As a Matter of Evidence (Grant)

Thursday, July 26th, 2012

Via Mark Grant, author of Out of the Box,

“Circumstantial evidence is a very tricky thing. It may seem to point very straight to one thing, but if you shift your own point of view a little, you may find it pointing in an equally uncompromising manner to something entirely different.”

                          -Sherlock Holmes

The article referenced the tremendous shrinkage in lending of the banks of Europe. It pointed specifically to the French banks and how they were setting up for all funding to be at the local level and to stop funding from the parent banks in France. The article concentrated on the notion that the French banks were setting up for some kind of break-up in the Eurozone. To me, though, there was ever more than met the eye at first thinking, meaning what happens after reading. It is relatively simple to read some headline or story and absorb it; much more complicated and useful to think through the meaning of what is presented. Here, past the obvious, was a rather large indicator for the Emerging Markets and their bonds as these entities are primarily funded by the European banks so that lending here, one may realistically surmise, is shrinking dramatically so that first the Emerging Markets will shrink as funding dries up and then their bonds will spike in yield and their equities fall as their main basis of support is pulled. I think now that whatever play anyone got in the Emerging Markets is now done and I would be pulling in my horns from these markets. As Europe bounces off various walls and as the American banks will have little to do with these areas; the play is over and I suggest a thoughtful retreat.

Answers

Amid all of the talk of Union and the greater good and the trumpeting of the three Musketeer’s “One for all and all for one;” we are about to get some concrete answers to help illuminate our path ahead. Greece has come nowhere close to their agreements in the Memorandum of Understanding with the European Union and the IMF and we are about to be able to view the whites of their eyes. Will Germany agree to more funding or not; this is the primary question and one that is about to be addressed. I do not believe there is a rational person on the planet that thinks that Greece can repay its debts; today, tomorrow or at any point in the future so is it to be another $50 billion as requested by the Greeks, debt forgiveness and a huge cutback in expectations or is it to finally be the end of the road and an end to the charade? The response will center on the ECB and their absorption of $238 billion in direct Greek sovereign debt coupled with their exposure to God only knows how much in securitizations moved from the European banks onto their balance sheet. Did you think that the decrease in the exposure of the European banks to Greece was sold into the marketplace? Ah no my friends, it was just repackaged and moved onto the balance sheet of the ECB and so hidden from us which was a clever ploy I suppose in the short term but one that is turning out to be quite painful as losses surely mount and as various credits stop payment. The calculators must be running night and day in Berlin as the Germans try to figure out just how much pain they are able to bear but debt paid by even more debt almost always proves to be a scheme that fails in the end. The plan is almost certainly foundering so that the only real question now is “when is the end” and the answer to that; we may soon be given.

“Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong these are the features which constitute the endless repetition of history.”

                           -Winston Churchill

The Great Game

The Europeans have played the Great Game badly; are playing it badly and there will be consequences for their failures. All of this nonsense with Greece, with Spain, could have been avoided by telling the truth about the numbers, by not goose stepping with plans meant to mislead instead of illuminating the truth, with trying to hide the self-evident and presenting scams as solutions or by addressing the size of firewalls instead of trying to cure the sickness of the nations that lie within them. The indefensible schemes that have been foisted upon us reflect errors in judgment that are not just wrong headed in conceptualization but just plain dumb. The trivialized minds in Brussels and Berlin have vastly underestimated the intelligence of the people that matter, the institutional investors that are required to fund their programs and pick your language, “Nein, Non, No” is the growing response that is echoed down the hallways of finance from one institution to the next, from one nation to the next.

“Out of the Box” is not the Financial Times or the Wall Street Journal but then it does not need to be for me to assess the reaction of those that matter which are the world’s large institutional investors. The savants in Brussels and Berlin think that it is the hedge funds or other speculators that are causing the yields to rise for Italy, Spain and the rest but they are 100% wrong. It is the real money institutions that are fleeing and moving fast. The debt at the ECB can be expanded and the local institutions can be pressured by their sovereigns but, in the end, there is not enough money in these institutions to fund the European experiment. I can report to you with certainty that many large institutional investors will no longer play, will not fund, as they have been consistently lied to and abused by the European Union and her various branches. The first European bank stress tests were a sham as manipulated by incorrect data and the second one was falsified by its methodology and the projected 120% debt to GDP ratio for Greece was little more than the antics of a fool while the baloney about the $125 billion for the Spanish banks that would not affect the country of Spain is a fairytale with the same substance as Snow White and her dwarfs. There is no Prince, there are no glass slippers and the bills have to be paid and the money to pay them will not be found in the pot of gold at the end of some rainbow. Day by day and month by month the bills accumulate and there is not enough capital left in Europe to pay them unless the Germans are willing to have the same standard of living as those in Greece and that will not be happening so that it can be foretold that the play will end badly. It is not economics that will determine the end of the European fantasy but politics. If it were just economics I could have given you the date of the end long ago but fiscal and monetary policies have long ago given way to machinations of the political system in Europe but the lies and deceit only have a lifespan that is so long and so the trend, regardless of the daily fluctuations, is set in place. Down goes the Euro, up goes the Dollar, up go Treasury prices, down go European bond prices, down goes the equity markets, the recession worsens, the contagion spreads until the counting houses are out of money and the printing presses only print paper and some German in some political party rises that says, “Enough!”

At the end of a battle during World War II a Soviet General was quoted; “We gained 22,000 square miles of territory which is just enough to bury our dead.”

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Why Listen to Keynes in the First Place (Miller)

Thursday, July 26th, 2012

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada,

In a recent BBC News article, philosopher John Gray asks the quaint but otherwise vain question of what would John Maynard Keynes do in today’s economic slump.  I call the question vain because practically every Western government has followed Keynes’ prescribed remedy for the so-called Great Recession.  Following the financial crisis of 2008, governments around the world engaged in deficit spending while central banks pushed interest rates to unprecedented lows.  Nearly four years later, unemployment remains stubbornly high in most major countries.

Even now in the face of the come-down that inevitably follows any stimulus-induced feelings of euphoria, certain central banks have taken to further monetary easing.  The Bank of England recently announced an extension of its quantitative easing program by £50bn.  Not to be outdone, both the People’s Bank of China and the European Central Bank cut interest rates in an effort to boost consumer borrowing.  Still, these new rounds of monetary stimulus don’t appear to be doing the trick.  The Keynesian miracle cure has been a spectacular dud thus far.  All that modern day disciples of Keynes can do is scratch their heads and say “more should have been done.”  They never allude to how many more trillions of paper dollars should have been created or spent; just call it the excuse that keeps on giving.

Perhaps for these reasons Gray doesn’t make a full blown recommendation of Keynes’ famed countercyclical policy to combat the ongoing downturn.  Instead he asks if Keynes would propose a policy that contrasts heavily with the influential theories presented in The General Theory of Employment, Interest, and Money.  To Gray, Keynes was an intellectual heavyweight who possessed a “deep understanding of the complex, unpredictable and at times insolubly difficult nature of human events.”  According to Gray, policymakers worldwide should see to it to welcome Keynes’ vision of achieving an “intelligent variety of capitalism.”

Gray’s simple query of “what would Keynes do” really begs another question: who was Keynes and why is he looked to by as a brilliant mind?  Does this man truly deserve the praise he receives by the intellectual establishment closely aligned with government?

To answer these questions, it helps to first observe the early years of the 20^th century’s most famous economist.  For starters, Keynes was not born into a family with little means.  In fact he was incredibly privileged while growing up as his father, John Neville Keynes, was an important figure within Cambridge University.  With the help of his father and his father’s good friend and economist Alfred Marshall, the young Keynes was introduced to the aristocratic life of Britain’s intellectual upper-class.  This included his joining of the Apostles as a student at Cambridge University.  The Apostles was a secret society reserved for those connected to or within the country’s ruling class.  Keynes’ membership would ultimately shape his view on life and humanity in general.  It would lead to his adopting a self-serving elitist bent for much of his career.

And it all began at Cambridge with the Apostles.  He and other members would frequently refer to those not within the highly secretive clique as “phenomena” and not “real.”  As an undergraduate, Keynes wrote in a letter to his friend Giles Lytton Strachey,

Is it monomania — this colossal moral superiority that we feel? I get the feeling that most of the rest [of the world outside the Apostles] never see anything at all — too stupid or too wicked.

Keynes’ feeling of superiority was also accompanied by the Apostles’ disdain toward notions of morality and values held by the middle class such as thrift.  After graduation, he would help form the Bloomsbury Group which became an intellectual force in early 20^th century England.  The Bloomsbury Group, like the Apostles, embraced avant-garde views toward aesthetics and morality and detested traditional values.  Much of Keynes’ hatred toward sensible views of good and evil was influenced by a philosophy professor at Trinity College named G.E. Moore.  To Keynes, Moore’s magnum opus Principia Ethica was “exciting, exhilarating, the beginning of a new renaissance, the opening of a new heaven on earth.”  In his memoir “My Early Beliefs,” Keynes insisted that Moore’s personal ethics, “made morals unnecessary….We entirely repudiated a personal liability on us to obey general rules.”  Towards the end of the paper, he also ensures his readers that “I remain and always will remain an immoralist.”

Keynes’ rationalization for government intervention  and horribly inflated ego lead him to be one of the most sought after economists during the initial throws of the Great Depression.  To the politician who fancies himself as a molder of the perfect society, the theories Keynes presented which divorced themselves from all semblance of reality were a Godsend.  The General Theory would go on to provide the intellectual cover needed by the political class to convince the man on the street that only the state could deliver him to the land of the plenty.

Most controversial of Keynes’ theories was that investment should be socialized to, in a sense, “euthanize” the rentier class that had no justifiable income.  He went as far as to write “Interest today rewards no genuine sacrifice…[T]here are no intrinsic reasons for the scarcity of capital.”  The ultimate solution would then be to engineer “an increase in the volume of capital until it ceases to be scarce.”  To do so meant lowering the interest rate for borrowers by expanding the money supply.  To the delight of public officials, increased government expenditures would then follow in tandem.

Of course this strategy would be successful if it weren’t for one critical detail: capital doesn’t consist of pieces of fiat currency.  Capital is real savings represented by things such as industrial machines, assembly lines, factory equipment, optical cables, and raw materials.  In other words, capital can never be rendered scarce since it can’t be printed on command.  However, this truth has yet to stop politicians from promising “free” goodies for life to susceptible voters.

And that’s why The General Theory wasn’t just a book on economic theory; it was a “how to” guide on winning elections.  Should it be any wonder then why so many apologists for the state saw it containing some great, hidden-until-then wisdom?

Indeed, what politician doesn’t love to hear that prosperity is just a few laws away?  The world of homogenous aggregates Keynes presented to the Establishment played into their lustful desire for societal control.  In a world of lifeless statistics, the people are nothing more than pawns on a chessboard to be moved to and fro with the faintest of ease.  Objections matter naught; the path to virtue is only seen by those central planners who, like Keynes, regard themselves as the chosen few not constrained by the primal instincts of the common people.

In short, John Maynard Keynes didn’t just provide a roadmap for a centrally managed economy, he did so by wrapping his intellectual dishonesty in incomprehensible jargon and charisma.  As Murray Rothbard pointed out in his short biography “Keynes, The Man,”

Keynes displayed a positive taste for lying in politics. He habitually made up statistics to suit his political proposals, and he would agitate for world monetary inflation with exaggerated hyperbole while maintaining that “words ought to be a little wild – the assault of thoughts upon the unthinking.” But, revealingly enough, once he achieved power, Keynes admitted that such hyperbole would have to be dropped: “When the seats of power and authority have been attained, there should be no more poetic license”

Keynes’ ego was so grand that when pressed by friend and Austrian economist Friedrich Hayek on the kind of totalitarianism his theories were inspiring, he assured a worried Hayek that he could swing public opinion easily; as if by the quick twisting of his hand.

The question of interest shouldn’t be “what would Keynes do” but rather “why even listen to someone so pompous and nihilistic to begin with?”  Just as Keynes missed the Great Depression, modern day Keynesians missed the housing bubble and financial crash.  From his contempt for moral principles to his enthusiastic support for eugenics, Keynes saw the world as something separate from the bubble of his fellow elitists.  He was a charlatan who convinced a generation of economists that the pool of real savings for any given country could be made infinite if only the state fully embraced the printing press like a dictator embraces the gulag.

The “intelligent variety of capitalism” that Gray terms is just a clever way of saying central planning.  To Keynes and his followers, capitalism is inherently ignorant because it is consumer based; which means the common man determines what is produced and how much of it.  For someone who pictured himself as floating seamlessly above the fray of fools, the growth of the market economy must have worried someone as power-thirsty and narcissistic as Keynes.

Perhaps the best summary of Keynes comes from Rothbard who once remarked:

To Robbins (Lionel) he is the Godlike figure with a golden light…around a halo.  I’ve got a slight different assessment.  Sum up Keynes: arrogant; sadistic; power-besotted bully; deliberate and systemic liar; intellectually irresponsible; an opponent of principle; in favor of short term hedonism and nihilistic opponent of bourgeoisie morality…; hater of thrift and savings; somebody who wanted to liquidate the creditor class…exterminate the creditor class; an imperialist and anti-Semite; and a fascist.

Outside of that I guess he was a great guy!

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Mike Mayo on Weill’s Call To Break Up the Banks

Thursday, July 26th, 2012

(h/t: Barry Ritholtz)

Tags: Banks, Barry Ritholtz, Break, Mike Mayo, Weill
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Map of the Underwater Internet

Thursday, July 26th, 2012

Tags: Barry Ritholtz, Map
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Gold (GLD) is Sneaking Up

Thursday, July 26th, 2012

by Mark Hanna, Market Montage

Gold has been sidelined for many months as it has been in an intermediate term downtrend.  Since the Hilsenrath article it has shown some strength.  As you can see below it has made a series of lower highs throughout most of 2012, and it is now coming to touch the trend line.  If we see gold begin to blast off it would put credence into the idea that action from the Federal Reserve is imminent.

As for the general market, we have a rally in the Euro and weakness in the dollar.  With that this incredibly strong relationship continues to be rooted in the market and equity buyers step in.  S&P 1340 continues to be an incredibly strong magnet.  While this selloff has been sharp the S&P 500 did not actually create a new lower low.  So the potential remains for the range bound action we have seen for the past 2 months…

That said I mentioned housing related as a relatively immune sector, and true to form this is an area seeing a lot of selling today.  It continues to be impossible to buy almost any strength as these areas get attacked.   At this point the only theme I see working ok is perhaps agricultural stocks, due to the U.S. drought.  A few REITs also stand out but the way things are going, those will be the next area for selling to occur.  The lack of themes or groups working in concert showcases an underlying weakness in the tape.

Tags: agricultural, Amp, Blast, Credence, Drought, Federal Reserve, GLD, Gold, Magnet, Mark Hanna, Nbsp, Rally, Reits, Relationship, Selling Today, Selloff, Showcases, Stocks, Term Downtrend, Trend Line
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Bonds: We Don’t Dislike Them All

Thursday, July 26th, 2012

by Scott Ronalds, Steadyhand Investment Funds

We’ve been vocal about our aversion towards federal government bonds. We noted in our Q2 Report that the Government of Canada 10-year benchmark bond yield dropped below 1.6% in June, and 10-year U.S. Treasury yields sit below 1.5%. Both Canadian and U.S. government bond yields are at or near all-time lows. Further, the German government issued 2-year bonds at auction last week which produced a negative yield for the first time ever. In other words, investors are willing to pay the government to park their money for two years.

These record low yields are an indication that investors much prefer the safety of bonds over stocks. We feel this safety is misplaced. Government bond yields have little room to fall further, thereby limiting their capital appreciation potential (when yields fall, prices rise), and the interest they are paying is paltry. Further, a rise in interest rates would be detrimental to government bond prices. We feel there are better opportunities elsewhere, notably corporate bonds. And in particular, U.S. banks.

The manager of our Income Fund, Connor, Clark & Lunn, believes that select bonds issued by large U.S. financial institutions offer compelling value. This is a contrarian view as negative sentiment still overhangs the U.S. financial sector, but many banks are in much better financial shape than they were a few years ago. They have recapitalized their balance sheets and restructured their housing exposures. Further, CC&L has a more positive outlook for the U.S. housing market as there are increasing indications that the sector has bottomed. While the manager doesn’t expect a rapid recovery, they feel the downside is limited and certain companies are well positioned to benefit from stabilization in the housing market. More specifically, they have increased the portfolio’s holdings in bonds issued by Citigroup and Bank of America (all foreign currency exposure is hedged).

Higher interest payments and yields are one attractive aspect of these bonds – they offer yields that are currently 2½ – 3% higher than 10-year U.S. Treasuries. Another benefit is that the manager believes their prices will be correlated (positively) to interest rate movements, which will help protect the portfolio in a rising rate environment, yet still provide a higher income stream until such an occurrence materializes.

The high yield sector is another area where CC&L is seeing value. The manager is finding opportunities in bonds issued by financial and consumer-related businesses as well as real estate investment trusts (REITs). Their focus is on businesses that are in a sound financial position and are producing strong operating results and growing their earnings. Examples include Great West Life, Hertz and Norbord (a producer of engineered wood-based panels used in the construction industry).

We’ve been advising clients for a while to be light on bonds in relation to their strategic asset mix, as we feel stocks are more attractively valued. That said, we don’t dislike all bonds. Corporate and high yield securities are our friends. This is reflected in the positioning of our Income Fund.

Tags: Bank Of America, Bond Prices, Bond Yields, Canadian, Canadian Market, Capital Appreciation, Connor Clark, Contrarian View, Corporate Bonds, Currency Exposure, Financial Shape, Foreign Currency, Government Bond, Government Bonds, Government Of Canada, Negative Sentiment, Q2 Report, Rapid Recovery, Steadyhand, Time Lows, Treasury Yields, U S Treasury
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