The Haiku of Finance for 07/08/21

Economic test

All input factors survive

Annihilation

Awaiting Some Tumultuous Market Tumble

It has been a long time since the 2008 financial crisis. Everyone who bet on a market recovery since then has been rewarded. Professional money managers think they have the recovery all figured out. Endless monetary and fiscal stimulus in the developed world made even the worst investment theses prosper. The experts have no idea how wrong they are about so much of the economy.


It is impossible to fairly value any publicly traded financial security when interest rates are permanently at zero. It is difficult to invest in fixed income securities when sovereign defaults in Greece, Puerto Rico, and elsewhere invalidate distressed debt investing. It is hard to buy real estate in desirable locations when credit-impaired mortgage borrowers drive up prices after putting no money down. It is ludicrous to endorse some nation's economic potential if its government statisticians falsify important data.


Painful lessons recede from memory when shamans apply fake salves to real wounds. The snake oil feels good for a while if the patient does not catch on to the placebo effect. Witch doctors on Wall Street have run away with investors' money since 2008. The cleverest and luckiest players have already left the game. Suckers remain, awaiting their chance to hold an empty bag while Wall Street's knaves clean them out.


The post-2008 economic recovery is mostly a mirage in Europe and the United States. China's growth miracle has been a mirage for some time. The BRICS were a cute marketing concept as long as investors never figured out that those countries had weak legal climates for investing. Privately funded unicorn startups are deflating, flushing their employees' stock options down the Silicon Valley drain. Investment concepts that looked great when capital had no cost were suitable only for fantasies. The market tumble that will snap people back to reality will be one heck of a tumult.

Christmas Eve 2015 Wish List

The whole world waits for Santa Claus while I count my natural intellectual gifts. I enjoy dispensing grace, like a benevolent monarch blessing worshipful subjects while posing regally upon my resplendent throne. I willingly carry the burden of genius through this season of joy. I am sufficiently joyful for a whole bunch of you readers. Sharing my Christmas wishes multiplies such joy.

My first wish is for Wall Street to quit ripping off investors. This happens in so many guises you'd think it's hard for crooks in suits to think of new scams. Lo and behold, their creativity never ceases. Hedge funds, structured notes, multi-manager funds of funds, late-stage unicorn startup funding, and other such garbage are things the investing public can do without.

Here's another wish: Wall Street needs to quit hiring trust fund kids. It's easy for these lazy creeps to bring in new money because they just whine and cry until their parents cough up dough. The problems come later when they refuse to do work and their less privileged co-workers have to pick up the slack. The whole banking sector would be better off not hiring these mental weaklings in the first place but those new asset referral bonuses are just too good for some managers to pass up.

I wish economic annihilation for all of my enemies and bonanza for myself and my many friends. Haters crawl out from their caves to spew racism at me on Twitter or slander me anonymously online. A whole bunch of English-speaking morons can't handle my genius so of course they compensate by embracing pure evil. True friends are more fun to have around, especially when they swoon after exposure to my overwhelming talent.

Finally, I wish the idiots who take shopping carts out of grocery store parking lots would acquire their own conveyances. I used to think this phenomenon was confined to low-income neighborhoods. Now I see it in well-off San Francisco neighborhoods. A whole bunch of financially secure people think it's okay to drag a grocery store's cart all the way home and not return it. The store then has to send its workers in a truck all over the place to haul these things back. They pass the cost on to you, people, while the staff in the store remain short-handed. If you're too weak to carry more than one bag of food home, then buy your own cart, for crying out loud.

Pass the eggnog and I'll mix it with brandy. I do that all the time during the holidays. I can metabolize booze like you would not believe because I'm the next step in human evolution. Santa can squeeze his fat red behind down someone else's chimney tonight, unless he has a big pile of cash to give me with no strings attached.

Mobile Money Spells Economic Annihilation For Credit Cards

I don't let hype over US-Russia economic sanctions take my eye off the ball.  Other wanna-be global powers can talk all they like about creating alternative global settlement systems to the US-based SWIFT system.  Russia will not succeed even with help from China until both of their economies are completely open.  Transparency and the rule of law have enterprise value even though they are weakening in the US.  The relative advantage still lies with the Anglo-West and even Asian banks prefer more transparent interbank transfers.

The real action worth tracking is in mobile P2P payments.  The emerging tech for smartphones is an existential threat to the major credit card companies.  Any combination of Google Wallet and M-Pesa is a knockout blow to credit card payment systems.  The combo will eventually metastasize in the developed world.

Vendors who migrate from card payments to mobile payments will find many advantages.  They won't lose gross margin by paying credit card charges.  Reducing the number of steps in a transaction means less friction for purchases.  Consumers will love the simplicity of mobile transactions and spend even more of their dwindling middle-class paychecks.  The unbanked poor in the US will finally join the mobile revolution once they see how quickly M-Pesa fills their SNAP accounts.  Everybody wins.  

The Limerick of Finance for 03/24/13

Cyprus on the edge of a deal

Depositors think it's unreal

They'll lose what they save

Concerns are now grave

Eurocrats need more assets to steal

EU Forces Cyprus to Destroy Its Depositors

Europe is testing the limits of its citizens' patience.  The government of Cyprus has announced a levy of between 6.75% and 9.9% on depositors accounts in Cypriot banks.  This stunning move comes at the behest of the ECB as a requirement for Cyprus to remain in the eurozone.

Early reaction from ordinary citizens is entirely predictable.  One guy parked a bulldozer in front of his Cyprus bank.  The outrage expressed on social media channels is palpable.  Calling it a "bail-in" with exchanges of shares in the banks as compensation means nothing if those bank shares ultimately prove worthless.

The tone of mainstream media coverage is as outrageous as this decision.  Talking heads are congratulating Europe's leaders and trying to confine the debate to choices between some confiscation or total confiscation.    The IMF's advocacy of a total "bail-in" for every account larger than 100K euros means that option is still on the table if this measure doesn't stabilize the Cypriot banking system.  That may now become a self-fulfilling prophecy as depositors start making panicked withdrawals.

I am not surprised that Europe's leaders think the savings of common citizens are collective assets to be appropriated as they see fit.  I am not surprised that sovereign governments are bailing out criminally incompetent bankers with the savings of people who have done the right things during their working lives.

I will be very surprised if there are no bank runs in the PIIGS countries on Monday and Tuesday.  Account holders in Europe have a very limited window of opportunity to protect their life savings before more onerous financial repression comes their way.  This confiscatory grey swan is about to lay a big fat goose egg all over European financial markets.

J.C. Penney Heads Even Farther Down the Tubes Along With the Middle Class

J.C. Penney used to be one of those anchor stores that could reliably draw suburban shoppers out to big malls.  Now it's just another fading monument to the dying purchasing power of middle class Americans.  This formerly venerable department store chain has been bleeding losses for several years with no turnaround in sight.  The store's business model is a symptom of a massive change in the structure of American society.

The retail market in our country is permanently splitting into two camps.  One end of the barbell, in the bad neighborhood across the abandoned railroad tracks,  is for deep discount chains like Target, Walmart / Sam's Club, Costco, and the various dollar stores.  They cater to those lumpen Americans living paycheck to paycheck and buying groceries with SNAP EBT cards.  At the other end of the street, behind the coded gate and security guard shack, are the high-end retailers like Neiman Marcus, Bloomingdale's, Nordstrom, and other brand names where only our ruling elite and their henchpersons can afford to spend money.

The evaporating middle ground is occupied by those traditional middle class icons - Sears, Macy's, and now Penney's - that cannot adapt to the bifurcation of American society into haves and have-nots.  Their products are too expensive for the large numbers of Americans who have difficulty affording the latest appliances and brand-name clothing.  Their branding and service are too downscale to attract affluent consumers whose politically empowered employers write their paychecks.  Those Americans who remain in the shrinking middle class have figured out that Internet retailers like Amazon offer better value and convenience for many of life's goodies.  The mid-range retailers can't compete.  Montgomery Ward learned this the hard way ten years ago, and the brand is now re-born as the online discount portal Wards.

The fate of mid-tier retailers like J.C. Penney is obvious to me.  Survival options include closing underperforming stores, rebranding into deep discount chains, or following Wards into bankruptcy and online rebirth.  The deep discount chains will have plenty of competition at the bottom of the food chain because many Americans will keep getting poorer.  The elite chains will do well because their clientele in the finance, pharma, and energy sectors own our planet anyway.  I'll wait my turn on the courthouse steps to bid on the bankrupt shopping malls formerly anchored by Penney's.  The vacated sites will make excellent permaculture installations and their former shoppers will make dedicated subsistence workers.

I've chosen sides in the class war.  Jeeves, pass the Grey Poupon.  Smithers, release the hounds.  Conchita, make mine a double (*wink*).  God bless America, the land of opportunity.

Full disclosure:  No positions in any companies mentioned.  

A Post-Election Investment Outlook For 2012

There are noteworthy takeaways from yesterday's exercise in self-governance.

Americans now overwhelmingly view their federal government as a provider of indispensable income and benefits.  Neither political party wants to convince them otherwise.  Voters will not tolerate policy choices that reduce or eliminate middle class entitlements.  This means policymakers will eventually opt for the invisible tax of inflation to reduce the unfunded liabilities of Social Security and Medicare.

There is little political will at the moment to reach a compromise on extending income tax cuts and cutting spending.  Policymakers will not opt for sustainable long-term fiscal policy that comes at the price of a forced recession.  This raises the chance of an involuntary fiscal balance forced by a bond market dislocation , i.e., Treasury can't sell enough bonds to meet funding needs.

The stock market is finally beginning to price in the seriousness of the dangers the U.S. economy faces from inaction in Washington.  Further QE from the Fed will have an even shorter half-life in support of asset prices than QE3.  The fiscal cliff is the end result of at least two generations' worth of flawed national decisions in favor of larger budgets, more expansive entitlement programs, and multiplying tax code loopholes.

My portfolio is structured to survive further equity market declines.  I await the chance to buy amid panic selling.  I am further hedged against the possibility of hyperinflation that may follow a market crash if the nation's policymakers and central bank attempt further stimulus.

This is going to be fun . . . at least for me.

The Haiku of Finance for 07/24/12

Geithner sees danger
Europe, fiscal cliff warning
Investors won't hear

Hot Summer 2012 Looks Like Economic Annihilation

Holy canole, things are starting to slide.  Spain gave the world a gentle hint today that it can no longer borrow in world bond markets and would pretty please like Germany to put its good credit behind eurobonds. You'll have to speak up, Spain, because Germany is still pretending not to hear you give notice of default.  They get that way sometimes.

Germany is also going to get an earful from Greece, again.  The Greeks are one month away from going broke, again.  The death spiral of austerity has a firm grip on Greece and cuts in government spending are generating positive feedback loops that are sinking the economy and tax revenue.  I've had personal experience drinking German beer and Greek ouzo and can attest that both are sufficiently strong for the leaders of those respective countries to self-medicate their way through tough times.

Germany should stop listening to these deadbeats anyway.  Its economy is really hurting now that its client states can't afford to buy German-made stuff after implementing their austerity measures.  Oh well, less German beer exported means more German beer available at home for volks to self-medicate.

The G-7 pledged to do something.  Their finance ministers have burned up lots of frequent flier miles and free long distance minutes this year with no progress toward getting Europe off the floor.  I'll hazard a guess that they agreed to let the Fed do the heavy lifting since Europe can't get its act together.  The only things I need to know are the size of the Fed's dollar swaps with leading European banks and whether the U.S. will push some inflationary transmission mechanism onto the U.S.'s systemically risky banks.

Speaking of systemically risky U.S. banks (and you know that turn of phrase is one of my favorite segues), the TBTF banks still don't take risk seriously.  The OCC can't figure out whether JPMorgan's risk management controls are real or imaginary.  The controls are probably as real as you can get when writing them with a stick on a wet clay tablet.  TBTFs won't have much time for controls anyway if they get busy pushing hyperinflated dollars into weird new loan programs for Americans.  All the Fed needs to do is give the banks the "go" codes.  The Fed is already thinking about whether things are bad enough to require QE3, Operation Twist, or whatever.  Helicopter Ben can't wait.  The Fed's June meeting can't come soon enough for him.  Hyperinflation is the most likely policy option with Washington too paralyzed to enact the requisite tax and spending fixes.

I really have to hand it to those hedge fund managers who were stupid enough to go long the euro, European sovereign debt, European bank shares, U.S. sovereign debt, and U.S. bank shares in 2012.  These preppies take stupidity to a whole new level.  

Europe Has No Plan For A Post-Greece Euro

The Eurocratic elite has been in love with itself for so long that it can't see how far the continent has fallen out of love with them.  The experiment with a unified Europe worked best when it was just Germany, France, and their tiny neighbors in a coal and steel community.  The long-held assumption of the inevitability of unification means there has never been a backup plan for dis-unification.  Planning for this imminent disorder will be ad hoc and will add to the crisis atmosphere just when calm is needed most.  The Davos crowd is in for a shock because they had it too good for too long.

Multinational corporations are the most foresighted supranational entities taking prudent precautions for a stampede out of the euro.  The lack of contingency planning among other relevant parties is sadly unsurprising.  The UK is a happy exception, so perhaps the Crown relishes the prospect of returning to its historic role as the balance of power on the Continent.  The Brits may have their work cut out for them.

I for one relish the prospect of many stupid European private equity firms going out of business.  A lot of LBO operators are very precariously overleveraged.  That is music to my ears.  It means that anything they own will be available at fire sale prices once they go bust.  It also means that there won't be as many Euro-trash wanna-bes making snide remarks about my lack of a pedigree at black-tie events in San Francisco.  They won't be able to afford tickets if they're out of work.  I have no plans to go hunting right away for bargain properties in Europe, although I suspect the dollar will go a lot farther over there this summer.  I'd rather wait for the follow-on effects here in the U.S. if European LBO shops have to exit U.S. equity positions in a hurry.  Investors are already shutting off the flow of capital into the high yield debt that LBO shops prefer and redirecting it into the no-yield bond havens that won't outlast hyperinflation.

Successfully navigating a government through a political crisis boils down to the character of top leadership.  I suspect that only Angela Merkel and Christine Lagarde have the requisite nerve to stay the course.  Everyone else is going to bail.  Whatever new leaders Greece elects in June will be the first to head for the exits.  The single currency isn't ready to become a museum piece just yet.  It's been a boon for Germany and still has a role in deterring French irresponsibility.  The most realistic end game is the one I sketched out months ago, with a devolution to a "rump euro" roughly contiguous with the original Holy Roman Empire.  

The Haiku of Finance for 05/25/12

EU hectors all
"Get your economies straight"
Yeah, you guys go first

The Haiku of Finance for 05/18/12

One more Greek downgrade
Caretakers can't stop exit
End of euro near

The Haiku of Finance for 05/04/12

Bond breakdown coming
Market run on the dollar
Destroy life savings

The Limerick of Finance for 01/22/12

The Davos elites will convene
As the world is perched on a ravine
They're all joined at the hip
But we need leadership
Total chaos could come to this scene

US Demands Europe Unification Bailout

The U.S. has cast its lot with European federalization, solidifying the Atlanticist elite consensus that only true continental supranationalization can prevent a European (and soon thereafter American) economic collapse.  Or so it seems.  The U.S. Treasury's Secretary's shuttle diplomacy is having the intended effect of shoring up elite European opinion in favor of U.S.-style bailouts and quantitative easing.  The only problem is that constitutional change is hard to come by when little countries in southeastern Europe can object.

I've said it before, and I'll say it again.  I'm agnostic on the question of whether the EU stays together or devolves into something smaller.  Staying together will now require rapid and massive legal changes that would empower the EU to make taxation and debt policies that supersede national sovereignty, and would give the ECB the power to print money like the Fed.  That outcome is much less probable than the uncontrolled dissolution of much of the eurozone. 

The U.S. knows what's at stake.  The Treasury is very cognizant of those American money center banks that will be exposed to European sovereign bankruptcies.  The Fed is very aware of the damage that the dollar can suffer if it must activate swaps with European banks that stand little chance of being repaid.  I do believe a contraction in the eurozone to a core of "Holy Roman Euro" countries would create a defensible economic perimeter.  I do not believe Europe's political leadership has the skill to execute this devolution.  They have instead gone for the all-or-nothing Hail Mary solution of continental unification.  This is going to be a photo finish, as they say at the horse races. 

The Dexia Domino Falls

Dexia?  What's that, some compact European car?  Oh, it's a European bank that's insolvent even though plenty of stress tests said it would be just fine.  Funny, I've never heard of it.  Not many people in the U.S. had heard of Creditanstalt in the 1930s, but that was the European bank that kicked off a lot of other insolvent dominoes when it went bust early in Great Depression 1.0.  Everything old is new again. 

We're going to hear more about desperate European moves to float credit to underwater banks.  They'll buy time but they won't matter.  Germany prepares its own Plan B to ringfence banks' equity support within national borders, almost as if it expects the IMF to exhaust itself with QE aimed at sovereign debt.  Germany seems to be hedging its bets in case the grand experiment in Continental unity proves too good to be true.  Better to leave equity backstops in national hands if some nations are forced to quit the euro. 

We should all hedge our bets.  Stockpiling several months' worth of preserved food and household consumables is a good Plan B in case a credit freeze makes transcontinental logistics temporarily untenable.  Wearing old clothing as long as possible is also a good plan in case rioting mobs start fighting over the last pair of jeans in the storefront window before they firebomb the whole mini-mall in frustration.  There are plenty of good Plan Bs left over from the 1930s if we start doing our homework.  Everything old is new again.  

Full disclosure:  No positions in any European banks at this time. 

Final Verge Of Last Ditch

We've been hearing about doom for months and the financial cliff we were all supposed to have trundled off by now has turned into a long, gentle slope down.  Greece is making its latest last ditch attempt of several to make the cuts it has always promised but never fulfilled.  Even the normally supine analyst community has had enough of this endless parade of tomfoolery and is predicting a global CDS blowout.  That's really nice.  Maybe they read my blog, or maybe their prop funds have gone short to clean up the clients abandoned by other hedge funds that aren't cutting the mustard.  Maybe they've just run out of lies to tell and have defaulted to telling the truths that a toddler could see in the markets. 

Maybe I should have sold more of my FXI holdings if China's bonds are suspect too.  Alternatively, maybe hanging on to some FXI will prove prescient if a forced yuan appreciation makes Chinese corporate earnings look more attractive.  At least I don't have to close up shop due to massive losses, redemptions, and liquidity crises like a bunch of stupid hedge funds.  Just get this whole market crash over with already so I can buy some bargain stocks. 

European Market Detonation Countdown

It's hard to count down to economic annihilation when the world's central bankers keep pushing back the minute hand on the clock.  Greece has received several bailouts and yet still needs to tap its emergency lifeline because the collateral it pledged to the ECB for loans is worthless.  Bankers see the rapid rise in premiums for credit default swaps on European banks as a warning of banks' imminent insolvency. 

The collapse of European banks and then equities will of course be felt here in America.  Wall Street insiders know what's about to hit.  So does Warren Buffett, which is why he invested in Bank of America's preferred stock (senior to common shareholders in claims on a firm's residual assets) and not its common stock.  The warrants he obtained can be exercised in the future, presumably after a recapitalization wipes out that bank's common equity.  Not that BAC would ever need a recap, of course, as long as the Fed and Treasury stand by ready to funnel it with some TARP 2.0. 

Full disclosure:  No positions in any banks at this time, certainly not BAC.

The Haiku of Finance for 08/08/11

Six hundred point drop
One of the largest ever
Bears are on the loose