in oil prices is bad news.  Because people always look at the option of choosing renewable energy Vs. oil&gas with the low price point as a reference guide.  Solar energy that was 10 years ago, prohibitively expensive is now cheap enough to be roughly comparable to oil & gas, but only when oil is around $100/bbl.  Some would say that the world has moved so far along the renewable side of the equation that a short term shift in oil price will not really alter people's long term energy generation decision... maybe, but again its far from certain that the same kind of capital will be deployed for renewable energy when oil prices are in the $70/$80 zone rather than the $95/$110 zone.

That's the law of unintended consequence, the impact of renewable energy, the reduction in green gas emission will be further delayed...

Saturday, October 25, 2014

America, the Richest, well maybe not for the bottom 72%

-39 percent of American workers made less than $20,000 last year.

 

-52 percent of American workers made less than $30,000 last year.

 

-63 percent of American workers made less than $40,000 last year.

 

-72 percent of American workers made less than $50,000 last year.


No additional comment needed!

Tuesday, October 21, 2014

Energy costs, CAD level and inflation expectations

Oil prices are crashing, from a peak of $105 per bbl its down to $83, a massive 20% drop in the price of energy in the last 4/5 months.  First, the world is awash with oil (granted not cheap oil) but oil nevertheless is plentiful.  From the Montana Bakken fields to Libya production has outpaced faltering demand for oil.  For the American producers, the headache is that production costs are high. According to some analysts, fracking production costs are in the upper 80s  which means that light and sweet crude at $83 is a massive problem for the producers of this "synthetic" oil.

Even up here in Canada, oil at $83/bbl is a problem, because some of the more recent oil sand projects have exploitation costs that are near that level (older projects are apparently producing at around $40/50 per bbl).  I've said it here, and I said it often, Canada is a bit of an oil play.  Canada accounts for nearly 20% of America's oil consumption.  An addiction that many Americans would like to break -- although I am not so sure that Canada's oil sands are much worse than America's fracking business...

At any rate for Canada lower oil prices is a double edged sword!  The currency drops -- importing foreign inflation -- as trade is a massive component of Canada's economy -- also stimulating exports; Canadian exporters in the past 2 years (since the CAD has dropped from parity to $0.89), and lower energy prices have translated into a more competitive environment.

Canada's economy while not on fire is doing well... just look at all the illegal immigration from  -- France!  The headline numbers:

  1. Inflation at 2%
  2. GDP growth:  2%
  3. GDP growth (July) 0.0% 
  4. Unemployment:  6.8% -- its like 1% to 1.5% lower if we use America's scale
The economy is not exactly on fire, but North America is doing a lot better than Europe or Japan -- that's something.  

The big question in Europe is:  Deflation is it a problem here?  Deflation like inflation can be a good thing -- but of course its a question of scale.  The problem with deflation is that its like inflation; it can easily get away from you if the conditions are right.  Currently, inflation risks are low:  why because the economy is working somewhat below potential.  This is changing with a shift in Canada's labour pool -- like the US, Canada's aging demographic will reduce potential GDP growth.  As we get closer to potential GDP growth level, inflation trends could re-emerge.

There are no signs of deflation in Canada -- none!  Although everyone is expecting the 11 year old housing boom to come to an end...soonish.  The reality is that Canada has more of a tendency to import trends -- it is a much more open economy, and while we import from the entire world, the reality is that Canada's southern neighbour accounts for nearly 3/4 of all trade activities.  The reality is that America is not, has not, and is unlikely to face deflation pressures.  

The current dislocation of America's wage market is not creating those pressures -- nothing will. Although most people focus on Average wages, the more telling figure is Median wages.  America's Median wage is around $53,000, while for Canada its around $80,000.  The average wage is greatly influenced by wage disparity -- a more important feature of the US economy (in fact, Canada is ranked 8th while the US is ranked 17th).  

Canada's economy is a second degree play for investors -- if you like energy, primary ressources (mining, metals and agriculture) its a very interesting investment play.  Energy costs are important but not as much as commodity prices.  The CAD at 0.89/USD is fairly well priced -- and a good representation of the two countries "Big Mac index"


Thursday, October 16, 2014

doubting Europe's creditworthiness!

La grande correction?  I don't know.  Generally, you only know that a big move is afoot once its all over.  Dragi could once again put forward the "plunge protection team" at work and prove that everything is fine, by buying every bond in sight.

But the reality of core/non-core Europe is serious.  First off, Germany is exporting to the rest of Europe, and still works on the premise that its client's inability to pay their bills is not its problem (right).  France is starting to behave like a non-core (that may be temporary) yields are rising fast in France:



But that's northing compare to Greece that saw a 200 bps yield rise in the past week.  (Hurray to all the French and German banks that sold off their Greek exposure to ECB over the past 36 months).   Don't know how many Macro funds went bust this week -- my guess is that its going to take a few weeks/months before the blood bath there emerges fully, but these leveraged hedge funds are simply not equipped to take that kind of price movement in the bond market.

US 10 years treasury trade with a yield of 1.99% and for Germany (similar instruments) the price is 0.79%.  If Germany cannot have a roaring economic growth when interest rates are as low as they are now -- compare to 7% in 2007, its an indication that even in Germany, not all is well.

I am still far from certain that Europe has done everything it can to delay the inevitable.  Clearly, with correcting stock markets, a wild ride bond market its getting more and more difficult to make the problem go away.  There was also a rather dramatic "tiff" between France and Germany after Sapin was told by Schaeuble (their country's respective minister of finance) that more stimulus was out of the question.

Add to all this that the wheels are coming off in Japan.  Abe's plan of fiscal stimulus, easing money and structural reform is not working out as planned.  Japan's GDP is shrinking fast -- 1.8% in the second quarter (7% annualized...).  Take home pay in Japan is shrinking by 3% per annum.  

China's own challenges are forcing it to re-energize its drive to slow property prices; a massive challenge when you consider the strength of the entrenched forces to maintain the status quo (never mind the current, and very public, mess that is Hong Kong).  China cannot be counted on to be a helpful force.

America is in the middle of a Ebola crisis mid term election cycle.  If the GOP is successful in taking over the Senate they have a real chance at miring what is left of Obama's presidency into irrelevance. More Bengazi enquiries more votes to defund the ACA (ObamaCare to the rest of the word).  Overall drive the economy down.  Just watching Fox News (GOP propaganda organ) its clear that the mission of the right's media outlet is to cause mayhem and fear in the heart of all Americans.  In other words, the usual politicking before a critical election -- that may shut down the US government over the next two years (not that much has been achieve of late anyway). 

Back to Europe, things could still work out for savers (temporarily anyway) if Dragi decides (with the help of Germany and France) that they need to push the correction into the future.  The question is how long can they afford to to this?  In the end, its a question of will on the part of Germany and France to make the ride continue.  There no elections for either Germany or France within the next 18 months (that matter) and it may be a good (as any) time to allow for correction to occur.  Despite's Dragi's very public statement that everything is fine in Europe, he is fully aware that Europe's economy is not well.  



Monday, October 6, 2014

Markets are topping -- Should I care?

Well, personally I have had the opinion that the markets were near their peak about 4 years ago! Got that wrong!  However, now the consensus is that the markets are near their peak (there's always a consensus that support your views/opinions).

How did we get to such high levels -- today earnings as a percentage of GDP are at a historical high (12% of GDP).  Companies are sitting on mountains of cash (granted most of that cash is offshore and will not be repatriated for tax reasons.  Companies continue to do well, and yet all earnings are directed to either dividends or stock buybacks.  Paying dividend is rational (some would disagree) and in many low growth sector essential.  But stock buybacks are another story: either funded by free cash -- or via more debt (debt is always cheaper than equity -- and has been incredibly cheap recently).  The CEO's decision to buyback his company's share are driven by a number of factors:


  1. Increase earnings per share (smaller number sharing the income pie)
  2. Increase the price of shares (as a management goal -- think CEO compensation)
  3. Better allocation of capital:  That's the worrying one!
In general, companies are well aware of the impact of share buybacks on executive compensation.  Maybe 10/20 years ago the wool could be pulled, but in reality the decision by management is often driven by an inability to find attractive investment opportunities -- and aside from keeping cash for acquisition (and making the company attractive to raiders).  the reason to buyback shares is driven by short term goals (not abnormal for  companies that change CEO every 4 years).  The reason that CEO prefer buybacks is that they cannot find (or fathom) attractive investment opportunities.  This has been a growing trend over the past few years.

This inability to find productive use for their capital, is telling with regards to future economic growth.  The engine of growth (job and GDP) is entirely driven by the growth of companies.
When these prefer returning capital to its shareholders it is an indication of a deep malaise.

This is a reason I work almost entirely with private companies.  They too have their blind spots (trust me it can be harsh too), but their investment horizon is very different.  In conversations, it is clear that a return horizon is not 36/48 months, but 72/96 months.  They understand that they are building a business for the long term.  What I mean is that they will invest with a view to making a long term return that may take some time to generate profits.  Historically they have been more conservative (although listed companies are simply not investing -- and have not for several years), but this is no longer the case.  They are conserving cash now, looking for opportunities the next time there's a correction.

As I recently explained you should only care about correction if you need to money tomorrow.  Those who stayed calm after 2008 now look at their portfolio as unchanged (with some exceptions -- looking at you Blackberry).  But it remains that calm is the best option.  Obviously some sectors suffered permanently -- Citibank was trading at $540 per share in 2007,  it trades around $50 today! That's been a permanent impairment.  But GE that was trading around $35 is now around $28 -- and you got lots of dividends.  If you bought the DOW in 2007 at 13,000 its now at 17,000.  Not a bad trade a 30% increase is 7 years!

If you need the cash in 20 years there is no reason to take a short term view of the market.  Your broker (whoever he may be) is right.  You may want to get out of certain sectors, but as a whole the market has been a good (if not great) investment.  Income has not risen, but earnings from capital is doing well!

No position in Citibank, GE, Blackberry or DOW



Thursday, September 25, 2014

Law enforcement breakdown Greek and American versions

A few weeks ago it was reported that:

A Greek individual called 911 to report a crime in progress; burgler were robing his house.  Apparently the police told this individual that they:  "Didn't have enough gasoline to make it to his house"  He was on his own.

When the state stops building/repairing roads, picking up garbage, paying pensions, providing clean water or providing basic policing services -- breakdown is among us.

Today the Canadian government told Canadian to no longer bring cash to the US.  Apparently, police officer regularly seize any cash as "proof that they individual was involved in drug trade".   Apparently, the police were given the authority to seize drug proceeds (their interpretation) and keep the cash (in the police force we presume).  That create great incentive for them to seize all cash and sundry... after all it helps their pensions!

Finally, as proof as to the size and importance of this:

Hundreds of state and local departments and drug task forces appear to rely on seized cash, despite a federal ban on the money to pay salaries or otherwise support budgets. The Post found that 298 departments and 210 task forces have seized the equivalent of 20 percent or more of their annual budgets since 2008  (Washington Post)

Just in case you thought this is BS, my source:  CBC

UPDATE:  John Oliver had the following to say:  here


Tesco income overstatment and the financial press

I don't know the details of Tesco's income overstatement -- the total looks large from here but not earth-shattering.  There are clear problem there but not really of my concern.  I know little about the company aside from the fact that I think my sister works there -- but in a non-retail division (maybe there are two Tesco's?) and that I used to shop there for groceries. Now this is a big company with annual profits in the STG 2 billion range (USD 3 billion with US$ 100 billion turnover) , so a STG 250 million error in net profit is a problem but its not about to kill the company (another story for its management).

This story is about analyst and financial reporters.  Last night flying back from Europe (on Air France -- man were we lucky that our flight was not cancelled) I was reading "Les Echos"  which is the French equivalent to the Financial Times.  There was a long winded article on the Tesco saga.  I was not very interested but one bit of information was fascinating:

The journalist was quoting an analyst that said that Tesco was overstating its revenues by not paying its suppliers.  According to the analyst Tesco would only pay 95% of the invoice and declare the balance as a profit.  My first reaction is that this has to be the most stupid comment on earth!  If you have an invoice for $100 and you only pay $95 aside from gross stupidity there is no way for the $5 difference to end up in profits... unless you decide not to eventually pay the $5 that you owe to the suppliers.  Even then this would not be ordinary income it would be extraordinary (not from operations).

Now this is where it gets tricky (and by the way the journalist never mentioned this bit).  Lets say that you buy $100 from a supplier -- but you have a deal with the supplier, if you order another $100 you get a 5% discount on your order.  In other words the next $100 of goods you buy only cost you $95. So it would be possible for Tesco to realize an additional profit on the next $100 of goods in bought of $5.

The question is then, when do you book this real profit.  As soon as you've order the next $100 of goods or once you have sold them?  This is not an easy question -- in fact there's a famous case study of discounts with the Arthur Murray School of danse ("AMS"). Guess what in AMS' american operations this kind of discount is accounted as profit at after the sale of the goods (the second $100) but in Australia the profit is booked as soon as the second $100 of good is bought.  Clearly there are different ways at looking at profits.

As a side note its always interesting to look at companies account in different jurisdiction (dual listing) the P&L are often very different -- for the same company.

Overall, and this is what is important as with regards to the article.  The fact that Tesco didn't pay the whole amount due to suppliers doesn't constitute a potential profit event; the only thing it does is that paying the $95 invoice will reduce payable by that amount -- in itself it has no profit impact.  if Tesco decided not to pay the $5 balance this is not an "ordinary profit"!

This is my point, this is a complex problem:  little of the information is available on why Tesco mis-stated profits by such a significant amount.  Grocery stores are notorious bad payers (to suppliers) because they operate in such tight margins.  But the article gave a false impression as to the nature of the problem.  I have serious doubts that an analyst (this was  a quoted statement in the article) actually said something as stupid, but I am confident that the journalist didn't understand what the nature of the problem was that could have generated this mis-statement of profits.

anyway that's it!

I have no position on Tesco (or any grocery operator for that matter)


Friday, September 19, 2014

Scotland & independence movements

Can it ever be the same?

The reality of the 55/45 vote overnight in Scotland is a cold shower for independence aspiration in Quebec and Catalonia (among many many others -- looking at you Wales).  The Scots got a very clear question -- do you want to be governed from London or Edinburgh?  The Scots said, no thanks -- better the devil you know!

However pandora's box is now open.  Once talks of divorce start its hard to stop -- my guess is that yesterday's vote solves nothing;  discussions will continue for a long long time, with the Scottish nationalist party finding a new excuse to restart the process. As an example:  "although the question was "clear" it didn't spell-out what was the alternative, what was the ideal of an independent Scotland".  It remains that 45% of Scotland's voting population said "we want things to be run out of Edinburgh", that's 1.5 million people, a not insignificant percentage of the population.

Already, the press is having fun.  In reality, it is the press that loves those kind of plebiscites.  The press will find the unreconstructed separatists that want nothing less than Scotland for Scots!  its not about governance but hurt pride. 

The past 50 years the Scots have wanted self-determination.  The threat of departure has been a huge incentive for London to devolve many of its decisions to local officials; often better equipped to see the problems on the ground, rather than 500 km south.  Those opposing independence don't give enough credit to the independence movement to see its impact on how the Scottish population is now governed.  This has been the real achievement.

The Quebec separatists sent delegations to Scotland -- probably (after too much whiskey) are on their way home deeply demoralized.  If a nation (Scotland) which has been "subjugated" by England cannot free itself from the cold grasp of their invaders -- what hope go Quebecers have; we don't have inspiring movies like Bravehart.  Moreover, the Parti Quebecois has seen slipping polls -- in the 18 to 25 age group they rank 4th in voter intentions!  That lower than the Marxist Leninist "Quebec Solidaire"  which is pretty bad.

Generally the most attractive features of independence movement is that they bring to the forefront the grievances of a nation (Scots like Quebecers are nations -- based on the concept of a shared identity) and act a pressure valve allowing for the central government, over time, to devolve those functions that are better (maybe not) administered locally.  In Quebec, aside from the armed forces, 99% of population governmental interaction is with the Quebec government (except during tax times).  Similarly in Scotland, the London government has started (years ago) a devolution process that it seems to want to accelerate.  Talk of separation has yielded a true reform in how, as nation, we are governed today.

Tuesday, September 16, 2014

Ebola -- a public heath crisis

Several years ago, at the bookshop in Hong Kong I bought the Hot Zone.  To say that the book freaked me out would be an understatement.  It is a compelling look at the risk of contagion (and the movie with the similar name was scary enough) by one of the world's deadliest diseases.  Thankfully, Ebola is not airborne (yet anyway) apparently ebola is a very sloppy virus that has a tendency to mutate -- already there are two or three variants.

The CDC, Medecins sans frontier, and others have raised the alarm.  So far America (today) is the only country that has raised a hand -- with 3,000 personel.  Not Russia, not China and nor Europe.  How is it that America is always seen as the policemen or the doctor of the world.

If Europe and China were to look seriously at the security of the middle east (the oil zone) it may be of comfort that is America that is providing all the security in the straight of Hormuz, and yet 99% of the oil produced in the region goes to China or Europe -- who assume no cost for their energy security!

Back to Ebola, there is a sense that this is a disease of Africa, and that it will be contained.  Maybe, but Lagos is a big, big town and to think that international air travel -- or illegal immigration out of North Africa is not a problem would be to seriously misunderstand the scope of the problem that the world is facing.  The Ebola crisis is still (only just manageable), but Ebola is considered an R1 or R2 communicable disease -- that means that every sick person will infect 1 or 2 individuals -- this is very high (in the movie Contagion they were talking of an R0 -- maybe an R1).  The case of the American missionary who fled a hospital to return home (eventually died in Lagos) infected between 12 and 20 people.

We are finally meeting our deadliest foe -- and he a virus!


Enough already with Europe -- lets trash America instead!

So apparently France's prime minister (Manuel Valls) said that its economy was "screwed" if there was no recovery within the next 3-6 months.  personally, I think that he's now calling "higher powers" in the hope of a devine intervention... He wishes!

Out in in 'merica the situation is all rosy, at least if you look at the stock market which continues to define any logic.  There is no good news, aside from stock buy back -- that's it aside from a few companies that are doing well (looking at you Disney) but the real game has been the stock buy back. Why do better if you can just reduce the float!!!

The reality is that without wage growth in the middle class there can be no economic boom.  Moreover, the big spending now is in "education" as John Oliver pointed out the $1 trillion student debt has been mostly used to attend private (for profit) universities -- who according to Oliver spend nearly twice as much on advertising than they do on the faculty's salaries!  That doesn't produce much growth -- but provides young people with massive debt, and in many cases degrees of dubious quality.

The reality is that with the growth in wage disparity between the 1% and the rest (no wage growth for the rest, and a 25% a year increase for the 1%) there is no way for the economy (one that is based on consumption) to grow.  Moreover, with the GOP's "war against Democrat spendings" there is no spending on infrastructure.  Bridge and viaducts are failing down or considered "in grave danger" but there is no money at the local level, at the state level or at the federal level.

One of my favorite countries is Paraguay, the economy is full economic growth, 10% a year with a massive shift from agricultural labour to city employment.  All great, but with a 10% income tax rate and minimal property taxes (which is great for rich people) there is literally no infrastructure spending.  There are few if any traffic lights in Asuncion, the main (and only) state road is in such poor shape that to call our "Canadian potholes" a calamity would be a gross exaggeration;  we are talking massive holes (up to a foot deep.  Ranch owners fly out to their properties (which are immense -- for good reasons) and are far flung anyway, but goods transportation by road is greatly hampered by these poor infrastructure (there is no rail network in the country)

Traffic in Asuncion is becoming a problem.  The 5km road to the airport can, and has taken me, more than 2 hours.  There are real economic costs at not having infrastructure.  America is discovering the cost of having crumbling infrastructure.  $20 Trillion -- that's the total (an expense that the GOP is apparently glad to pass on to the next generation.

Monday, August 25, 2014

So Europe is on track

Over the weekend, Draghi spoke at the Jackson Hole economic symposium.
He addressed the absolute disaster that unemployment in the Eurozone has been, but also made the case that the ECB has been somewhat limited in its ability to address the economic situation in the bloc because of austerity measures taken by European governments.  Ok so first off, Draghi has no control over fiscal policy (he can have a word, but nothing else) .  Moreover, when European government put the breaks to spending (largely at the urging if the ECB -- with an objective to cut deficits) the impact was, surprise, surprise, economic contraction.
Amazingly, the ECB is now saying "it's not us, we didn't tell Portugal, Spain, and their friends to cut spending". Guess what then, European countries put pressure on their economy to stem the flow of capital out -- so that the pain would be mitigated, the ECB was surprise of this outcome -- "Sovereign pressures also interrupted the homogenous transmission of monetary policy across the euro area,".  
The shocking part is that there is no shame here, that telling government that they had to curtail expenditure to meet some predetermined budget deficit targets, that the ECB would not think that governments would yes try to raise revenues, but also cut revenues.
Europe is a mess, the market noticed this incongruous statement and it's illogical conclusion.  But then the ECB just saw its objectives, and didn't account for unexpected consequences! 

Monday, August 4, 2014

Markets are going down -- what should I do?

Twice last week I got that question, don't know why!  I keep on telling all my friends that I must be the world's worst stock picker -- if I choose it, it will go down.  Anyway, the markets have decided that the news is suddenly bad, don't know what is different suddenly (not wars, not economics).  It used to be that in thin summer trading "trolls" could play their games but with the advent of high frequency trading this is no longer realistic -- for those who don't know HFT accounts for 40-50% of all trading activities on most North American markets.

So since computers don't take holidays summer doldrums cannot be it, maybe the markets have over-reached over the past few months.  I always commented that the markets were rich over the past few months -- corporate profitability has never been higher (NEVER) as a percentage of GDP, earnings multiple while not insane are "rich" insofar as there's not much increase in multiple (again the logic here is that markets revert to the mean -- always) so when the multiples are high there's is less room for the upside.

Short interest has been rising over the past few months -- since hedge funds don't take kindly to inactivity there is a rush to look at negative outcomes - moreover, with volatility down the crapper (at a level not seen -- ever) sustained low vol has a huge impact on the price of options -- its true!  Cheaper option means; more room to play -- on the other hand less vol means that the stock movements have been minimal (they go up slowly...)

Back to my point, first don't sell in a panic, think of your average price and then look at what is important.  Those who were able to perfectly time the market (all liars by the way since perfect market timing is impossible as a trading strategy) made a bundle in 2007/2010.  think about it you sell Citi at $500 and buy it back at $10.00 and then today Citi is trading at $48!  The reality is that you cannot achieve that: you sold at $50 and you bought back at $36!

My advice is don't buy individual stocks -- because as a retail investors you cannot follow individual stocks (you may be able to follow a sector?).  If you pick stocks then understand them, buy bell-weather stocks (e.g. GE, Bell etc) and make sure that you have target returns -- Have some bonds and stocks (depending on your age more bonds or stocks), and that's it.  There is no magic formula!  Personally I like ETF, because they are cheap as hell to trade and hold -- they are very liquid and at the end what is important for investors is to reduce transaction costs, and there is a wide variety, so you can be sector specific and you can invest cheaply  offshore, if that rocks your boat .

Anyway that's just me!

P.S.  No position in Citi, GE or Bell


Tuesday, July 29, 2014

Why are Russian reading my blog?

Google analytics is cool, a bit of "porn" if you will, and I've notice that of late (I've not written anything in two months) Russia has been the biggest source of readers for my blog!  Now I should not get a big head about this, we are talking at most 50/60 readers a day, hardly a large population, still its funny to think what makes me attractive to them -- maybe my "non-American" voice (really Canadians think they are not Americans... we are a little delusional some times). Anyway, an amusing situation -- BTW the second largest reader base are Americans followed by Australia -- Canada is 6th.

Back to work now!

European rates test new low -- financial risk in China

Over the past few days new records have been set; Spain saw rates on its new 5y debt at 2.5%, the lowest ever -- and that's a country that has had a debt market for 500 years!  Italy saw its debt rate fall to a new low, the same day that the Italian government admitted that it owed more than $100 billion in late payments to its creditors (local suppliers).  What's going on, for a start there are no risks in Europe, the ECB has decided that it will buy all paper not absorbed by the market, making peripheral (higher yield) Europe a sure thing for institutional investors, this is particularly true for the short dated instrument (interests could still go up -- and destroy bond values).  But deflation is a greater risk (especially since European countries are locked-in with a single currency) its almost an objective of current policies.



The above graph is very positive for Europe (not good, but positive) insofar as the total debt volume is down, mainly because core Europe has squeezed the public expenditures (hence the massive unemployment), so the picture is still positive,if you compare to 2008 its great, but rather bad compared to 2007!  Anyway there we are, Europe's basket cases are borrowing cheaply (in the short end of the curve), there is no fear of inflation in Europe (deflation is the real risk here -- same as in America where the economies are working substantially below potential).  So rolling the short dated debt presents limited risk for investors.

It makes perfect sense when you consider that European investors have few "choice" options available.  The market is seen as "very bubbly" and most investors are already very long the market -- usually with solid profits buffer in their positions, and are therefore unwilling to buy more with the risk of increasing their average costs.  Especially hard to justify investing in the CAC or DAX in view of the rather high multiples (the same is true for the American markets). Sure a P/E of 14 can be justified but its considered high when corporate profits as a percentage of GDP are standing at historical high (its hard to see how they can go higher... although).

So for institutional investors the bond market in Europe is the one place they can go, and the search for yield pushes them to the outer edge of Europe (where by the way the population has already been wiped into submission).  Things in France are just starting and the population isn't going to take it lying down, no sir!

Investors are logical give a set of options they will seek maybe not the best solution, but the least bad one at least.

On a side note, a European friend recently told me that it was disgraceful how North America's pension funds were changing the rules on pension holders (I didn't mention that the move to replace defined pension to defined contribution occurred years ago).   But I did point out that at least in North America we had pension assets -- while in Europe they have nothing!  Just a promise to pay -- maybe.  He actually didn't believe me!  (ok not really a friend more of an aircraft acquaintance really) I explained to him that in North America the pension assets belong to the "pensioners" while the promise from European governments (and companies) was just that.  In fact, I pointed out that after Enron it became illegal for pension funds to invest in their own company (no more than 5% of assets) to avoid having a bankruptcy killing both your job and your pension.  I suggested that he check with his own company...

Finally, China does weird stuff -- this video, says so much about China's risk management culture. The video (from a dashcam) shows the demolition of a building in the middle of a city, people are walking nearby unaware that the building is about to go down.  Rather spectacular.  It reminds me of a book a read a few years ago:  Poorly made in China where a shampoo made in China had on the label:  "Not tested on animals"  which was absolutely true, since that product had not been tested at all!

Recently, GDP growth in China has been lagging from target numbers -- the solution has been to turn the spigots of money creation full on.  The imbalance that the Chinese themselves worry about:  Investment Vs, Consumption is worse today than it was 4 years ago.  Chinese are used to the way things are and are not ready to assume the very real burden that shifting to a consumption society implies.

hence this:



This is very bad

The NYU measure of systemic financial risk for China this year reached an all-time high. This seems to be a result of the fact that liabilities of the Chinese banks have continued to grow rapidly while stock valuations of the institutions appear quite vulnerable to a downturn.  The real issue is one of contagion.  When Lehman was "let go" no one thought the repercussions would be so dramatic -- really everyone though there would be some limited contagion, turns out the way our world is connected it doesn't work that way.  So imagine a Chinese bank walking away from its derivatives obligation to JP Morgan (or DB for that matter) the largest derivates players?  I don't know, my bet is that no else has any idea either!



Finally, the same Systemic financial risk graph of America:



Don't let the GOP make you believe that Democrats are the big spenders here!  The worse point was under a GOP administration.

Note:  A graph are from NYU -- a measure of systemic risk

Friday, June 13, 2014

US Q1 GDP bad news for Obama -- maybe good news for the GOP?

Numbers as published are always subject to revision.  The initial Q1 U.S. GDP number has been revised as more information was made available.  Today, the US government revealed that Q1/2014 GDP growth was revised downward from -0.7% to -2.0%.  Apparently healthcare costs that were assumed to grow by 9.9%, and account for about 15% of overall GDP actually fell by 6% instead.  This is a truly terrible number, one of the worse (top 10) since the end of WW2.  If that provides some perspective!

It's going to make the 3.5% target set by Wall Street difficult to achieve!  

In other news the boys on Wall Street are suffering, low volatility and a scarcity of new deals in the 2nd half of the year means that banks are thinking of trimming traders numbers and even IB guys are looking around in fear (let's not exaggerate) nevertheless it is we'll know that the bonus pools are shrinking, and that the banks are mindful of their overheads!

The usual exit strategy into private equity and hedge funds is also closing.  It appears that sell side guys are not so hot when working for the buy side.  Moreover PE funds and HF have had a terrible time over the past few years -- a strong market makes acquisitions difficult and excessive liquidity (in the form of HFT players have hurt HFs earnings -- HF will not admit that what has really hurt is the lower leverage they can now get, the cost of shorting stocks has gone up!

2014 will be hard for bankers and traders, please start a compassionate fund for these poor millionaires!  They can no longer afford the rolls they will have to downgrade to a merk or a Beamer 
Tough times all around for the 1%

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Wednesday, June 11, 2014

Christine Lagarde -- 2,000 Greek names with Swiss bank accounts

So Ms Lagarde was in Montreal yesterday for the "Montreal Conference" a watered down version of Davos that aspires to do... something.  Anyway, the lunch speaker was Christine Lagarde the current head of the IMF (Washington based) and all around cheerleader for capitalism!

The highlights was that the global economy is back on its feet, yep we're looking at 3.5% growth in America and "something positive in Europe"  China should be around 7% -- less than before but still respectable, shifting towards consumption...

Ok so there are a few things wrong here, Q1/2014 GDP growth in America was -0.7%, so to make the 3.5% target Q2/3 and 4 are going to have to be gangbusters.  Still, Europe is going to get something positive because the ECB is so brave -- they have entered into the land of negative interest rates.  If you accept a deposit from the ECB, you pay them interest.  There's no way that this can go wrong, and deflation is not just around the corner.  As for China there is no doubt that the leadership wants to shift from investment to consumption, they are just not too sure how to go about it.  Moreover, local governments' entire tax base is driven by capital expenditure -- they get property taxes up front.

So granted the US economy is seeing some interesting credit growth -- usually a signal that the economy is pumping, but and this is a big BUT! median income continues to fall... BTW interesting stat.  In 2013 average income in the US was $300,000 p.a. (placing America in third place), but it turns out that Median income is around $40,000 (placing America in 19th place).  The obvious reason for the massive difference is income inequality, which is a big today as it was in the 1930s.

Which brings me back to Lagarde, when she was minister of finance in France she gave to the Greek government a list of 2,000 names of Greeks who had Swiss bank accounts -- a part of a larger list that was sold to the German and French government by a Swiss national.  A local newspaper published the 2,000 names -- Government's reaction -- arrested the journalist for sedition (that was in 2009) continue to harass him to this day.  Number of Greeks that were questioned in connection with this list ZERO. Yep, and this is my favourite part Ms Lagarde said that governments have to continue to reform the banks (i.e. give banks time to sell their junk to the ECB, and to recapitalize).  One neat trick has been to reduce all forms of lending to a minimum -- so that their balance sheet shrink and meet their capital requirements.  Obviously the impact of that is to stop all possible growth.  And so next for the Euro-zone has to be deflation.

Granted Ms Lagarde has few options, and cannot speak the truth.  What would happen if she said that Europe is in for massive deflation and that the growth of the US economy is in  its past?  Not good for the capitalist system (or the stock markets).  No extend and pretend that the problems will go away.  In a sense its kind of working, as of last week Spain (85% debt/gdp) debt cost was below that of the US, in fact as of Monday Spain's borrowing cost are lower (in absolute terms) than they were in 1790.  Right now government borrowing in Spain is the cheapest it has been in more than 300 years.

Clearly the markets believe that Spain's economy has never been so healthy....

Monday, June 9, 2014

AAPL down 85% pre-opening

Sometimes I love the ticker!

Shares of AAPL in the pre-market are trading around $92 a share... sure the stock has lost 85% of its value overnight, there was big news today -- AAPL stock split 7:1.  So really nothing to see here.  All the automated news will show that AAPL is the biggest looser today -- some will correct the news to reflect the split.  Others will not.

My bet is that a few investors will call their broker in panic!  The stock is down, the stock is down sell it all!

It reminds me, a million years ago, my then firm had created a structured product for Nortel shares.  It was a strange instrument created in the early 00s (before Nortel went bust).  So in 2005 I get a call from this angry investor, because her structured note was not going up, and all her friends at bought Nortel at $8 and it "was going to $18" -- according to her friends.

I had to point out that she had bough the instrument when Nortel was at $85, we had offered to buy it off her at $100 and at $110 -- she had refused... "it was going up" for ever!  Now here instrument was worth the equivalent of $85, she had not lost a penny (granted she had not made much) but she didn't understand that her capital had been protected (she also got a nice coupon -- hence the note).  This investor could not understand what I told her, she didn't remember (we had recordings) she turning down our two offers -- calls and letters.  She was still pissed that she didn't get the "upside" from $8 to $18 -- actually Nortel went bust and was de-listed a year later.  There's just no pleasing certain investors.

Greece, The far right and the GOP!

Watching Greece over the past few months has been an education, and education in the rise of fascism! Turns out that the Greek population in general is not enamoured with its politicians and their current method of "saving the country"  The new favourite pastime for the middle class (well educated at that) is to support Golden Dawn a avowed  fascist  party that is "blaming the Jews" for all that has befallen the country.

Granted financiers have a lot to answer for, but they're not the ones who spent like drunken sailors -- yes bankers were enablers, but... at any rate in local election Golden Dawn which is just short of being thugs (actually not that short) and who have committed some rather appalling actions (and enjoy a bit of Nazi salut) got almost 10% of the vote.

It's really not that surprising; considering the state of the economy, the unemployment and destruction of the middle class that a far right party would take hold of the popular imagination.  They are not the first to blame the "foreigners" for their problems -- it was after all the reality faced by Germans after WW1 and the treaty of Versailles that made sure that Germany could never recover.  The hardship imposed -- the cost of reparation all made a radical Austrian's view sound reasonable and action necessary to remove the leadership of the country in favour of Nazism.  BTW its not because I understand the outcome that I support the outcome, but its somewhat predictable.

The far right (FOX news ha ha) has long been able to tap into the fears of ordinary people, especially when their values are no longer recognized (whether they were real or not to start with) by their government; abortion, gay rights,  gay marriage, immigration etc...  so the attractiveness of certain candidates that speak to your values your desire for some kind of "white picket fence", and small town sensibility -- or really some anti-Rambo phenomena!  Where the people that are different are kept away (or at least hidden).  The anti-immigration rant of the Tea Party is a case and point, its not so much that America doesn't like brown people is just they White America doesn't want to see them, clean my house mow my lawn, but you don't get to go to my kids school! America has found in local government a re-segregation tool that it has welded with impunity!  Schools in America (public schools) have not been as segregated since the 1950s -- all that by re-drawing school districts, keeping poor neighbourhood away from the all white schools.

The use of certain language in America's far right, the use of code word, something that the neo-Nazi groups have made into an art form, is now finding itself in the mainstream of the political process. Often the talk of "community" or "shared values" is used to exclude non-white from the discussions.  The current voter's disinfringement process via photo ID has been driven by the fear of "voter fraud", which simply doesn't exist in America. America's real problem is that people simply don't vote.  Amusingly some GOP politicians have admitted (on TV) that the real goal of voter ID is really a "keep the democrats away from the ballot box.

The GOP's problem is serious, an aging voter base, a pandering to fear and loathing has made the party generally unattractive to young voters and ethnic voters -- with rare exceptions if you are brown, black of Asian the GOP holds little real interest for you (despite the fact that the GOP's anti-abortion stand would usually play very well with the very catholic spanish speaking population), The GOP is facing a demographic problem -- its supporters are dying of old age!  If the GOP was a normal party it would be able to re-invent itself, but there are powerful forces that stop this move to the left:


  1. The hard right controls the GOP at the local level, these activists (supporter of the Tea Party) are able to push the current officer holder towards their views by threatening to support a more radical person.  In America politics is 100% local
  2. Talk radio's core reactionary values -- and dollars/cents livelihood depends on a sense of moral outrage.  Nothing has to be true, it can be a pack of lies, for the listeners it doesn't matter they will have forgotten the topic within 2 days.  Talk radio finds its "voice" in a reactionary (slightly racist -- like your grandmother) view of the world and it pays the bills too!
  3. The GOP doesn't have an Obama or Clinton that inspire (not saying these guys are/were perfect) but like Tony Blair in the UK they could shift their party -- GOP doesn't have those voices
  4. The GOP's new "anti-science" view of the world is a brand new expression of 'know nothing"  a desire for the world to be the way you want it to be, without any regards to how the world really works.  "I'm not a scientist" is the new (5/6 months) mantra of the GOP.  That way they can say stupid things "because they are not scientists" -- who they generally despise anyway
  5. On a more general note, lobbies have taken the complete control of America's political process.  The ability of lobbies (starting with the NRA) to scuttle elections makes them immensely powerful.  Forcing elected official in specific directions
The GOP's inability to find an alternative (anything at all) to the ACA "Obamacare" speaks volume to the GOP's breakdown.  Despite having the desire to strike down the ACA -- they tried over 50 times, when asked what would the GOP offer instead -- there's simply nothing available.  No ideas, no thoughts, no plan just nothing at all.  The GOP has ceased to be a national party -- any big ideas any shift in policy (aside from "supporting our troops" -- as long as it doesn't include the Veteran's administration) is simply absent.  There is no policy, there are no idea -- except to make government small enough so that it can be drowned in a bathtub!

Aside from being a "funny-ish" line about the role of government -- the reality is that governments have to play a roll in the economy.  It is often very efficient -- other times less so!



Friday, June 6, 2014

Guns in America

Yesterday's tragedy in Moncton (where 3 police officers will gunned down) just brings closer the whole firearm mess that is a constant headline grabber.  In the US the number of "daily" incidents is so large to make it almost farcical.  The number of American who manage to shoot themselves (or their family or friends) is simply depressing.

Interestingly enough gun ownership is in free fall in America.  Despite all the rhetoric and the crazies in Texas with their "Open Carry" demonstration gun ownership has dropped from around 40% in 1980 to around 25% today.  granted those who own guns tend to own many many guns!



Look at these two morons!  I mean you've got shorty on the right who's clearly got some "size" issue -- will anyone ever tell that guy that his assault weapon is some form of penis replacement therapy (well maybe not to his face), and as for the fat bastard on the left, you know he's wanted to be a soldier all his life but all the running was way too much for him, so he got a cute littl' hat and an AR-15 and he thinks he's the coolest and that all the girls want him.



Think about it, you walk into a Tim Horton, scratch that you walk into a Dunkin Donnut and these two cretins are right behind you what is your first reaction -- I know that I get the hell out of there.  Maybe that's the solution, to every none-nut Texan, as soon as one of these bozos' walk in, you get your check and you get the hell out of there.  let them enjoy themselves in an empty store.  I wonder can service staff refuse to serve these cretins, you know they may take the view that they may shoot you -- under stand you ground rules.  Then you call the cops you say there are two guys in the stores with guns and you think they are there to rob the joint... let the cops deal with that shit!

Anyway, all this gun nuttiness started when the NRA decided that the 2nd amendment was all about personal safety and not about a well armed militia
A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.
Now, over the years (the Supreme court) the meaning of type of arms and what use it could be made was changed.  After all it could be presume that if you have guns you should be part of a Militia -- but again that was changed.  it was so changed that the NRA changed its slogan to remove the idea of militia entirely, guns were to be own to protect oneself.  The advent of stand your ground laws (where apparently in America you can shoot a black guy if you feel threatened)

Americans don't seem to understand the following concept:

  1. You don't have to keep a bullet in the chamber
  2. You can lock the safety on your gun
  3. Its not a good idea to play with your gun while you drive
  4. Its not a good idea to stick your gun in your trousers (with a bullet in the chamber and the safety off)
  5. Guns and booze don't mix too well (EVER)
  6. Its not a good idea to leave you gun on your bed so that the kids can play with it
  7. Its not a great idea to scare off your friends with a revolver to win an argument
  8. You don't have to walk into a Target store with an AR-15 (with spare amos)
The only thing I don't really understand is the decision by several state senates to allow guns everywhere except in the capitol -- cause really guns in a debate situation between Tea Party nuts, GOP crazies and Democrats pot smoking morons is really a great idea.  Legislators are for guns everywhere except where "they" work...hypocrites!

Now up here in Canada we don't have "open carry", as a rule a greater percentage of Canadians own firearms, granted the vast majority are shotgun -- used in hunting, we don't have much of a gun lobby, although we do have a Conservative Party -- that among other things doesn't believe that firearms should be registered.  Not sure that would have changed anything to the tragedy that enfolded yesterday in Moncton.  Sometime people are crazy and will do crazy things that have horrible, horrible consequences.  

But at least we take some consolation that no Canadian politicians would ever say -- sorry about your loss, but if that's the price for me to keep my guns -- I'm alright with that!   


Monday, June 2, 2014

Polls, Politics and the Future

This morning the local French newspaper (called La Presse) released a new poll for 18-24 year old party affiliation/interest.  The result is both stunning and obvious; from the 500 young people who were asked, 34% would vote for the Liberal party, 23% each for the CAQ and QS and 16% for the PQ. What was obvious at my time in high school and college that the "cool and Hip" crowd supported the Parti Quebecois -- the party pushing for the independence of Quebec (maybe) is no longer true.  The Party Quebecois is GrandPa's party -- its no longer cool, and the people who run it are the same who were running it in the late 70s and early 80s!

The reality is that young Quebecers don't really see their future here -- 60% say that would like to work and live elsewhere!  Canada, the US doesn't matter -- they are considering a future (or at least dreaming of) that doesn't include Quebec and its "aspiration" to become a country.

For the PQ that is about to sit down for its first real discussion as to its future in about two weeks the poll has to be depressing -- first that the youth is no longer part of their support group, that 60% of young Quebecers consider the possibility of living elsewhere and that their major concern is the heath of the Quebec economy.

For the Liberals, if they play their cards right it could mean another decade in power.  With three opposition parties splitting the vote, the Liberals have a 5 year mandate to govern -- that could be easily be extended.  The CAQ could read some very positive outcome here, if they play their cards right they could see themselves as the true opposition to the Government -- for the next 18 month the PQ will be in full navel gazing mode -- with the race to replace the currently vacant leadership position.  As for Quebec Solidaire although they will be heart warmed that so many young people support their party, they are smart enough that an 18 year old who supports socialism (and a radical form at that) may not remain so when he/she enters the labor force and pays taxes...

What I think we are seeing is a new permanent shift in the role of Quebec in the Canadian federation.  It will take a while but I suspect that if Quebec is seen as a more engaged player in the federation then the resentment (that had been bubbling just below the surface for years now) will dissipate.  Already the rest of Canada has figured out that Quebec's stated dream of independence was the brainchild of too many journalists desire to sell copy!  The reality of the last election, the massive defeat of the PQ government after only 18 months in "power" is more telling than all the editorials that have been written.  The ballot box has spoken!

Now the next generation of voters are telling the pollsters that their future is not bound to the province!

On a side note, and rather depressingly the poll also showed the lack of knowledge about history -- and Quebec history at that.  Don't really understand how that happened, but it seems that young Quebecers know little about the history of the country in which they live -- it may have something to do with our education system I just don't know.




Tuesday, May 27, 2014

GDP Growth

American Q1/2014 GDP growth that was to be 3% (when discussed in late 2013) was finalized last week....drum roll; its -0.7% (I presume that the media will blame the weather).  Why is the economy underachieving what everyone believes to be the right way to go?

There are several reasons:  First off, median income continues to fall, America's middle class is seeing real wage contraction and has done so since the mid 1980s.  There is no doubt that the contraction in high paying blue collar jobs is a culprit, personally I blame the financial services that accounted for less than 5% of GDP in 1980 and today accounts for nearly 10%.  This "value added" has to be paid for.

Looking at machinery from cars to telephone via white goods (washer etc) one inescapable truth is that the craftsman is a dying breed.  Two years ago my range oven "died" it was $900 to replace the electronics or $1,200 for a new range oven.  Guess what I did -- I bought a new oven.  Worse part is that you don't need a technician to change the broken parts, a few screws and the motherboard (on an oven) is replaced.  BTW who though that it was good idea to install delicate, heat sensitive electronics on an range oven?

The technically proficient blue collar workers have been replaced by the ignorant "Chinese factory worker" who installs the same component 2,000 times a day the exact same way -- thing of him/her as a cheap robot!

Back to GDP -- how can the economy grow when only the rich are seeing any income growth; they simply consume less (more savings) and therefore the economy cannot grow. Moreover, with an aging population consumption patterns shift -- a young family consumes much more than older (nearer retirement) couples.

We are therefore seeing a number of forces that conspire to keep GDP growth in check:

  1. Median income continues to fall (ACA aka Obamacare may help)
  2. Aging population shift consumption patterns
  3. Higher unemployment and lower skill employment affects earnings potential -- hence spending patterns

The value of investing in education;  A cautionary tail -- Friend's son just took over the sales and administrative responsibility of a consumer goods distribution regional network in Europe.  The retiree got his job when he was 25, had the equivalent of a high school diplomat.  His replacement has a MBA from a second tier European University (still very good), but in 30 years the job that was accomplished (until 3 weeks ago) by a High school graduate has been taken over by a MBA.  The cost of educating the replacement has been astronomical when compared to his predecessor -- what that value for money? 

This is a bit like the GDP growth stories out of China where cement factories are still being built (or cities for that matters) when there is already massive over-capacity (like a couple of hundred time the demand).  Building a $200 million cement plant that is un-needed still counts as part of GDP growth.  Can we make the same statement about education; were university graduates are taking over jobs done until recently by people that had not even finished high school?

I hear horror stories about education standards when young men and women graduate high school virtually unable to read or count -- its actually policy here in Quebec, to graduate from one year to the next in high school you only need a passing grade in half your classes!  

Who is school for the student, the teachers or society.  To me it looks like someone is getting cheater her -- the students for not having a real education and the tax payers that foot the bill.  I cannot speak about the teachers because such insane rules doesn't issue from professors...




 

Monday, May 12, 2014

Sometimes its de denominator that counts!

Last week StatsCan announced that jobs were down 29,000 in Canada for the month of April!  That's not good news with Quebec and the Atlantic province suffering the most.  In  fact, Quebec accounts for 110% of all job losses in Canada -- the province actually lost 32,000 jobs -- but the rest of Canada made up the difference. This is not good, and in fact, will probably probably cause the Loonie to drop some more over the next few days (which it did).

Sometime not only is the Nominator in the equation an issue, sometime its the denominator that has an impact.  As an example, Europe has seen no real changes to its economic fundamentals, France's government budget deficit is going to be huge, again!  Greece has seen no reduction in its overall debt burden, in fact it continues to worsen.  Italy that has a new government (and seem to want to tackle some hard issues), the market has given an unusual sign of confidence with historical low borrowing rates, but there too the overall debt burden -- that was apparently unsustainable 48 months ago, is no longer an issue.    

The reality is that the debt level of Europe's PIIGS are still as high as they were in 2010 when the European crisis started, in fact, in most of these economies there has been economic contraction, so that the debt burden is now a greater percentage of GDP!  Still all is well, the Euro is trading around 1.40 to the dollar.

By 2060 Japan's population (128 million today) will have shrunk to about 78 million.  There is a high degree of certitude as to this outcome, since Japan is a near perfect model of a closed economy (with regards to immigration).  It is virtually impossible for non-Japanese to emigrate to the country.  The reality of Birth/Death statistics (even taking into consideration advance in medical science) leads to an absolute decline in Japan's population.



The above table shows that by 2100, japan's population will be back to the level it was prior to 1900.  However, the make-up of this population will be very different.  In 1940, almost 40% of Japan's population was below the age of 14 and nearly 95% of the population was below the age of 65. In 2010, 25% of the population was above the age of 65, and only 13% of the population was bellow the age of 14.  By 2060, nearly 35% of that country's population will be over 65.  The turning point occurred in 2007 where Japan's population shrank for the first time.  In 2013 population contracted by 255,000.  The change in the denominator is important, while you can have a near stagnant economy (as in Japan) the number of participants are dropping -- notionally everyone else in Japan is a little better off!

Greece faces the same kind of problem, while its debt burden is unchanged (the biggest change is the creditor -- which has moved from pension funds and banks to the ECB) the reality is that Greece's economy is now nearly 25% smaller than it was in 2010.  Making it that much harder to find a solution that doesn't involve either exit from the Euro (very non-optimal) or some form of debt forgiveness (I'm sure Portugal, Spain, Ireland and Italy are watching that closely).  The only other option is either transfer payment from Europe to Greece, so that it can repay its loan or wage/cost deflation to make Greece more competitive.

Population shift has lead to a drop in the unemployment because the labor force has declined -- some would say, especially in the US, that ACA (a.k.a. ObamaCare) has had a huge impact on people's work need perception.  Some have dropped from the labor force because the only reason they kept working was to receive medical benefits.  Shifting demographics means that last year while unemployment rolls dropped off more quickly because people simply left the labor force.  The trend that is evident in Japan now, is slowly emerging in post babyboomer America (its important to note that America has probably the best worker/retiree numbers in the OECD -- Italy is the worse and only second to Japan...).

The same is true for Canada, while jobs were lost, the number of workers looking for work dropped even more, which means despite job losses Canada showed improved unemployment numbers.

Now you know

Friday, April 25, 2014

Gold, new economics et Friday stuff

Well two weeks ago, GS and Merrill stated that Gold was a sure thing to hit $1,045/oz.  Guess what its now at: $1,300 so again a bad call by the boys.

Although I've not started it, it now looks like I've found the  an economist for the 21st Century".  I bought his book! I have not  yet started reading Thomas Piketty book  Capital for the 21st Century, but it seems that he's found what ails us!  No wonder the WSJ and the GOP hate the thing.  It explains that the normal state is the all powerful 1%, and that the period between the first world war and the new century are the aberration.

The markets do what markets do!  The DOW, NADAQ and S&P 500 are all testing their all time highs; but again they retreat, once again failing to achieve their exalted goal.  BTW I, like many others, are bemused by the strength of the markets.  Earnings are high, but their quality dubious.  Most economies are on the edge (Look at the QE program and ECB "buy every bond" strategy).  My favourite bellwether stock: Caterpillar (NYSE:CAT) [no position] continues its upward trajectory (since January its been on fire +14% since Jan 1).  First, excellent results and positive guidance , suddenly thing are looking  in the world of construction/mining etc.  Yet Rio Tinto (LON:RIO) is down and Barrick (TOR:ABX) is going nowhere.  Strange!

Then, when my buddy asked me last week what to choose between FB and AAPL I said I don't know tech stock, but apparently made a case for FB --  because I said that each dollar of earning for FB was 8 times more valuable than AAPL.  That was apparently a reason to buy FB.  I just don't get it!  I told the guy that I don't understand tech stocks... and he should actually buy dividend paying stocks, and he hears buy Facebook.  Guess what today FB is down $1 since "my call" (really that's what he called it) and AAPL us up $40.   Now, and this is always the problem AAPL had great results -- better than anyone expected (back to my Analysts know nothing), but frankly so did FB, who had a "blow out" performance.

We're back into the zone of "who is more popular"