Friday, 24 February 2012

It must be the Illuminati

“This great evil.
Where's it come from?
How'd it steal into the world?
What seed, what root did it grow from?
Who's doing this?
Who's killing us?
Robbing us of life and light.
Mocking us with the sight
of what we might have known.
Does our ruin benefit the Earth?
Does it help the grass to grow
or the sun to shine?
ls this darkness in you, too?
Have you passed through this night?”

-          The Thin Red Line (1998)

Perhaps we like to think that someone, somewhere is ‘pulling the strings’ and that they are in charge. We imagine an illuminati of controllers secretly running the world for their own evil benefit be they politicians, bankers or the mythical 1%.

However when you really look into it you will find that these people are actually also human beings. This revelation suggests they too may be vulnerable to the same greed, fear, envy, joy, love and anger as the rest of us. This disquieting discovery means that in fact we may all ultimately be responsible for the circumstances we find ourselves in.

Our leaders and bankers are a function of our own consciousness and they suggest that we are both comfortable living in denial (witness the EZ crisis) and quite happy becoming rich without understanding why (witness the housing bubble.) Therefore this crisis is really no less than we deserve.

Unfortunately most of the reactionary protest of our times seems to be putting the cart of greater equality and a ‘fairer’ society before the horse of our own deformed and lowly consciousness.

“No problem can be solved from the same level of consciousness that created it.”

-          A. Einstein

Tuesday, 21 February 2012

Greece; the country in the stocks

“A Country is not a mere territory; the particular territory is only its foundation. The Country is the idea which rises upon that foundation; it is the sentiment of love, the sense of fellowship which binds together all the sons of that territory.”
-          Giuseppe Mazzini

The deal is clearly unsustainable because even on the most optimistic of predictions Greek debt is still too high (120%+ GDP) and with unemployment above 15-20% for the next 5 years the people will seek alternatives to their current 'government' arrangements and their indentured servitude. The choice is stark but obvious. 10 years of slow pain and humiliation or a short, sharp shock.

The real issue is the EU forcibly demonstrating that nobody leaves and hence they need Greece to stay in the Euro to demonstrate austerity working and as an example to the rest. This is about the survival of the Eurozone project. The EU leaders need Greece to blame when it’s the euro itself which is at fault. Greece cannot readjust inside the Euro nor can Portugal and arguably Italy, Spain and well basically everybody except perhaps Germany and the Netherlands. EU leaders should really be questioning just who it is who doesnt belong in this union. 

Suppression of the reality is failing. No politician can prevent the flood which is starting to leak out. When you build on the sand you get washed away.

Murder will out.

Friday, 17 February 2012

Sure method to spot an economic bubble

Watch housing shows in the UK.

Throughout the past two decades there was a proliferation of housing shows in the UK. These shows had humble beginnings in Changing Rooms which involved neighbours ruining a room in each others houses. This format evolved to the pretentious ramblings of Kevin McCloud in the fascinating but equally horrifying Grand Designs which involved smug middle class people escaping the proverbial ‘rat race’ to build bizarre palaces and eco-homes which invariably (and satisfyingly) cost them 3x their budget. One could always identify the flash of greed on McCloud’s face when he asked them just what the final spend was.

These two shows captured the evolving British fascination with home ownership and the expression of our identity through said activity. However other shows better laid bare the most base British desire; none more so than A place in the Sun. Said show offered the most naked assessment of the average Britons dwelling instincts which amount to taking bad food and dress sense to a place where the sun shines perpetually. A typical episode would feature either a recently retired couple from some sad town in Wales or a young family where the breadwinner was a builder, decorator or plumber. The basic premise was to find a home in a sunny place (usually Spain) and to live the good life either enjoying the strong pound from your annuity income (retiree) or enjoy painting the hordes of new developments springing up all over southern Spain. The most wonderful thing about these shows was that the prospectors would always say “they wanted something traditional” allured by the exotic mystique of the Spanish hill town but then they actually ended up purchasing a faceless villa with a communal pool. Every single time.

What does this tell us about property bubble spotting? Wherever Britons are invading there is or will be a bubble in property.

Case in point is two recent shows. One a cultural export which features a slightly less pretentious aussie version of Kevin McCloud (he has to be because aussies make even worse weird eco-homes than we do) in Grand Designs Australia. The other is a home grown show called Wanted Down Under. Wanted Down Under is a masterpiece in recreating the heady mood of 2006 vintage property shows and it illustrates humble Britons with manual skills who discover they can earn £50k painting houses whilst living in perpetual sunshine. Homes are usually pricey but unperturbed many Britons are making the move just as all those lucky tradesmen and retirees did to Spain during the good times.

These shows are a classic bubble indicator so rest assured I will be keeping my short on the AUD for the time being. Since Australia is essentially the sandpit of China which is suffering from a severe case of Dutch disease I see little hope for the lemmings on Wanted Down Under except perhaps a premature return to Britain with a rather fetching tan.

“The English take their pleasures sadly after the fashion of their country.”

Maximillian, Duc de Sully – ‘Memoirs’

Thursday, 16 February 2012

The Falkland islands; a political football

“How much’s it want,” Syverson yells, “how much, this organization
you tell us about?”
“Dang it, Syve, all it wants is what’s fair—”
“Fair! It wants advantage is what”
“Okay! okay!” Floyd hollered, getting rattled,
“but all it wants is its fair advantage!”
Everybody laughed when Floyd made that slip, even old Floyd himself.

-          Ken Kesey, “Sometimes a Great Notion”

Much as the Italians like to make clever footballing allusions with the geographical position of Sicily and the boot the Falkland Islands/Malvinas sit like a political football off the coast of Argentine Patagonia in the cold winds of the South Atlantic.

The Falkland Islands can always be relied upon as a convenient cause to distract the populace from any problems at home. Whether that be high UK unemployment or 30% Argentine inflation one can trust the governments to step up the rhetoric and rouse the populace for a ‘just’ cause. This certainly helps shift copies of the Daily Mail and The Express as much as it helps Argentines do what they do best; gather and protest wrapped in national flags.

The UK really is not paying the game very well. Falling for these taunts they have committed some rather serious faux pas in upping the ante. Even if sending Prince William to the Islands was routine it was not smart. It feeds the popular sentiment in Argentina and reinforces perceptions. Much the same with the deployment of HMS Dauntless. Cameron is not very good at reading the political subtext on these occasions in much the same fashion as he got shafted during the EU fiscal pact agreement.

In recent days many weighty voices in the environment of global diplomacy have weighed in on the issue including the esteemed Sean Penn. Sean Penn seems to have forgotten that he is an actor or rather he is overplaying his role which dictates that he now go around Mercosur emulating various political leaders both in rhetoric and appearance; 

H/T Guardian

If I were one of the 3,000 islanders (or half a million sheep) I might care. If the Islands were able to declare independence and call themselves an island nation like Vanatu  there would be no question in the UN about sovereignty – the right of the people to self determination would prevail. If the British claim is colonialist then so is the Argentine claim.

What really matter is why does anybody in the UK or Argentina really care? Who are these people that have the time, passion, commitment and zeal to protest on the streets of Buenos Aires or lambast in the newspapers of Britain over the islands? It never ceases to amaze me the distractions we humans find for ourselves. I mean seriously how many Argentines would emigrate to the Malvinas if they were actually ceded? In many ways the issue is simply an emotive symbol – one could imagine Argentina gaining the territory and then giving it away again just so they can bemoan the loss all over again!

“HARRY THE HAGGLER: Oh. Uhhh, twenty shekels.

BRIAN: Right.


BRIAN: There you are.

HARRY THE HAGGLER: Wait a minute.

BRIAN: What?

HARRY THE HAGGLER: Well, we're-- we're supposed to haggle.

BRIAN: No, no. I've got to get--

HARRY THE HAGGLER: What do you mean, 'no, no, no'?

BRIAN: I haven't time. I've got--

HARRY THE HAGGLER: Well, give it back, then.

BRIAN: No, no, no. I just paid you.


BURT: Yeah?

HARRY THE HAGGLER: This bloke won't haggle.

BURT: Won't haggle?!

BRIAN: All right. Do we have to?”

-          Monty Python -  “The Life of Brian”

Wednesday, 15 February 2012

Desperate times…

Bessie Braddock: “Sir, you are drunk.”

Churchill: “Madam, you are ugly. In the morning, I shall be sober.”

The long term structural outlook is definitely deflationary. There are still huge stocks of debt to be paid down from the last credit cycle meaning asset price gains are unlikely save for short term central banking manoeuvres.

The inflationary argument rests solely on the fact the central banks are attempting to inject record amounts of cash into the economy and support asset prices. The underlying reality is massive deflation. ‘Proper’ inflation requires low unemployment, loose monetary conditions (we do have these) and a deficit of productive capacity and infrastructure. Therefore ‘proper’ inflation is totally non existent in the developed world.

At the moment investing feels like a binary gamble between who will ultimately be more successful; the central banks or the deleveraging process. Ill put my money on deleveraging with tactical moves into inflation. The Bernanke 2% inflation put was the war cry of a toothless tiger. You don’t play your hand like that until you have no aces left up your sleeve.

The reason why central banks will fail in the end and really have already failed is quite simple; at some level people just don’t want any more debt. When a man goes out drinking there is an inevitable point where the goodness of drinking shifts into a downward spiral of greater drunkenness. At some point he wants no more to drink and even ‘free’ alcohol cannot entice him to drink. This is called saturation. We are at this point with debt. People have no confidence in the future so don’t want to borrow on it today in case the future works out worse than the present. This is really a simple point and no amount of zero interest rates and quantitative easing will change this psychological mind-set.

So the current reality reflects this psychology. Everybody is sitting on cash waiting for a brighter day whilst the velocity of money slows down. Corporates are sitting on record cash but won’t invest for a lack of clear opportunities. At the same time governments are implementing fiscal austerity to cut their own spending as they are short of cash. Now something is amiss here. Doesn’t the government print, own, authorize and back the money supply? (Eurozone aside.) How can they not have enough of it?

Fiscal taxation and spending simply taxes productive uses of the currency and redistributes these currency units to non productive or public entities in turn are supporting the economy (Hospitals, roads, power grids). The government make up the rules. So claiming you are captive to ‘the market’ and ‘living within your means’ is a fiction. You control the money supply, the laws and the tax code. You are free to do as you please.

Now I am not advocating simply printing more money. This clearly isn’t working because the money being printed is not circulating in the economy anyway because either the banks (transmission mechanism) don’t want to lend it or the people don’t want to borrow it. The money supply is irrelevant if it is not circulating.

What the government should consider is that it has a pair of balls and therefore can do whatever it wants.

I think in due course persistently high unemployment will start to outweigh all other considerations. The social costs are too high. The government may start to realise that the entire mechanism for monetary exchange has broken down. At this point we can expect lots of unconventional measures to try and jump start the process.

I wouldn’t be surprised to see big tax grabs on corporate cash piles. What is occurring at present is the entire system has failed and it is now eating itself. Corporate margins are high and corporates are in rude health buying back shares, cutting costs (cutting jobs), merging and acquiring (cutting jobs), paying dividends, paying boards and hoarding cash for rainy days. Due to an artificially low cost of capital and relatively high cost of wages corporates fire employees and mechanize. This is a vicious cycle because every job cut means fewer consumers and more rainy days.

Other measures governments can consider because they make up the laws; (i) Make all commodity ETFs illegal and all physical holdings of gold illegal. This forces capital back into productive uses instead of ‘store of value’ trades and reduces inflation globally (ii) Tax wealth instead of income. Taxation on estates and property holdings would encourage consumer spending by raising the disposable income of poorer working people who spend money instead of rentier asset squatting which is currently encouraged by many tax codes (iii) Back ‘reunionization’ of employees across the private sector or create new unions for them. This would allow employees to start negotiating higher salaries at the expense of corporate margins. At most marginal rates of tax employees pay more tax than corporate so the government improves its tax take and the employees improve their take home pay. Just a few politically unpalatable ideas which might become more savoury as the economy sours.

Corporate behaviour is all rational at the micro level but at the macro level the end game is one giant mega merged super company which owns all the productive industry in the world, employs nobody, has a huge pile of cash and a very well paid board and a legion of unemployed proles. Before we get to this point I expect the government will start forcing corporates to spend. Or otherwise upping the tax take from them and spending the money themselves. The problem is they need to do this in a globally coordinated fashion and/or with capital controls because otherwise corporates just relocate to tax havens.

Friday, 10 February 2012

Greece is doomed and irrelevant


"Through the loan package and bond swap, Greece’s lenders are trying to lower the country’s debt-to-GDP ratio to 120 per cent by 2020."

- FT

No really this is the best possible outcome of 8 more years of Greek deflationary austerity! Given the muted moves in the market I think nobody really cares anymore. We have become bored and therefore immunized from news on the fate of Greece.

It is obvious really that
(a)    Greece has an unsustainable debt burden based on any given measure and it always did way before the Troika got started (see Argentina 2001)
(b)   Greece has weak and corrupt institutions which are incapable of implementing reforms (see Argentina 2001)
(c)    Greece has no means to adjust is trade deficit with the rest of the EU within the euro fixed FX regime which means it has no way to restore competitiveness except through endless deflationary austerity (see Argentina 2001)
(d)   The Greek people can no longer take endless deflationary austerity (see Argentina 2001)
(e)    The rest of Europe no longer believes it is worth pouring more money down this bottomless pit

In the end Greece will default and it is not a matter of if but a matter of how soon. It will also have to exit the euro to restore competitiveness. But since everybody knows this (but Brussels PR wont say it) it is no longer a market moving observation.

The upside is that after their deflationary euro exit they can readjust the economy and get excellent foreign currency inflows by becoming what they always were; a great place for cheap and sunny holidays.

The country will be awash with Germans but they wont be technocrats or troops they will be plum coloured pensioners.

Wednesday, 8 February 2012

The sound of one hand clapping

"Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof."

- JK Galbraith

In times of sentiment shifts in the market I like to draw a parallel from the I Ching. Each trigram is made up of 3 lines which are either Yin or Yang lines. Each line in turn can have an old and a young line implying it is tending towards its opposite (i.e Yin line to Yang line or visa verse).

These old or young lines are the most important in terms of the interpretation of the final resulting Hexagram.

The great thing about this kind of observation is this is something that one can observe time and again in everything; just as love breaks down into hate or liberalism shifts into fascism or drunken confidence descends into a paranoid hangover.

Yin and Yang is a pretty simply concept well illustrated by Wikipedia;

“Yin yang are not opposing forces, but complementary opposites that interact within a greater whole, as part of a dynamic system. Everything has both yin and yang aspects as light cannot exist without darkness and vice-versa, but either of these aspects may manifest more strongly in particular objects, and may ebb or flow over time.

Many natural dualities—e.g. dark and light, female and male, low and high, cold and hot, water and fire, air and earth— are thought of as manifestations of yin and yang.”

To this I might add “bullishness and bearishness.”

It is important that within the Yin and Yang in each side of the symbol there is the element of each other represented by the eye. Each impulse holds the seed of its own transmutation into the opposite impulse.

This really explains much of the turn in risk assets in January.

Structurally things remain the same but our attitude toward them adjusts and evolves. Right now things feel really rather ambivalent. Ignore the events but watch the reaction to them. A Greek default may now be irrelevant simply because the attitude of people to such a default is no longer one of fear. The Germans appear instead to be tired and the Greek leaders resigned. A default looks imminent but I am not sure anybody really cares anymore.

This is why when sentiment in the market is so blindingly negative or positive one is always entering a turning point in that sentiment. As soon as a given market view solidifies into a consensus, as soon as every broker reads the same or as soon as the market crunch or high has made it into the everyday pleb press you know that the environment itself has reached its zenith and is now tending toward its opposite.

Thursday, 2 February 2012

An idea for the Facebook IPO

“People for years were asking me why aren’t we trying to make more money. I would say I’m trying to build a business for the long term and it was clearly the right strategy. I think the same is true now. Maybe there will come a time down the road when most of the industries we think should be social are already social and the primary thing we can do is optimize the amount of money we can make.”

- Mark Zuckerberg - WSJ, Oct 2011

Finally it seems that Facebook has decided to go public. Usually this is a great indication that management / various PE groups are ready to cash out and hand over some stock to suckers 'long term investors' for the 'next (lower) growth phase.'

The most notable absence from the announcement is the number of shares. This is kind of crucial to see whether it is going to be another LinkedIn squeeze where you offer a tiny part of the float to institutions and then leave a huge pool of insatiated retail clients to drive up the price. Still any multiple is likely to be both absurd and justifiable in equal measure due to the unparallelled network effect of the Facebook brand; most of the value is totally intangible and may indeed be massive and worthy of $100bn.

However maybe Zuckerberg should think about being 'cool' rather than cashing in.

Come on Mark, you already made more money than anybody needs. Don't let Wall Street 'zucker you into the deal. Break the mould. Make Facebook a mutual. (I'm sure your PE friends wont like it, but you have a fairly good record of pi$$ing on people's shoes.)

Facebook could be made a mutual instead of a corporation! They could give every profile on Facebook a share and therefore leave it owned by its constituents. This would be quite fair and rather revolutionary really since Facebook is basically a platform which allows the company to make money by profiling adverts to its members. This would mean each member would actually earn money to be on Facebook. It would become a giant partnership. Afterall members of Facebook are sharing their information - they should really claim a share of the profits. Currently Facebook simply takes your personal life and whores it out to the highest bidder.  How long before the members rise up and revolt staking a claim to own their egotistical extensions into webspace?

Probably a long time. About as long as a time as that since the era when Zuckerberg was cool and Facebook had no adverts and the only people on it were your University friends. Now your boss is on it, your parents are on it, next your kids will be on it. They say the rats always leave a sinking ship first.

So Mark, prove Facebook can still be cool, give it to the people.

(btw maybe Occupy can add this to their long and convoluted list of complaints and initiatives)

Wednesday, 1 February 2012

Pack up and go home.

"Sick of this life
Not that you'd care
I'm not the only one with
Whom these feelings I share

Nobody understands,
Quite why we're here
We're searchin' for answers
That never appear

Sometimes I feel like I'm beatin' a dead horse
An I don't know why you'd be bringin' me down"

- Guns'n'Roses "Dead Horse"

There has been much discussion of the difficulties of the principal / agent relationship in executive  'compensation' as the Americans call it; quite apt for more castigated execs like Stephen Hester. However there seems to be another problem born of this relationship which is arguably a worse affliction for shareholders; beating a dead horse.

There are several examples of these kind of businesses that fall to mind. Firstly there is the dead, dead horse. HMV is a perfect example of the dead, dead horse. A business with all the growth dynamics of an entertainment focused woolworths. HMV is losing sales in everything to Amazon, music to Itunes, DVDs to Lovefilm rental culture and books to the Kindle. The business is on a slow road to being absolutely and totally worthless (except the live business which they could spin off). This begs the question why they don't just fold it, count the losses and go home? There could be some profit on liquidation? Can it really be in the interests of shareholders to carry on running this business? If it were owner managed would it still be open? Maybe because the execs are taking in around half a million pounds a year? These guys are pretty expensive given they are effectively administrators.

There is also the dead horse which wants to live again. A great example of the dead horse which hopes to survive by mutation is NII Holdings (also known as Nextel). Nextel had a great product 10 years ago with their push to talk IDEN phones helping lots of construction workers look busy by doing lots of walkie talkie stuff. However walkie talkie phones went the way of many short lived inventions such as the pager and the tamagotchi! Motorola is discontinuing manufacturing the last of these phones. So Nextel have decided instead to build a new mobile network in Latin America. From scratch. In the era of MVNOs with the great fixed capex boom of mobile technology fading away Nextel figure it would be a good idea to take shareholder funds and build a whole new network. Look up the trend for annual ROIC for this company on Bloomberg over the past decade. It is an unmitigated disaster. What could possibly justify building a new network? They figure they can emulate their push to talk service over a 3G network. This one is definitely ready for the knackers yard. Management of course are still taking bringing home the bacon. Just not to shareholders.

Finally we have the basic lame horse. This is a horse which if nursed back to health could go on surviving for a long time serving its owner well. But this horse will also never race again and it needs to know this. Such a stock is RIMM. These guys make Blackberries which are of course the best device ever for reading your work emails or BBMing your mates about where to start a riot in a London suburb. This gives RIMM a great market share with a specific product. RIMM used to be a super growth business like its lame now gelded Finnish brother Nokia. Unlike Nokia RIMM may be able to continue working in its home markets and won't get sent to Africa to finish out its days. However the management of RIMM needs to realise they will never race again and stop wasting shareholder capital on tablets and other pointless ventures.

Therefore shareholders should not be as worried about why executive pay is so high rather they should be asking whether it is helping to run their invested capital into the ground. Perhaps shareholders can get together and start petitioning for these managers to be paid all net worth in stock in future. Lets see how they like their half baked 'growth' ideas when its their money on the line. This also explains the success of Buffet; he keeps managers to run the business but allocates the excess capital to new investments rather than letting the management piss it up the wall on ill conceived projects.

Disclosure: I have no positions long or short in these stocks nor do I plan to take any in the future. This is a piece of personal opinion and is in no way a solicitation to buy or sell these investments nor does it constitute advice to do so.