Thursday, 24 November 2011

Turkeys give thanks the day after Thanksgiving*...

Turkey-gobblers caught doing the futterwacken the day after Thanksgiving usually end up trussed and golden-brown just a few weeks later on the Christmas-table.. It's an amusing silly-season reminder that surviving an anticipated negative event doesn't necessarily mean that all is well indefinitely!

The same applies in the global markets. Very few market-professionals (if any) can claim that the last six months have been smooth-sailing. It's been a perfect storm of unanticipated economic shock and political ineptitude. Worse still, the confusion has been compounded in the real world by the exposure of the structural inefficiencies in the banking-model considered sacrosanct and against which none of us could draw on much experience. Even so, if you're reading this you've probably survived the toughest markets in living memory but dancing the victory-fandango is more than likely a dance-too-soon.. The weak global economic climate, structural headwinds, accelerated global deleveraging and high levels of debt prevalent in September which led to the last asset-price blow are still synonymous today however your interpretation.

In a two-sided financial tale and on a more positive note there are, as we speak, trillions of disenchanted dollars in cash or cash-equivalents earning negative real returns.... That's a status quo that will NOT endure indefinitely.

*Wishing our US friends a Happy Thanksgiving!

Friday, 18 November 2011

You, me, a German & an economist walk into a bar...

Buy a German a drink and you'll be told that the economy is wundenbar, prices are robust and unemployment is at a generation-low. Change seats, if you have the stomach for it, and do the same for an economist and he'll be squealing like a bag-full of pigs... You could argue that the economist is highly-skilled, well-educated and therefore worth the price of a beer but more often than not you'd be wasting your money..!

The disconnect between the economy and stock-market performance is not always fully understood. The supposition that the stock-market reflects the economy is false, palpably so! If anything, the stock-market tries to predict the future, usually one year out, which is why traders and professional money-managers will talk about the '12-month economic lag' on current pricing. That means current stock-market prices reflect the predicted conditions 12 months hence... The variables we scan from which we make our predictions are mostly the subjective interpretations of the current circumstances we find in 'the real world'. Euphemistically, these predictions elevated in status to FORECASTS by analysts or economists are nothing more than, well, predictions and unless the forecaster has divine authority it's nothing more than, yes you guessed it, a prediction! Extrapolating this theory in the media, a Bloomberg or a Reuters or any other similar financial-media company would then collate these FORECASTS (ie: predictions), calculate the middle-ground (an insipid concept at best) and elevate the average FORECAST (ie: prediction), to unimaginable status by renaming this number the CONSENSUS FORECAST (ie: the average prediction). In reality that's the same as buying lukewarm tea because half the world likes ice-tea and the other half like their tea hot. 

These CONSENSUS FORECASTS (ie: average predictions) are applied to a company specifically, a sector broadly, an economy generally and in recent times to the global economy as a whole. Investment strategy is a discussion for another time. Even so, applying CONSENSUS as reality to your personal investment strategy is, quite simply, intellectually poor... You'd be selling yourself short. 

Returning to our two lechers above, whilst the German lives in the now, the economist lives in the future. One lives in ignorant bliss and the other is blissfully ignorant for everybody knows that today's reality is not always tomorrow's certainty. The same applies to markets, today's prediction is not always tomorrow's reality. One more thing, three years ago the US financial crisis heralded the end of America and by implication the rest of the world. Surprisingly then we're still here. We'll say the same about Europe...

Friday, 11 November 2011

2011/11/11 11:11 - Once in a lifetime!

It's another extraordinary day in an extraordinary year in these extraordinary times. Those who are spiritual or esoterically-inclined will record this day as a day of reckoning; the coming-together of humanity across ethnic & religious chasms; a changing of the guard, so to speak, from attitudes of indifference and suffering to a rekindling or ignition of what once made us great; the rejuvenation of the human spirit...

For the rest of 'we-the-unimaginative-many' the 11th day of the 11th month of the 11th year at 11 minutes past eleven is perhaps, at best, an intriguing number and at a stretch, considered lucky.

In these spiritually-impoverished times, crippling economic strife and religious intolerance perhaps even we, the life-weary many, should recall our humanity; toss a small coin into the fountain of hope and perhaps, just maybe.. we might just spark the start of something weird...; an auspicious reawakening ... 

Thursday, 10 November 2011

Europe awake!

For the attention and consideration of Europe's leaders

What has happened to Europe?

You've told us that the EU stands as a select body of nations believing in social and economic freedom. Circumstances have proved that the interests of individual nations are not identical. At the same time the separate identities have, until now, been seen as a strength rather than weakness. With the region's experience and expertise now is not the time to hide your heads in the sand....

New problems are looming.. Live not under any illusions. You cannot opt out of the world!

Your capacity to play a constructive role in world affairs is related to economic strength. If you hope to guarantee your way of life, the question you must ask yourselves is whether the present leadership is fulfilling their duty. The battles are being fought in your territory, not ours.

This is the moment - a moment when your decisions will determine the life or death of your kind of society; - and the future of your children.*

* With apologies to Margaret Thatcher whose words roused the nation's collective spirit. Will Chancellor Merkel be hailed as Europe's new Iron Lady

Monday, 7 November 2011

Italy's next..

Italy is next? What does that mean, exactly?

The Italian problem-  One:   Debt to GDP ratio - 119%.
                               Two:   0 (zero) political credibility.

How's that any different from Greece? It isn't.

So what happens now? Predictably, the scenario generates two basic market reactions. One; bond yields rise, alarmingly. For the technically inclined Italian bonds have broken the crucial post-euro-era highs of 6.5% .... As an exercise and confirmation of the severity of the situation, if you like, consider the rapidly diverging European bond spreads (comparative yields - usually against the German bund) and Two; as Italian bond yields rise the cost of credit rises commensuratelywhich makes it more expensive for Italy to raise money to service EXISTING debt. As the debt burden rises on comparatively more expensive credit, Italy's ability to go-to-market cost effectively, so to speak, diminishes and so on and so on..

What's done is done. Global debt levels are excessive. That's old news. So why has the market singled out Italy rather than France which is equally indebted? In a nutshell, the market has little faith in Italy's ability to get-its-house-in-order and service its debt-burden. It's a global vote of no confidence in Italy's leadership. 

The EU is structurally-imperiled, once again, with an economic problem not insurmountable given the diversity of the Italian economy, but rather on Berlusconi's lack of application and or ability to draw on the collective energies of the ordinary Italian to address the issue, in time and before conditions deteriorate.

Unless the EU addresses the structural concept of competent sovereign leadership, which is complex and fraught with danger, it's just more of the same..

Friday, 4 November 2011

Unpredictable white noise..

Investors and traders who succumb to headline-induced volatility do themselves an injustice. Media-promoted emotive pap (nonsense), usually accompanied by subjective talking-head 'expert' commentary, often abrogates from intelligent strategic insight...  As a practical example review yesterday's intra-day chart for any of the major European equity indices. Greece's to-referendum-or-not-to-referendum .., BBC-rumoured resignations / 'official' political retractions, Super-Mario's surprise rate cut on debut and his subsequent commentary at the ECB Q&A press-conference each had a profound peak & trough influence on the global markets...

It would be wise, perhaps, to lift the emotive-veil and understand stock-valuations, earnings expectations, consumer sentiment, the cost of credit, regulatory change, dividend yield & default swaps before contemplating any strategic adjustments or revision.

Very few professionals deny the premise that successful traders / investors usually confine short-term headline-driven market shocks to the emotive bin. Most appreciate that mainstream market-commentary is white noise and or conjecture, at best...

Tuesday, 1 November 2011

Greek referendum... CLEVER, very clever!

It's clear that this latest shock out of Greece makes little sense UNLESS of course Papandreou and his cronies have decided that they don't like the latest deal announced last week and WANT to default. We all know how the Greeks will vote in a referendum........

If the theory holds true, Papandreou could claim the 'will of the people' and refuse the deal. Now, if Papandreou plays his cards well he could in fact force Germany's hand and wrench a full amnesty on all Greek debt at the eleventh hour. It's no secret that export-driven Germany and France need the captive EU market.

All hail Greece; who would have thought...

Monday, 31 October 2011

7 000 000 001 - SOS!

It's a colossal number and if nothing else, bloody terrifying...

Anatomically unequipped as we are for underwater life and as a consequence confined between a rock and a hard-place, here at last, in quiet desperation we stand alone, all 7 billion of us, on what's left of this good haven, the planet EARTH.

Let's pretend, just for a moment, that our moral compass points resolutely NORTH; our right to procreate willy-nilly is unequivocally entrenched and our every whim and wish, material or otherwise, a guarantee and whilst we're at it and yes admittedly it's a bit of a stretch, let's imagine a world where its leaders are intelligently honest and hard-working; holding sacred their people's electoral mandate... In such a gaga-world of music, milk & money and where our bellies grow fat on the marrow of excess will we ponder the day when the music stops, the chairs run-out and the cows run dry?

For now, once more, let's park the ceaseless and perhaps ultimately trivial debate on energy consumption, growing labour-market strife, finite resource allocation, infrastructural spend and space utilisation and ask, as simple men & women one, as yet unanswered question:

- will The Almighty's orchard of little apples feed us all..?   I wonder.

Tuesday, 25 October 2011

UBS - lies, damn lies & statistics..

In scenes reminiscent of the bewigged slap-stick reality TV's 'Apprentice', UBS's Oswald Gruebel quit as CEO immediately after the public disclosure of a substantial loss from an unauthorised trade in a London-based equity division. The question of where the buck stops becomes interesting if not a little contentious........ ?

Take today's UBS AG 3rd-quarter results as a point of departure. Net income for the period:  $1.16 billion. Tier 1 Capital ratio: 18.4%. Wealth Management & Swiss banking earnings:  up 67%. Notwithstanding the once-off accounting-gain and the sale of sovereign treasuries those results are pretty impressive...

Now, if falsified reports which resulted in the unauthorised trading loss in London did in fact trigger internal risk controls and they weren't sufficiently investigated or escalated then logic dictates that the fault lies not in the system itself but with the front-line staff responsible for compliance. As it turns out both line-head managers have subsequently tendered their resignations.

At face value and if these results are anything to go by, it's impossible to fault Gruebel's vision or strategic performance. Expanding the trade-loss witch-hunt and implying the same inconsistencies to the Group CEO as its logical conclusion, smacks of an undisclosed agenda not necessarily in the best interests of shareholders. Time will tell.

Friday, 21 October 2011

Losing our humanity

A 'momentous day'. - US President B. Obama.  For whom?

I suppose you can understand the violent reprisals and retaliatory vengeance of the common Libyan. 40 years of brutal oppression at the end of a gun and the blood of innocents is difficult to cleanse. Even so, this way of settling differences is an injustice.

'It is better to be violent, if there is violence in our hearts, than to put on a cloak of nonviolence to cover impotence' - Mahatma Gandhi

Global leaders, in haste, opportunistically celebrating the post-capture execution and subsequent display of the body, in flagrant religious violation, does not reconcile with the veneer that is 'justice for all'. It's vicarious violence in its purest form. It is an unwise confirmation of our inhumanity. Perhaps even, proof undeniable of an irretrievable decay of conscience.

If western leaders, the United Nations included, paraphrased, celebrate a 'momentous day' without explicit condemnation of what was, quite obviously, the execution of a wounded, unarmed man and therefore by anybody's definition, cold-blooded murder, then we celebrate a cruelty. Looking to these same individuals for leadership in these trying economic times seems, if anything, a dream of fools.

Thursday, 20 October 2011

The sins of our time...

To Sarkozy I say - Fais ce que dois, advienne que pourra and for Germany's Merkel - auf Biegen oder Brechen / mag es biegen oder brechen. For the effluent who masquerade as members of Congress - a house divided against itself cannot stand! To those lesser fools (honi soit qui mal y pense) and a spineless Cameron - Actions speak louder than words and finally to that philandering twat in Italy - in bocca al lupo! (to the ordinary men and women who might take offence, I apologise. This is not for you.

With Merkel's bluster and Sarkozy's indifference the world waits, once more, on the precipice of the unknown. Perhaps in a pleasant dream and if you cast your mind back far enough you might recall the time when our investment decisions were based on sound sector and or company-specific fundamentals? Theoretical investment principles, now frustratingly outdated, discarded & forgotten, reinvents the mayhem.

Our children will look back on these days of political flotsam and recall 'the sins of our fathers' ...

Wednesday, 19 October 2011

You knew the world would not be the same

I suppose one way or another we all knew what had to happen here.

Only a fool dismisses the potentially cataclysmic socio-economic protests outside Wall St as a non-event. Even so, perversely, it's a self-absorbed and deceitfully false consolation to chant demographically popular anti- Wall St rhetoric. To do so adds credence to the establishment which relies on the ignorance of the people for stability. Systemic failure is hard-wired into the financial 'operating system' and it can't be outrun..

Ignoring the emotive naivety that 'all men are created equal', the presupposed notion of self-indulgent material entitlement becomes core. Selective praise for technological advancement is equally naive. For interest, lauding Apple Inc. for its technological innovation whilst despising the technological efficiencies in the manufacturing sector which, by definition, lead to job losses is wrong. Equally, blaming banks or Wall St for excessive credit extension, sovereign or otherwise on the basis of deferred repayment, an accepted, modern innovation, is ignorant. These institutions, conduits for our ceaseless material demands, then become scapegoats for greed, not theirs, ours...

Accepting that the fault lies within each of us is an obvious if not painful prerequisite for economic change. Only then can we effectively address 'the system' which is, quite candidly, terminal.

Wednesday, 12 October 2011

Cry our disenfranchised youth..

Even if you consider yourself well-read, intelligent, sophisticated, proactive and or financially astute, chances are you haven't heard of the Occupy Wall Street movement. Described by the US establishment as a dysfunctional rag-tag group of disenfranchised youth intent on social rebellion and as a consequence dismissed by the media, these disenchanted few deserve our considered attention.

Occupy Wall Street is a self-styled descriptive label for the demonstrative Wall Street sit-in protests of ordinary men and women, mostly young, some old, who find themselves homeless, jobless and economically disenfranchised. Their plea, largely ignored by the financial media, is a thunderous silence which paradoxically proves their claim that Wall Street has an insurmountable stranglehold on US politics and commensurately on the media.

If I was you I would sit up and take notice. Understanding market structural reform and social imbalances will become key risk variables.

Corporate greed, epitomised by the colourful antics of Wall Street's captains of industry, will result in more social upheaval. People are losing hope. People are angry! Politicians, regulators and money-managers, variously shortsighted, would do well to pre-empt an inclusive strategy for the populace at large or history will record our social implosion.

Thursday, 29 September 2011

Quack quack - Financial-media pours on the oil!

Influencing the human psyche in times of financial stress is fairly straightforward. It's not science or an acquired skill. Get the right people saying the right / wrong things and short-term markets react accordingly.

You might say that unique to the markets in recent months is the prevalence of unsubstantiated emotional opinion voiced publicly which, in some cases, has had draconian implications for targeted industries. By way of example, the narrowly averted french interbank lock-out arose, largely, from individuals /institutions with opportunistic intent and given access to visual-media. At face value, very few level-headed investors discount the brevity of the situation in Europe. Nevertheless, analysis free of bias and or emotion is uniquely the global commodity in least supply... Who will ever forget the slack-jawed, dazed confusion of Biggs, a respected big-star 'regular' on Bloomberg?

Now, more than ever, we are hostage to media-channeled emotive influence.

Tuesday, 27 September 2011


The markets are poised for another volatile week this week ahead of the EU and IMF reports on Greek-solvency and Thursday’s German vote on an EU stability fund. It’s a disheartening prospect for most. Even so, sifting through the financial jargon, speculative volatility and political impasse is possible if you ignore the emotive pull of FEAR. (Net equity outflows suggest that’s more easily said than done).

Faced with this political turned banking turned economic-growth turning political turned banking turned…. crisis it’s easy to understand why investors have lost confidence in the system. Without understating the brevity of the EU/global crisis most of the recent stock-market declines have been self-inflicted by investors susceptible to an emotive press. It’s usually costly as history will show.

As a reminder and working backwards: - Biggest weekly stock-market declines since Lehman and the financial crisis in 2008;  commodity prices collapse on adjusted forecast growth prospects; Bernanke predicts ‘significant’ risk to the downside; ECB commits to three-month funding for EU banks locked out of the interbank funding market; EU banks stock-prices collapse on exposure to Greece and other potential EU-member delinquents; Greece faces default; euro strength threatens EU-member nations unable to export; German growth exceeds expectations on exports to a captive duty-free eurozone market; EU banks encouraged/compelled to lend to member nations favourably; France and Germany push for a common economic union.

So what did we expect? Surely we should not be too surprised by the latest turn of events in Europe? The structural inequity in the 'common-union' was manifest at inception. One more thing whilst we're on the subject of economic imbalance; only an eternal optimist or a fool would suggest that China's phenomenal growth does not carry with it some interesting socio-economic issues still to manifest. Legislated economic subjugation ALWAYS has a shelf-life...

Nevertheless, emotively speaking, you might conclude that the latest stock-market crisis is a FEAR-contrived response to failing confidence in the system. Until we see evidence otherwise, liquidity-confusion will stay systemic.

Thursday, 22 September 2011

Boehner's amazing technicolour dreamcoat

The amazingly arrogant letter penned by Boehner & his Fellows-of-the-IQ-deficient association (FIDA) and delivered to Chairman Bernanke interrupted, rudely, whilst in the chair at the FED's two-day monetary-policy meeting, demanded no further monetary-policy action...?? Anecdotally it's the blind who with a skip & a chuckle and grappling in the dark for the hand of the sighted attempts to lead the sighted safely through the global economic traffic-snarl...

Flying in the face of expectation, America's politicians continuously dredge the sludge of incompetence in bewildered drudgery without coming up for breath. Just how they do it so consistently well remains a modern Congressional - vocation understood by few, if any, non-political 2-legged hominids.

Drunk on the life-juices of ordinary American men and women these jesters of the political court continue to nuzzle the trough for more. The ghosts of leaders-past, grim-faced and humourless, stride the dung-speckled halls of Congress weighed low in chains of shame. America's obituary shall read 'We knews dem 2 be fools but we's failed 4 we's 2 foolish 2 be better'.

Tuesday, 20 September 2011

'Operation Twist' is QE3 by any other name

A divided US Federal Reserve gathers this week in a market-anticipated drive to realign monetary policy in the face of high unemployment and rising inflation. A third round of bond-buying or quantitative easing (QE) has its critics both from within the FED and from Congress. It has been claimed that QE2 was largely to blame for significantly higher commodity and food prices...Seemingly out of arrows the FED may consider the implementation of the failed 1960s plan colloquially dubbed 'Operation Twist' as a short-term boost for the US economy.

The idea is to use FED funds to lower longer-term interest rates by selling short-term government securities (or by letting them mature) and buying longer-term government bonds. 

The FED's increased demand for long-dated bonds would drive down the interest rate payable to find willing buyers. The falling long-term interest rate at the expense of higher shorter rates would alleviate the debt-burden of struggling home-owners and at a stretch also boost business spending.

That's all good and dandy but in case you've forgotten, this crisis is the result of policy indecision, poor judgement and political ineptitude.

Thursday, 15 September 2011

Beware BRICS bearing gifts..

BNP Paribas
4, rue d'Antin
750002 Paris

Attention The Board of Directors

Dear Sirs / Madam

I'm a tax-paying son-of-a-BRIC and by now you will have read in your Les Echos our (the BRICS) collective intention to extend your access to additional credit facilities in what can only be described as a selfless act of mercy before you suffer the Coup de Grace.

Now, after some careful soul-searching and studied consideration, I too feel your plight sufficiently dire and in need of urgent redress. Therefore, I'm thrilled (avec plaisir), ecstatic even, to confirm, given your hitherto impeccable financial standing, that you have been selected & pre-qualify for an additional $1000 away-from-the-window funding. Now, I realise that this must come as quite a shock. Even so, I can imagine your relief. There are however and this is important, two caveats. Firstly, I will require appropriate security and as a start might I suggest the Arc-de-Triomphe de lEtoile? Perhaps, given your generosity in Athens, you would, contrary to what would be considered prudent business practice, volunteer additional security? I'll leave you to your deliberations; exhausitive, no doubt. Secondly, if you celebrate the generosity of my offer by going to the press, the deal is off. It is not my intention to move global markets on the news. Notwithstanding, it would, however, be disingenuous to hold your board accountable for a leak stemming from any unauthorised activity ie: board-room phone-tapping and or other clandestine eavesdropping irregularities, by the mainstream press.

Fondly, yours in rescue.


PS: I'm going out into the garden now to mine more gold. Demand, it seems, is quite robust. 

Wednesday, 14 September 2011

Save the Euro

For the love of all things financial LET GREECE DEFAULT. Please! It's insignificant; a speed-bump, if you like. Bailing Greece once more defers the risk of contagion and fosters more uncertainty. I submit that this is a political impasse rather than a financial issue and Merkel and puppy-dog Sarkozy are at the forefront of the facade. This politically contrived European 'banking crisis' provides ideal fodder for the current 'leadership' to ride to the market's rescue, elevate their individual status in the eyes of the pathetically grateful duly wrenched from the jaws of deprivation and in so doing, save-the-day! In the interim adequately capitalised, credible institutions like Socgen and BNP pay the piper... You only have to listen to honest line-by-line commentary from the CEO of Socgen to find the truth.

By the way, if the uncertainty persists, one or all of DB, Socgen or BNP will end up wearing the donkey's tail on assigned (contrived) counterparty-risk and get shut out of the funding markets facilitating another Bear Sterns-like collapse, the consequences of which are well-documented from the last financial crisis. 

The markets WANT Greece to default. That will confirm and clarify the logic behind the common union and the enforcement of the regulations that govern it. It solidifies the eurozone as a functional economic region and lends credibility to the euro which diminishes in stature each and every day. At the same time it will also send a CLEAR message to the other PIGS to get their house in order, quickly. One more thing, if countries want to leave the EU to enjoy the benefits of a weaker currency let them do so, voluntarily. It will cost too much to do so anyway..

An orderly default? What a crock of the purest political pap imaginable..

Monday, 12 September 2011

The layman's solution - Part 2 Regulation

This is my Simple Layman's hArd-line, Common-sense [SLAC] three-tiered solution to our current malaise. Each tier revisits perception; planning & implementation. Let's leave the economics, which is nonscience, to the economists and the politics to the cleverly-polished..

JPMorgan's Dimon has labeled BASEL III as unduly restrictive, particularly for US banks which in his words is 'anti-american', whatever that means. Amusingly, this is the same individual who called for an international set of regulatory rules post the financial crisis. BASEL III purports exactly that ie: an international set of regulatory rules applicable to ALL banks, eastern banks included. For interest, a cynic might illustrate the need for more transparent regulation citing, in illustration, Dimon's chameleon-like propensity to camouflage self-interest with the well-being of society at large. 

However which way you slice it, the financial services industry needs effective, rather than restrictive, regulation. Conversely, retaliatory bank-bashing is equally ridiculous. The markets face the prospect of unrelenting, uncapped civil claim against US banks by delinquent US mortgage-holders wronged or otherwise in unlawful lending practice. This sword of Damocles hanging over the banking industry will, no doubt, have a profoundly negative impact on US banks in the future already evidenced in the mooted retrenchment of thousands of employees. In an already stressed jobs-market there are no winners here...

SLAC proposes:
  1. Intangibly difficult to quantify or legislate against selectively, US authorities must limit civil suits against the banking industry arising out of the housing-market collapse. If they don't the destabilizing effect on the US banking system and the commensurate industry contagion worldwide will limit any chance of economic recovery. As a concession to dispel capital adequacy fatigue, if you like, level the regulatory playing field across the global sphere and expel, immediately, any bank from international financial markets for material breach.
  2. Make regulatory authorities jointly responsible for financial loss arising out of a material breach of regulatory stipulations. 

Friday, 9 September 2011

The layman's solution - Part 1 Leadership

This is my Simple Layman's hArd-line, Common-sense [SLAC] three-tiered solution to our current malaise. Each tier revisits perception; planning & implementation. Let's leave the economics, which is nonscience, to the economists and the politics to the cleverly-polished..

At the heart of our troubles [Tier 1 of SLAC] lies the notion of competent leadership

You could try and argue that our problems are rooted in economics but that, for me, falls a long way short. Condense any of the 'events' since Lehman's demise and the crux of the problem is always poor leadership. In illustration you might remember mad-man Madoff? He's a convicted liar & a cheat, right? It's also why investors lost $50 billion or so, yes? NO. That's only half the story. His scheme flourished because the SEC leadership structures failed in their basic mandate. Investors incorrectly, as it turned out, assumed the SEC's competence.. How about the ratings-agencies and their collective (some say collusive) miscalculation of the risks associated with securitised mortgage debt? That too was a cracker, not so? You can't blame Wall St. They'd wrap, securitise and hawk a crock of dung if they could get away with it. It's the nature of the beast; can't be helped. Here again leadership was exposed for what it was ie: blatantly untrustworthy. Investors were under the misconception that both regulators and ratings agencies had sufficiently competent leadership structures to ensure their basic mandates. Clearly that perception was wrong. You could say the same for the US government. Partisan petty-politics [PPP] still holds sway. As a non-American it's difficult to accept that the US, a country with a proud economic and cultural heritage, has failed to deliver competent 'people-bias' leadership. Amazing. Clearly my perception that the US could lead from within, is wrong. Across the waters, some time ago, EU-incorporation-rules were debated, agreed and then not-applied. Simplistically, you could point fingers at specific sovereign leadership parties from within member countries and claim that as the root-cause of the Eurozone's problems but where was Brussels? Perceptions that the EU had cohesive competent leadership structures to ensure complicity are wrong and so on & so on.. You could apply the same disappointment in leadership world-wide.

To convert negative impressions into positive perceptions takes some planning. Even so, good planning means little without delivery. So, only when the planning process is transparently representative and the plans rigidly applied ie: compliance becomes non-negotiable, will leadership be considered effective. Only effective leadership will change the perception and so on..

As an opening salvo SLAC theory suggests the following:

  1. Dissolve the US Federal government and impeach the president because no-he-can't. Neither are functional. Reread The US Constitution, understand that one-man-one-vote means one-man-one-vote. Elect, by majority vote, one individual who is undisputed leader responsible for the appointment of a Presidential Panel of EXPERTS in their field with proven, exceptional skill drawn from the real world. Reduce the presidential term to two years or when performance measurables, clearly defined and non-negotiable, aren't met, whichever comes first. Federal states remain autonomous BUT subject to the Presidential Panel.
  2. In Europe demand tangible security for currently overly-indebted member countries and expel, out of the eurozone, any delinquent countries still in flagrant disregard of recognised EU regulations. If the EU is still viable and BTW. the jury's still out on the point, elect from within the EU a panel responsible for the formulation and rigid implementation of a regionally comprehensive economic plan. Restructure regional economic efficiencies and cross-pollinate the skills base. Raise regional funding through a single conduit via the issue of EU-guaranteed bonds.
  3. Collapse the Big 3 rating-agencies monopoly and open the market to improve competition. Scrap the current product-originator / ratings agency compensation model and introduce a transparent cost-levy specific to the product. This levy is paid on purchase of the product by the investor, collected by the product-originator on the ratings agency's behalf and then paid over to the ratings agency. 
  4. Transfer risk of securities reg. non-compliance to the SEC. Investors have punitive claim against the leadership of the SEC arising out of third-party & counter-party non-compliance of securities regulations within the SEC's mandate.
In this way current leadership misconceptions may evolve into perceptions of competence.

*In Part 2 SLAC looks at infrastructure and the jobs market

Thursday, 8 September 2011

Everything's on the table...

So we anticipate tonight's Obama-jobs-speech. Don't hold your breath and don't expect too many surprises. It's forecast to include a few tax cuts and a $300 billion jobs plan. Anything less would fall short. Even so, it's not bad but probably isn't enough. Fed Chairman Bernanke due to speak this afternoon might throw us a bone ahead of the next scheduled Federal Reserve meeting on September 20. Over in Europe markets hope against hope that Trichet will change his mind and soften his stance on monetary policy. The G7 Fin. Ministers meet over the weekend to discuss a coordinated move to reignite the global economy...

The lunatic-fringe somewhere in the bowels of UBS has us believe that Europe is on a war-footing. More precisely, any delinquent country or otherwise wishing to leave the EU faces the prospect of economic Armageddon and since the people will have nothing better to do other than apportion blame among themselves, civil war's a certainty. Guru Soros tells us that the crisis in Europe is 'worse than the crisis around the collapse of Lehman Bros'. I suppose you could add Deutsche bank's 'money-market funds are under stress..' and things look pretty grim all round.

If you listened to Bernanke at Jackson Hole you'll remember the most important bit. He applied his thoughts to the US economy. Even so, it's equally applicable globally. Paraphrased simply, Bernanke pointed out that it wasn't the function of central banks to reignite the global economy but rather the responsibility of government to implement long-term fiscal policy change. Therein lies the rub.. The 21st century enjoys a LEADERSHIP VACUUM.

Why are the world's leaders not locked-up in conference, without the prospect of deferral, to discuss a tangible, acceptable solution to resolve the systemic or structural inefficiencies in the global economy once and for all? *

The mindless criticism of the status quo by disenfranchised politicians, intellectually-diminished economists and confused traders or worse-still, yesterday's hedge-fund heroes doesn't improve your or my prospects much, not so?

* My global economic solution in tomorrow's blog

Wednesday, 7 September 2011

9/11 & The Patriot Act

It's almost that time of the year when we recall the events that led to the 9/11 tragedy. An act of violence on America specifically but mourned around the world by ALL decent men & women. It's a sensitive issue but no matter the motive, innocent blood was spilled. Our thoughts and prayers go out to the victims' families and friends.

Without abrogating from the tragedy of the act there remain a few unanswered questions. Ten eventful, some would say 'spiteful', years have past and countless other lives have been lost in retaliatory strikes in open or clandestine conflict. Religious beliefs have been questioned and extremists eliminated in seek & destroy missions. All the while the indoctrination continues... Exceptionalism, a term loosely used to describe superior motive and good intention, is 'The American Way'. Conversely, little boys & girls from other walks of life, geographically removed mostly and sometimes incorrectly associated with Islam are taught from their beginning that 'death to America' is a divine edict! It's difficult to fathom and almost impossible to stop. Even so, I for one, would like to see a change. Without taking sides for neither is justified and as an aside, who can forget the haunting pictures of the US president & his aids whilst they watched on live TV the retaliatory strike in Pakistan?

These then are a few of my questions:

  1. How was it possible logistically, to introduce, understand, debate and vet The USA Patriot Act (300 pages) written in 'response' to 9/11 a mere three days after the tragedy? The Patriot Act doesn't stand-alone but is read in conjunction with the Constitution, a task clearly beyond the competencies of the average congressman or woman read over three years.. Three days?? For those who don't know, the Patriot Act reduced / eliminated restrictions on law-enforcement agencies to search your email, telephone, medical and other records. More importantly, it expanded transparency and financial regulation on foreign individuals and families. Quite clearly a departure from the terms of the US Constitution itself which, until then, guaranteed liberty..
  2. Rumours surrounding the discovery process at ground-zero post the attack are all too easily dismissed as conspiracy theory most of which, to this day, have NOT been adequately dispelled, quelled or disproved. Some of the more obvious queries include the discovery of a large number of explosive caps found on the scene immediately after the attack and the subsequent removal of all steel girders prior independent examination. 
  3. If the US holds the moral ground in Iraq why was Darfur, just a skip to the south, completely ignored?
  4. - and my final question: Why is the US defence-budget equal to the COMBINED defence-budgets of every other country on the planet when millions of Americans live in insecure, fearful poverty...?

One last thought: - If the USA is really just a conglomerate bent on global domination for financial gain, then it's a stock I wouldn't want to own for two fundamental reasons. Firstly, who would openly want to profit from corporations blatantly engaged in immoral activities (The Patriot Act in a convoluted way, specifically prohibits that very thing....) and secondly who would want to own a stock where its executive team hasn't the faintest care for the well-being and motivation of its employees. You might even claim that the executive team couldn't fight their way out of a paper bag, they're that stupid..

Friday, 2 September 2011

The market paradox - The 'Bernanke Put'

Perversely, bad economic data is driving equity markets higher which at face value doesn't make much sense and yet in the shadow-world of trading it makes a 'whole-bunch' of sense..

I think it's safe to say that the developed world teeters on the precipice. Recalling last month's events that led to the market sell-off you'll remember Boehner vs Obama and the subsequent political impasse which led to the, now infamous, S&P-downgrade. Whether S&P got their sums right or wrong doesn't matter much. Apart from highlighting the structural inefficiencies in Europe and the US it settled the debate once and for all that too-big-to-fail as applied to even the most advanced countries / economies is a concept now, at last, consigned to history. IT'S A BIG WAKE-UP CALL. Whether the US goes into double-dip or not or even if, as some will claim, it hasn't emerged from the last recession is not important. What is important is the following:

  1. The world is bankrupt.
  2. Global leadership as evidenced in the US is fatally flawed.
  3. Reliance on emerging markets to sustain global growth is naive.
  4. Banking models are outrageous. Lending the same deposit-dollar 60 times or more is not sustainable..
  5. Wall St sold us rubbish and we swallowed it all hook, line & sinker.
Failing to address / redress the systemic problems means kicking the financial-can down the road. Even so, paradoxically, if the economic data gets any worse the FED will give us QE3 or some other form of stimulus, which: - kicks-the-can-down-the road but like QE2 will send markets higher. Like other junkies looking for a quick-fix with little or no regard for the long-term damage, so too the equity markets. It's the so-called Bernanke-put we crave. Damn the consequences! 

Thursday, 1 September 2011

Credit markets lead - period.

Deciphering today's economic data with any confidence is almost impossible. It's frustrating, contradictory and open to subjective interpretation on book-bias dependencies. The violent swings in the VIX confirms the confusion. That said, short-term trade-direction is simplistically a function of one overriding factor - money flow. Following the flows of cash is key. Unusually for this time of the year, investors are carrying excess cash relative to the traditional asset allocations. Asset-price change then becomes a function of liquidity. Less liquidity or volume in the markets exacerbates the price change.

Liquidity, certainly in the month of August was unusually thin. The only true indicator for traders in these circumstances is an understanding of the credit markets which professionals use to gauge strengths or weaknesses of an economy. For interest in the month of August US credit markets fell off a cliff to levels last seen in late 2008.... Speaks volumes..

Wednesday, 31 August 2011

BRICS - Why all the fuss?

Coined by Goldman's rock-star Jim O'Neal, the acronym BRIC conjures up images of easily-attained fat returns. It's an illusion or a load of crock, whichever way you look at it. The recent addition of South Africa, somewhat contentiously, adds to the allure..

As a South African I don't deny the kudos of the association but has it changed the capital inflow? For now, at least, it's still too early to tell. What I do know, however, is South Africa's claim to some of the finest natural resource reserves anywhere on earth. Her infrastructure is Africa's most advanced. Corporate governance is entrenched; technology is current and management skills are innovative. Finding attractive investment opportunity in this country is relatively simple and with a very stable banking system settlement risk is greatly reduced. SA's problems lie in her politics and the socio-economic difficulties associated with her political past. Simmering rumours of resource nationalisation, constantly denied by government, is a variable of risk which is difficult, if not impossible, to quantify. Our economically disenfranchised youth are also becoming more militant. GDP growth of 1.3% is concerning. Even so, the so-called Japanese carry-trade, still views SA as one of its preferred investment havens. That assumes a stable currency and for now that's true.

That accounts for the S in BRICS but what about the rest?

B for Brazil is fast becoming the globe's bread-basket and with its associated infrastructure-spend and the price of soft commodities ie: food, you can't deny its importance. Dig a little deeper and you'll note that Brazil has a history of fiscal inefficiency and as a consequence more than its fair share of financial volatility. You wouldn't want to bet against another fiscal shock..

Russia pretends stability readily denied by its infamous disregard for corporate governance. Her oil and other natural non-renewable resources aside, her political instability and a virtually decrepit banking system make selective investment vital.

Ask any foreign businessman how difficult it is to operate effectively in C for China and you might begin to understand the cultural difficulties of 'the east'. Nevertheless, her infrastructure-spend and the extent of her peoples; more precisely her people's work-ethic exchanged for small reward, makes China an obvious investment choice. Even so, it's China's people, currently an economic strength, which adds disguise to her biggest weakness. I can't imagine that a highly educated people won't want more inclusion.. Socio-economic problems are just a click or two away.

Of the five associated countries India is the most interesting and also the most difficult to quantify. Tax-evasion is legendary. Entrenched ethnic segregation either geographically or on grounds of religion adds to political risk. Vast chasms between the rich and the poor are not socially sustainable particularly given the advanced levels of education her peoples generally enjoy. Nevertheless, India is vastly populated and demand for basic goods and resources will rise; her infrastructure is selectively sound, if only in the major urban metros; work-ethic is eastern rather than western ie: economically efficient and her peoples, generally, are well educated and ambitious. India like China, does have imminent socio-economic problems. Add internal religious intolerances and the risks escalate...

Assuming that emerging markets, BRICS the flagship, are a haven for fat returns is wrong. As always, do your homework and make selective choices. Inherent risks, well disguised, can be difficult to price.

Tuesday, 30 August 2011

It's the chicken; no the egg.... perhaps the chicken...

So what came first? The economy or the market? Take the financial crisis as a point of departure. Until Lehman all was well with the world - then surprise, then panic; then global stock-markets collapsed, confidence withered, interbank lending 'jammed' and 'For sales' signs mushroomed around the world. Today, some two years later, the global economy teeters on the brink.. Markets roar ahead, then falter, then recover, then falter..

So who came first? Greenspan or Bernanke? Over-exuberance had Alan holding rates too low. Printing presses roared around the clock. 'Treasonous' Bernanke's QE1, 2, 2 & a half, 3 and 4 ad infinitum, has Stiglitz in a bubble.

S&P cuts the States, admits the maths was poor. "Our downgrade's good.." but senior S&P executives fall on their swords and are asked to leave. US treasuries go viral on inflow demand..?

Democrats or Republicans? Bush slashed taxes, Barack's spent too much. Revenue suffered first; expenses are now too high.. Companies slash jobs and cut spending. Politicians urge them the other way. 'Spend more, hire more and win the future..' The world's awash with idle capital and idle skill...

They do or they don't need funding? "We DO NOT need external help..." - Bank of America [BAC] sells preferred stock and a 10 yr open call on wads of deep in-the-money discounted stock to clever Warren. Costs BAC 6% to fund.. That's not cheap. You might even say that's deceptively desperate..

"I never had sexual relations with that woman..." Enough said!

Obama's WPA...

Will Obama conjure up the imagination in his economic plan due on 5 September? The yes-we-can-man has, until now, been a contradiction in terms. In Obama's defence, the structural no-you-wont inefficiencies of Congress does effectively hamstring any change. Even so, for Barack it's now or never.

President FDR, the last great US democrat, rejuvenated the US national spirit and soon had the world singing his 'happy days are here again' ditty. To this day President Roosevelt remains the only US president to serve more than two terms.

Faced with crippling unemployment and global economic strife at the height of the Great Depression, FDR introduced his New Deal plan in his first 100 days in office, a program some considered wildly optimistic. Nevertheless, New Deal introduced relief and reconstruction programs which included paid jobs for millions of the unemployed. History records the economic recovery and the lift in national spirit as extraordinarily successful... Even so, FDR's greatest success and key to the economic recovery was his cross-party coalition which realigned American politics for decades.

So Obama has the recipe and the catchy ditty. What he lacks, perhaps, is the clarity of foresight, some political compromise and a little courage. If I was Barack I would look to Irene as the catalyst / excuse for my own New Deal / WPA plan..

Bernanke claims the farm

Last week traders 'built-in' a $500 billion FED-induced stimulus they colloquially nicknamed QE3. Equity prices clawed back some lost ground. As a consequence gold-bulls got hung up by the meat-hocks as the herd swung wildly this way and then the other. Risk on! Mr Buffett helped himself to a plate-full of BofA and coolly made a paper profit of $1.5 billion in less time than it took to say 'clever Warren..'

Amusingly, from a macro perspective at least, nothing much had changed.

When Chairman Ben rang for lunch at Jackson Hole, famous for its fine cuisine, we were served instead of rib-eye steak only fortune-cookies; without much salt.. Unappetising fare and tears were shed! So we-was-robbed ...or were we? Breaking the cookie open revealed a lesson for us all - 'tread careful-like; ranching isn't a piece of cake..'. You'll agree, steak served medium rare would be fine but if we don't see to the farm the cows will run out and it would be the hunger-jive for us all.

Chairman Ben's got my vote. Let's fix the problem properly this time.

Thursday, 25 August 2011

Apple to the core!

Apple Inc. without Steve Jobs is like Berkshire without Buffett. It's eggs-benedict without the hollandaise. It's okay but lacks pazazz ..

Apple's vision and innovation is legendary; unusually fine dinner-conversation fare..Who can deny the remarkable transformation / impact the iPod, iPad, iPhone & Mac has had on our daily activities. Amazingly Apple's success is distilled down to the brilliance, ethos and extraordinary appetite for risk of one man, Steve Jobs. To make the assumption that Apple will continue to evolve with the same energy without Jobs, even in his new role as Chairman, seems fanciful. No doubt Apple has enough pipeline technology to carry it through for a few years. The question then would be whether Apple has the strategic ability to maintain momentum. Only time will tell.

It's a risk some investors might not like.

Wednesday, 24 August 2011

Macro vs. micro - The disconnect!

Few, if any, professional money managers / traders have experienced the current market volatility at any time before. If the movements in global financial markets are unprecedented, the obvious question we should be asking is why..

The growing dissonance or disconnect, if you like, between macro economics and micro corporate performance is concerning. Most of us accept that the global economy is faltering. Confidence has declined in Europe. Austerity programs to address deficits will impact growth. Unusual dissent within central banks compounds the broadly inept leadership response. Educated predictions of a break-up in the Euro zone adds to the soup of confusion. On the flip-side, corporate profits are robust. Companies have cash, lots of it. Corporate fundamentals are sound and on that basis 'value-managers' (Warren Buffett most famously) and other 'bottom-pickers', Blackrock included, have been buying equity.

Given current economic conditions economists have, rightly, adjusted their growth forecasts lower and yet financial analysts forecast average earnings growth of 17% for S&P listed companies. 

So what's the missing ingredient? In a nutshell, CONFIDENCE! Until traders / investors accept the economically-negative medium-term consequences of the financial crisis, the most serious financial shock since the Great Depression, as part and parcel of the recovery process and that these things take time and money to rectify, volatility is here to stay.  

Tuesday, 23 August 2011

The Arab Spring

Since that now infamous suicide in political protest in late December 2010 a wave of demonstrations in the Arab world has led to revolution in Tunisia and Egypt; uprisings in Syria, Bahrain and Yemen; civil war in Libya and fears of ‘Arab –inspired’ violence by Palestinians on Israel. Sadly, countless lives have been lost. More will follow.

So what is at the heart of the unrest?

A popular yearning for democracy; improved representation in the leadership and decision- making processes of government and a share in their country’s wealth is commonly cited as causal. Ultimately though, people want an improved standard of living. The issue is more likely, therefore, to be socio-economic rather than an enforced change in political ideology i.e.: economic rather than political disenfranchisement.

These politically-contrived economic barriers imposed on the populace by government is a common thread in the Arab world. Even so, the impact of revolution is far-reaching. Quite distinct from the moral implications of violent protest are the structural deficiencies in leadership these countries now face. Although still in its democratic infancy there is little discernable economic improvement in Egypt. The same can be said for Tunisia. Concerns of a leadership void are real as the people battle their feudal differences. Only time will record the economic success of the regime changes rather than the short-lived political joy of victory in armed conflict.

Friday, 19 August 2011

Who understands the US bond market?

Would I sell equity at these levels to buy gold and US treasuries? No chance in hell; on paper anyway. Even so, smart investors are doing exactly that and it seems, amazingly, that a new chapter is being written in modern investment theory. Generally accepted conventional theory dictates the sale of bonds, (after a sovereign downgrade) and the purchase of equity on strong corporate fundamentals. Yet the reality is different.

So what's going on? The first thing I noticed was very little change, if any, in the dollar / euro cross. Why? Who's buying US treasuries then? The same can be said for the yen. If the Japanese were buying US treasuries they would be selling yen and yet the yen continues to strengthen against the cross. That's also strange.. The S&P 500 is already discounting a substantial collapse in corporate profits in the short / medium term on fears of a decline in global demand. Equities are, conventionally speaking, severely oversold on current fundamentals. International dividend yields, particularly in Europe, have become very attractive; some of the best multinationals paying as much as 6%. As long as companies pay the dividends (cash on balance sheets is high) I see NO reason whatsoever to buy US treasuries yielding almost nothing. So that doesn't make any sense either.. There is, however, a very real technical possibility that the US 10yr will test new yield lows of 1.8%. If that's true, then US equity prices should fall, on average, 6-8% given recent mathematical correlations between equities and bonds in the US. That would be strange too..

Marginal downward adjustments in growth have been penciled-in for emerging markets. Growth levels of 6%, on average, are still expected.

The interbank rates in Europe are high but nowhere close to levels seen in the financial crisis late last decade. Notwithstanding, smart investors, whoever they are, still see the US 10yr as the ONLY acceptable safe-haven investment left anywhere in global markets and yet currency markets remain static or even counter-intuitive. That's interesting if not a little unconventional..

Thursday, 18 August 2011

Equities are not always for the 'long-term'

One of the interesting dynamics of investment is the concept of buying and holding for the long-term. It's very often this dynamic that most affects your absolute performance or real return, net of fees, over a specific period. 

Take the S&P500 for example. Had you bought the index ie: it's constituent stocks, in January 2006 you would have paid 1300 or so 'for' the index. Today the index trades at 1145 approximately. Your real return, excluding dividend income, if any, would have been a real loss of 11% over the five years. Compounding the loss, realised or otherwise, is the concept of opportunity cost ie: the return you could have made in an alternative investment. Too many investors make the error of accepting a benchmark against which portfolio performance is measured which is too close in asset class to their own investment. Using the S&P500 as the example; had you accepted an annual benchmark of S&P +1% against which to 'measure performance' and your equity portfolio performed accordingly, you still would have lost money over the 5-year period. Even so, your financial manager would have 'out-performed' according to the mandate and would be entitled to charge a performance fee

By the way if you think this doesn't affect you, where do you think your pension is invested? 

Tuesday, 16 August 2011

A guilty conscience is political suicide

If your tax bill for the last financial year was only $7 million at an effective rate of 17%, your taxable income would have been approximately $41 million. Now, if your net assets are an estimated $50 billion that would equate to a ROE ('return on equity') of approximately 0.084%. It isn't top draw....

The equation is grossly simplified; assets don't necessarily generate a tax event each year and it's obviously a little tongue-in-cheek. We all respect the man. The pursuit of tax efficiency as opposed to tax-evasion is neither a crime nor a character-defect. There's also nothing wrong in securing the services of a LARGE team of accountants to mitigate personal taxable income...

Volunteering to pay more individual tax is admirable. Even so, the moral 'bang-for-buck' impact is forfeit when the party you actively support is advocating a general hike in taxes for ordinary people already hopelessly overburdened.

Monday, 15 August 2011

Vexed by the VIX?

If short-term trading strategies are influenced by the subjective, if not emotional, interpretation of risk, who then can deny the benefits of the VIX? The VIX or volatility or 'fear & greed' index, whichever way you like it, although reactive, does give investors a transparent market prognosis.

One of the interesting things about the VIX which you might not know is the accuracy of its 'prediction'. The VIX peaked at 49 in ALL but one major market sell-off. If you take the 6 equity sell-offs of the last 20 years ie: the October 1997 Asian crisis; the Oct 1998 LTCM hedge-fund crisis; the September 11 'terrorist -attack'; the July 2002 bear-market; the 'financial crisis' of 2008 and the first European solvency failure in May 2010 all but the 'financial crisis' in 2008 bottomed-out at a VIX of 49. The VIX peaked at 49 early last week and has subsequently turned down and consolidated in the lower 30s. 

So, if history is to be believed, when the VIX moves close to or at 49 and turns back down, markets generally consolidate and build a base. You could, quite conceivably, make a case for a consolidation in global equity markets. Conversely, if the VIX breaks 50 in the next few days or weeks then expect trouble, very big trouble...

Global leaders might just 'walk-the-talk'.

In this vortex of confusion isn't it nice to know that some sanity prevails. 'Global leaders' have not exactly covered themselves in glory and have, until now, had the propensity to do, well, nothing; and yet I can't help but hope that tonight's emergency summit 'walks-the talk'. Even so, it's difficult to see just what can be done. Nevertheless, those who pretend to know these things will conjure up an economic rabbit of sorts but can we really afford the crutch of a temporary fix?

If global leaders have a small measure of courage they will forego the illusionary band-aid promises of Greenspan, Trichet & Benanke and implement some meaningful change. I for one would follow such a leader. 

Friday, 12 August 2011

Let's call a spade a spade

Why have the Germans been so generous and why is the eurozone so important to Germany?

Over the last ten years external demand generated almost 70% of the growth in overall demand for German goods. Today, Germany is a touch off being the world's 2nd largest exporter...

Some will argue that the free-trade area we call the eurozone, gives Germany an exclusive competitive advantage. Exchange rates have been favourable and more importantly, Germany has enjoyed a captive market. The EU buys almost half of Germany's exports or just over 8 times the goods exported to China. In today's crisis other EU countries faced with rising costs are unable to control imports or devalue their currencies. Germany continues to export without restriction whilst the economic conditions in most of the remaining EU countries deteriorate..

Thursday, 11 August 2011

Taking stock: Risk on - risk off?

As the western world moves into either a 'soft-patch' or even a double-dip recession, you have to wonder where-to from here. Deleveraging seems to have surpassed our assumptions of an expansion in income. You could in fact argue that central-bank stimulus hasn't worked. Global growth, corporate earnings and end-of-year index projections have, generally, been revised lower. Currency intervention is prevalent but ineffective. It's becoming difficult to see what else can be done.

So we're at a crucial crossroads. Risks to the downside are seemingly insurmountable. The recent divergence between equities and the credit markets, as evidenced by swap prices, is a clear indication that banks could be facing a post-Lehman type freeze in the interbank exchange. The VIX, a measure of volatility or the 'fear-index' as it's called colloquially, trades at levels not seen since the financial crisis.

We all know this. Nevertheless, the merits or consequences of QE3, eurobonds and intervention in the currency markets are moot if CONFIDENCE in 'the system' doesn't improve. Companies aren't hiring; private & public debt-levels are not serviceable; commodity prices are too high; inflation is price-driven rather than wage driven and unemployment is rising. The lack of political transparency exacerbates the issue.

The message is simple and it's for ALL global leaders. Yes we know stocks are historically cheap but who really cares unless you make us believe in the system and prove to us that your plans are tangible in which we, the ordinary people, feature. Give us jobs. That's crucial. Address financial regulation and incentivise the 'hiring' of people. Don't accept the imminent layoff of another 100000 people in the banking sector. Prioritise spending on infrastructure and development. Most importantly, look to your own people first

Wednesday, 10 August 2011

Economic distress motivates desperation

Nobody condones the looting and the rioting in the UK. Opportunists, usually cowards, are by nature quite content to take advantage of any chaos for their own enrichment. The legality and moral disquiet aside, I wonder if the rioting is symptomatic of something much more dangerous.

Unemployment is here to stay unless some of the structural issues are addressed correctly. Even so, on balance, the 'reality- disconnect' between policymakers and 'the people' will enforce the status quo. If that's true, the youth are usually the demographic most at risk. The unfortunate outcome of unemployment and ineffective welfare in an inflationary environment is survival distress. We could well be at that tipping point where the economically-disenfranchised i.e: our youth, take matters into their own hands and challenge the status quo and sadly, who can blame them!

Tuesday, 9 August 2011

Golden baubles

Indians do it, the Chinese too. You might do it and I bet you know someone else who does. It's a cultural thing and it's socially acceptable. Yes, we've all bought gold at some stage in our lives either for ourselves or for loved ones. Even so, buying gold as a hedge against future trouble & strife seems fantastical, if not a little silly.

At face value a case can be made for an investment in gold but is it the safe-haven investment it's made out to be? For one thing there's not enough gold above or below ground to make it a meaningful asset class. It's insecure, expensive to transport and difficult to 'move' in any quantity when you 'need-the-money'. If you think volatility and risk levels are too high in equity, just wait and see what happens when gold loses it's speculative lustre. Selling a tangible product with intangible 'value' into a vacuum is, well, difficult.

Is gold worth buying? Yes it is. Long-term natural demand outstrips supply. Would I sell everything, forego re-balancing my current assets and buy into the fallacy that is gold? No I wouldn't and neither should you. 

Sunday, 7 August 2011

It's time to speak with one voice.

Confirmation that the sell-off in global markets is a vote of no confidence in Global Leadership seems to have escaped our politicians. In fact half of them are on a 'well-earned' break...

We now know that the global economy requires a decisive, cohesive, centrally coordinated plan to address its structural deficiencies / inefficiencies. Relying on Bernanke and or Trichet to inject liquidity into markets will only, as has been the case over the last two years, delay the inevitable. Hoping against hope that China will pull us out of this mess is a little naive..

Some difficult decisions have to be made. Cutting spending is not necessarily the right way. Let us call on Global Leaders, in open discussion, to place jobs on the agenda; put politics on the back-burner and just this once, remember their 'fiduciary' duties in the interests of our sanity and for the future of our children.

Thursday, 4 August 2011

Dragon children of China.

Now, why would you 'downgrade' US debt if you're holding $1.2 trillion's worth already? A 'prudent' investor would talk his book, surely? Isn't that what we've always done?

If you're Russian why would you 'downgrade' US debt if the short-term reaction is negative for the price of oil? Why too, if you are Russian, would you be buying more US fixed-assets than at any other time in living memory if the 'downgrade' results in a weakening of the US dollar?

If you're the good-sumaritan you say you are, why would you not assist Italy who had asked for help directly? If Italy goes then Europe falls.... You promised! I'm confused?

It's said that if you are a child of the Dragon, then going after what you want would be second nature to you. You might even destabilise the dollar, shake global markets, end the commodity 'super-cycle', weaken international bargaining power and buy more at severely reduced prices.

Monday, 1 August 2011

Unprecedented unemployment will drive humanity to the next evolutionary rung..

Somewhere in HSBC's reported pre-tax earnings of 7 billion pounds is the announcement that the bank will cut 30000 jobs before 2013. It's a shame. Cutting costs, as apposed to increasing revenue, is easy. A case could be made for weak-minded management or overtly influential, demanding shareholders or the ever-increasing reliance on technology. Either way 30000 lost jobs seems outrageous.

Nevertheless, it's in times of adversity that humankind finds the energy to 'take-it-up-a-notch'. Harnessing this strife-induced energy is key and yet perversely it's always the comfortably-employed and therefore generally less-motivated who make the structural decisions. i.e: tax-breaks, access to cost-effective funding etc.  It's an unfortunate flaw in our humanity. Even so, I suspect this time will be different. There are too many highly-skilled individuals being forced into an entrepreneurial environment by a more restrictive formal market. By definition these individuals must be innovative and or cutting-edge to compete. That takes imagination which is an inherently unique and exciting concept!

Interestingly then, it is these individuals who hold the key to GLOBAL prosperity and NOT the 'too-big-to-fails'. These have failed us already.

Zun Zhong* - my master....

It's 'Amazing Africa Season' on BBC Knowledge this week. In case you hadn't noticed it's been 'amazing Africa season' in China for years.  [indicative perhaps of how far behind the curve the western world now finds itself....] China's quest for resources knows no bounds and like good subjects it's STD practice to show them the way.. Nevertheless, moving forward, some will say that China's influence on Africa's infrastructure has been positive. Time will tell.

Africa's dependence is established. But what of China? Recent data shows that manufacturing activity expanded in May but at its weakest pace in three quarters. New orders are declining. Our mother ails... or does she?

China recently tightened its monetary policy, stirred the pot and 'turned down the heat' on inflation concerns. Chased from the kitchen, Western penchant for fast food screamed foul. Temporarily, commodity prices sold off....

Connoisseurs know, however, that the freshest resources cooked slowly, make the finest dish. A 'kitchen-sneak-peek' will prove that 'Mother knows best'.

*Zun zhong - respect

Friday, 29 July 2011

Reasoning with a drunk is useless...

Messrs Blankfein, Dimon & friends have yet to learn that reasoning with a drunk is a waste of time. Congress' insobriety is a heady mix of power-mongered insanity induced by dull-witted intellectual inferiority. They can't help themselves. Enough said.

The BURNING issue is no longer the US-debt ceiling and the probable downgrade of US paper by the ratings agencies. The damage that Congress is doing to the credibility of the US dollar as the international standard is much more dangerous. For some time the United Nations has opined the view that the US dollar should be replaced with a more stable system. The consequence for the US economy after a significant decline in the dollar versus the global currency cross, is difficult to quantify. Nevertheless, their energy needs alone, paid in 'international currency', will induce a US economic collapse. The US has, until now, exported its debt. China holds approximately $1.2 trillion worth of US debt and Japan close on $1 trillion. Paying that back in 'international currency' on a declining US dollar is virtually impossible. 

Perhaps it's time for rational compromise....

Thursday, 28 July 2011

International Court of Financial Justice

The global market capitalisation is a credible $50 trillion, give or take. Nevertheless, it's $15 trillion or the ENTIRE debt burden of the United States of America lower than the $65 trillion highs of 2007.

Now, if we distill the events that led to the financial crisis of late 2007 and the subsequent collapse of global markets you wouldn't have to go too far to find the culprit / s. The same could be said for the Greek-crisis we've endured for the last month or two. Again the culprits are easily identified. Today markets are burdened by the US 'debt-crisis'. If it's true that the (R) party VOTED for extensive spending during (R) Bush's term then a case can be made that today's members of the (R) party are negotiating in mala fides (BAD FAITH), grounds for legal action. The Federal Reserve agrees that this political impasse, however temporary, will have serious consequences for global economic growth. Global markets will follow.

US political-impasse drove global markets 2% lower in yesterday's session alone. That equates to an equity loss of $500 billion or an approximate margin-call of $5 trillion for long-only positions on the derivative markets. The cost of capital alone to carry the position to recovery post 2 Aug. is still billions of dollars.

Is it time to introduce an International Court of Financial Justice and hold the fools accountable?

Wednesday, 27 July 2011

Boehner sings the blues and it's all a lie..

The US is not, as is claimed by Boehner, 'drowning in a sea of debt'.. Building political support by preying on ordinary people's fear is politically fashionable but it's cruel, out-of-touch and blatantly unethical. Most Americans want their representatives, both Republican and Democrat to address the issue of JOB-creation!

Sifting through the political rhetoric it's clear that the 'deficit problem' is NOT the burning short-term issue. Whilst the future increase in welfare spending will have to be addressed, the growth in deficit is primarily a function of declining revenue. In addition to tax cuts instituted during Pres. Bush's reign, the decline in revenue is largely a function of the recession.. Boehner's focus, therefore, on 'debt' and the deficit, which he claims requires massive cuts in spending, is nothing but a political sham or smokescreen. In case you missed it Obama's offer of trillions in spending cuts has largely been ignored.

One more thing; Boehner's offer of $1 trillion would see the US through to just shy of the next scheduled election....

Et tu, George?

Managed hedge funds adopt sophisticated but independently variable investment strategies and whilst the unique management style of each fund offers the investor choice, most if not all have one thing in common; the hedge-fund manager has his / her own money invested in the fund. Therein lies the devil.

It's too easy to concede that the manager's vested interest keeps him or her honest and in most cases that's true. Nevertheless, besides the management fee the ONLY reason the manager invites external investors to participate in his / her fund [usually unregulated] is to secure leverage for his / her own wealth. It's this performance-based leverage offered unwittingly by investors that creates immense personal wealth for the manager assuming the funds are managed effectively. Once the fund is 'established' it's become common practice for the manager to 'return' the external investors' money. Besides the tax-event generated on withdrawal, the timing of the withdrawal is never favourable....

Monday, 25 July 2011

If the Americans could tell a story...

The BIS* suggests the only way forward for the global economy is a complete moratorium on ALL debt. ie: a clean-slate for all... ; which is as probable as an unsolicited visitation by the Decepticons from the dark-side-of-the-moon..

The contrived 'debt-crisis' the US ponders today is just like Harry Potter; outrageously dull-witted. Now, if the Americans were more Chinese in their financial planning ie: for the longer term; then a default could be the prelude to the most amazing fable of them all!

Imagine, if you will, an intentional US debt-default. The ratings agencies, sidelined in Europe and eager to impress, would downgrade the US to 'Enron-negative'. ie: a sell... You, everybody else and I would sell our inflated US assets to Goldman's pension fund. The US 'price', expressed in dollars, would collapse. The US dollar, like the drachma, wouldn't be worth the price of printed paper and yet the world's debt is priced in US dollars.... Good-bye China, HELLO WORLD; what a story..!

*Bank of International Settlements

India catches GTE*

The plight of ordinary Greeks has gained our sympathy. We've been fooled. Uncontrolled frustration led 'the people' from their cafes and into the streets and we were amused when olives were pelted at passing politicians... Nevertheless that's only half the story or one side of the equation. Greece has one foot in Hades for two reasons:

  1. Papandreou spent money he never had on Zeus-knows-what and;
  2. the Greek citizenry never paid their taxes.
When revenue forecasts are inaccurate, projections fail. So when the Greeks evaded their tax obligations government was forced to borrow more and the rest, as they say, is written...

India has seemingly followed suit. That country loses approximately 14 trillion rupees from tax evasion annually which translates to an annual loss in growth of approximately 5%. India would have rivaled China as the world's fastest growing economy...

*Greek-like Tax Evasion

Artful & cunning practice

There's no denying that wisdom comes with age and without trivialising the allegations leveled against Newscorp and its subsidiaries, parliament's 'Murdoch Inquisition' was farcical. On the flipside, Rupert's masterclass in crisis management was nothing short of brilliant.

Off the bat the ineptitude of the inquisitive-committee bordered on the absurd. Who will ever forget the question '.........and do you concede, Mr Murdoch (R), that you are ultimately responsible....?' - Answer: 'Nope' (Murdoch Snr) [Aussie-style 'in-your-face' you pompous arse] EVERYBODY knows that the Chief Executive always carries the can. Rupert's contrived confusion had them guessing... 

You'll concede that frailty, awkward silence and bumbling confusion garners sympathy. In the boardroom, however, frailty and silence are tools of the trade. It's subterfuge! The old pie-in-your-face thing, even if the Murdochs hadn't orchestrated the attack, completed the performance. Genius! 

So the 'out-of-it old codger' will be pushed upstairs and an interim CEO appointed in his stead pending Jnr's. elevation. A new broom sweeps clean, so it's said... Competing rags will milk the story for all its worth. Nevertheless, even the M&G will move on to something new and it's business as usual for all concerned. The same applies on Wall Street. Nothing's changed, right?

Friday, 22 July 2011

Bundeskanzlerin Merkel - der teufel wird los sein

Roughly translated 'the sh*t is about to hit the fan' and for Merkel & friends time has run out. Unlike the contrived US 'debt-crisis', the eurozone problems are real. A protracted or delayed response to the structural shortfalls within the eurozone will DEFINITELY have us revisit the horrors of 2008.

Gott im himmel - NEIN. No more cash for Greece; please!

If global GDP growth takes a hammering as a result of Greek extravagance I might just give up olives. 

Thursday, 21 July 2011

Who's next - His Holiness the Dalai Lama?

I'm sorry but what the hell is going on?

Obama, a black supremacist?
Goldman's Blankfein wraps manure in tissue paper; sells it on as truffles.
UK's police chief 'walks-the-plank' - accusations of unsavoury dealings with the press too much to bear.
Cameron tucks his tail and whimpers home 'all the same'.
Murdoch's monsters mislead mourning parents to sell more space.
Berlusconi's political clout scores him underage girls.
Medvedev wins 440 out of 450 votes. Only 88 members voted...
The British Ministry of Defence sold arms and training to Saddam.
Palestinians KIA (killed in action) accidentally fall out of coffins only to climb back in..
Weiner's wiener holds the world enthralled.
First rape then consensual sex. Straus-Kahn casts off and sails away quietly.
Was Pope Benedict a nazi youth?
'Financial personalities' ape around the studio for our amusement whilst speculators artificially drive commodity food prices higher; millions starve.


Monday, 18 July 2011

Happy Birthday Tata (Father) Madiba

Happy birthday Tata Nelson Rolihlahla Mandela. You've made us proud.

Appropriately, even for a short while, we remember our humanity and realign our perspective and priority. It's a legacy or gift, if you like, that Madiba gives us still.

On a different tack, irresponsible political leadership negates the benefits of personal 'long-term' financial engineering. No amount of fancy footwork will help you one iota. Giving up 67 minutes of your time painting a hospital ward or donating 67 minute's worth of income from your business to a charity, although commendable obviously, has a questionable long-term affect. Perhaps we should rather spend the time in quiet contemplation and make a structural difference. Anything less is merely cosmetic or worse still, self-congratulatory.

Friday, 1 July 2011

Why the US lost its mojo..

Humanity finds motivation in leadership and courage. Our inspiration is fleetingly a function of success.

The US gave us its American Dream and inspired the world. Amazingly, somewhere, somehow and largely unnoticed the Stars & Stripes lost its way and with its moral demise went our respect. Consequently, lesser nations lacked the encouragement of experience and stumbled. Most of us can't balance the books....

These are the 2011 budgeted numbers for the US:
  1. Total receipts (turnover) - $2.56 trillion or 16.8% of GDP ($15.3 trillion)
  2. Total outlay (expenditure)- $3.8 trillion or 25.1% of GDP
  3. Annual deficit (overdraft) - $1.26 trillion or 8.3% of GDP
  4. Of the $3.8 trillion in outlay $1.4 trillion is discretionary. $846 billion is spent on security...(??)
Yes we KNOW the US will avoid armageddon by increasing its debt-ceiling before August 2. (Congress has done so 78 times previously.) Rules are easily changed and greed demands a quick fix. Even so, without our mentor the world will lurch from one catastrophe to another. 

Get the hell out of Afganistan, Pakistan, Iraq and Iran...and pull finger; the world needs you. 

Thursday, 30 June 2011

Your summer could turn cold.

The US runs out of money on 2 August. Unless Congress agrees to raise the $14.3 trillion ceiling sometime before D-day there's an excellent chance that the ratings agencies will cut the US credit rating to a notch or two above junk.

The consequences are two-fold. One; the US defaults on its debt payments. Two; large sums of cash will be withdrawn from the US treasury market prompting the US to increase interest rates to attract investment. Higher rates in the US would ultimately kill-off any hope. Forget the eurozone, Chinese PMI, Greece or Mayan calendar. This is the big one.

Wednesday, 29 June 2011

The commodity outcome is inevitable...

Five (5) new independent BUY recommendations for Glencore International Plc. were presented in Europe this morning. Unless you're a shareholder or potential shareholder of Glencore, who cares, right? Wrong!

Glencore, the global leader in commodities marketing, has three principal business segments: Metals & Minerals; Energy Products and Agricultural Products. China is the world's biggest consumer of commodities and given that the latest Chinese PMI (50.1) is one bip away from a suggested economic contraction, why the unanimous optimism? The CRB index, a commodities price index, broke down through its 200dma on Monday earlier this week. It's an amusing BAD news + BAD data = BUY equity.

So what are we missing?

  1. Obama authorised the release of oil from the SPR (Strategic Petroleum Reserve) which negatively affected crude prices. It's a short-term aberation.
  2. China's forecast GDP growth for 2011 is 9.3%.
  3. India's forecast GDP growth for 2011 is 8.75%
  4. The FFPI, a food price index, is a touch below its all-time high. Politics, weather and limited arable land continues to plague food supply. Demand for food as the world's population explodes will inevitably outstrip supply.
  5. Oil reserves will eventually run out... 
  6. The earth is not replenishing its metals & minerals...
  7. More people will eat more food...
Some cynically suggest that Glencore's recently timed listing signalled the top of the commodity market. Even so, if we agree that price is a function of supply and demand, then you might want to pay more attention, long-term, to Glencore's comings and goings. 

Being patronised isn't regulation..

Politics and politicians hold the key to the success of your investments, like it or not.

The formal press is inundated with examples of political influence. One of the more frustrating is the ‘intense negotiation’ on The Hill w.r.t the possible increase of the US $14.4 trillion debt ceiling. If the ratio of US debt to GDP is tapering off why are markets subjected to all the political posturing? Incidentally, excluding the mayhem in the bond markets which could cost investors up to $100 billion, the direct cost for every notch the US gets downgraded would cost an extra $20 billion, give or take, in interest payments.  

Goldman’s O’Neill coined the grouping acronym BRIC which makes reference to the emerging economies of Brazil, Russia, India and China, in itself a collective nonsense given their disparities in socio-economic development. Surprisingly, South Africa was recently appended to this illustrious group. It is now moot whether SA is still considered the Gateway of Africa for FDI, which remains consistently low. Internalised political debate on the merits of nationalisation continues to haunt SA; a political variable difficult to account for in assessing investment risk.

Elsewhere ordinary Greek people, thoroughly confused by the antics of their 'leaders' demonstrate their displeasure in the streets. Greek banks have run out of cash and contagion in the region has become a real possibility. Yet Greek politicians hesitantly consider the consequences of their self-indulgence at the expense of the populace at large…

Australia's Prime Minister Julia Gillard now fancies a crusade against the tobacco companies. Perhaps it’s political pandering to populism? Even so, wherever you find yourself on the moral spectrum it's obvious that the consequences for companies like Philip Morris are profound.

Political negligence or omission is equally financially destructive. Seems to me that the current intention to increase capital adequacy for banks at the expense of growth is three years too late and smacks of patronisation rather than regulation. Who elects these idiots anyway? 

Tuesday, 28 June 2011

More than one way to skin a cat..

Inevitably some countries will have to pull out of the euro. The current Eurozone quandary is less complicated than originally envisaged assuming that leaders show some backbone for a change and look to the region's future. Not surprisingly therefore, there are more ways than one to resolve the current Eurozone problems. Hand-outs are politically-popular but it's not best practice. Assuming German tax-payers are thrilled to continue supporting their Greek friends I suppose it's the easiest way. (ie: It's quite simple to lay-off the region's problems on unassuming, 'less-financially-astute' people with better things to do than understand the financial ineptitude of their neighbours...)

There is a better way...

The Eurozone has approved a large sum of money to 'bail-out' Greece. Even so, the Greeks find the Ts & Cs  a little 'austere'.. Like Oliver, our Hellenic friends have asked for more. We've given them more but they don't like the added spice...

Let Greece go. Use the money approved by the EU for Greece to prop up exposed European banks who might suffer loss from a Greek default. Kill two birds with one bail-out, so to speak. That way the EU has a reasonable chance of being repaid by REGULATED institutions (OCHI chance that the Greeks will repay their debts). Greece can 'cry-freedom' and pour themselves another shot..