Wednesday, December 12, 2012
One of the economic indicators that is one of the most prescient about
the direction of the global economy is the Baltic Dry Index. It measures
shipping around the world as a predictor of the health of the global
economy. When shipping in the world declines, so does economic activity.
from Zero Hedge:
It has been a while since we looked at the Baltic Dry Index, which when normalizing for the excess glut in dry container ship supply (such as right now - 5 years after all the excess supply in the industry - has long been normalized), continues to be one of the best concurrent indicators of global shipping and trade. We look at it today, moments ago it just posted an epic 8.2% plunge, crashing from 900 to 826, or the biggest drop since 2008! Of course, conisdering the collapse in global trade confirmed in past days by both Chinese and US data, this should not come as a surprise, although we are certain it will merely bring out the BDIY apologists who tell us that supply and demand here (like in every other Fed-supported market) are completely uncorrelated.
Monday, December 10, 2012
When it comes to market experts with decades of insight, we will pick
soon to be Second Admiral of his own sovereign navy (comprising of
privateered Argentinian schooners, Belize catamarans, and soon, Greek Made in Germany submarines),
Elliott's Paul Singer, over those of any fly by night TV talking head,
or "information arbitrageur" whose only 'alpha' in the past decade was
courtesy of expert networks. The same Paul Singer whose outlook on what
the next crisis may look like we posted yesterday.
It is the same Paul Singer, who three weeks ago was a headline speaker
at the Archstone Partnerships annual meeting, in which speech he laid
out not only the biggest threat facing America - namely the arrogance of the United States "by
not realizing that in today's world... you have to be attractive as a
country [because] capital will go where it's welcome", but more
importantly, the thing that keeps him up at night: "The thing that scares me most is significant inflation, which could destroy our society."
In other words, one of the best and brightest investors in the world,
is most terrified by the one thing that every central-planning
dispensing economist says will never happen: hyperinflation. Our money is certainly not on the theoreticians.
Extracting the key parts from Singer's speech. Highlights ours
Or, perhaps, the developments over the past several months were geared with precisely this outcome in mind: because there is nothing quite like "social unrest" to resolve decades of untenable economic and monetary imbalance build up...Let me make a few comments and observations on the current investment scene. I said before that every once in a while things really are “different this time,” and I thought of a metaphor earlier that might be useful to illustrate an important point. Let’s do a thought experiment: Let’s make believe we are in 1960 and sitting in Germany, and we are a group of German investors and businesspeople, about the same ages as the people here today. The group would be people who had seen the most astonishing changes in the underlying conditions of investing and growing capital—a complete evaporation of savings from 1914 to 1923; complete destruction of society; and a complete change in governance from 1943 until after the War. Keep that image in your mind when you come back to 2012 in New York City today and realize the basic terms and conditions of everybody in this room have not really changed over your entire career. There have been booms and little crashes, you’ve made money and lost money, some people were wiped out and others became wealthy, but the elections come every four years, power is transferred peacefully, and taxes go up or go down.
It concerns me that we might be entering a period—we have to think about this possibility—when the basic terms and conditions of owning capital, making a rate of return, and keeping the money you earned might be in the process of changing. Charles Krauthammer said some time ago that most of American political life is between the 40-yard lines and that this crowd, which has been elected for another four years, is kind of at the 30-yard line. I had thought about it at the 10-yard or 5-yard line, but Charles is more mature than I and I’ll accept what he said. But I’m very concerned about class warfare generated from the top, about the possibility of an extended period of lacking strong economic growth. I think economic growth could be easily achieved in the United States at greater levels, and I’m quite concerned that the current prospects, beyond the so-called “fiscal cliff” and a deal on taxes and spending cuts, will be an extended period of low growth and possibly a recession, the continued bashing of money and success and very large tax increases.
I want to call to mind a micro choice that I think is relevant. If you lived in the upper Midwest, you’d know the difference between Indiana and Illinois. You would know Indiana welcomes jobs and businesses, and finds ways to work with businesses; and Illinois is on a slide to Hades. Illinois—and I suppose Michigan, too—is doing everything possible to support unsupportable expenses, structures and make thing miserable for taxpayers.
By the same token, I think America—and this goes beyond President Obama’s administration—has been quite arrogant for a long time by not realizing that in today’s world, where many countries around the globe can turn out products and services more cheaply than America, and where America has lost so many industries and jobs to other countries, that you have to be attractive as a country. Capital will go where it’s welcome. It is subject to an understandable rule of law, regulation, fair and attractive taxation, and the quality of life. I’m afraid of that, because when you look at the sweep of the booms since the Internet boom and monetary policy, and the extremism that has become embedded in current monetary policy, the United States, Europe, the U.K. and Japan, you do see extreme monetary policy.
They say this is not massive money printing, but first they are wrong; and second, monetary authorities in the United States did not see the crash coming and the unsoundness of the financial system. In fact, right up until the crash they were saying that nothing like what happened could ever happen. So money printing and zero-percent interest rates, which have distorted the economic recovery and the landscape in the United States and Europe, have become a substitute for sound, pro-growth, fiscal regulatory tax policy. As a result, they say they are not concerned about inflation. This monetary policy, $3 trillion of bond buying in the United States, $3 trillion in Europe and another $2.5 trillion to $3 trillion in Japan, is unprecedented. It is not the case that they know the ultimate inflationary potential when this low-velocity money gets back into the system and acquires some velocity. If and when people lose confidence in paper money because of repeated bouts of quantitative easing and zero-percent interest rates—it could happen suddenly and in a ferocious manner in the commodity markets, in gold, possibly in real estate—interest rates could go up at the long end by hundreds of basis points in a very short time.
I’m quite concerned as a money manager that we have to manage money, not just for the boundaries of what’s in front of our faces—maybe we’ll have a little tax increase or not, the fiscal cliff, or the stock market might go up or down 10% or 15%—but for a basic shift. The thing that scares me most is significant inflation, which could destroy our society. Frankly, in my view the recent election has diminished the probability of a strong resurgence of growth, and I’m quite concerned. Others are concerned about the course of the next 12 to 24 months in terms of growth, taxation, regulation and social unrest, a resurgence or larger version of bashing anyone who has made money or makes money and not paying their fair share.
This is amazing. Investors are so pleased and so filled with faith in Bernanke, that they believe that stocks are worth more today, than they were on Friday, despite the worsening economic news. Here's the proof! Stocks just went positive for the day.
This sure looks like a bubble to me, when investors ignore all the fundamentals and worsening economic climate and keep buying, despite all of it. That's the very definition of a bubble.
Ben "Bubbles" Bernanke and the Fed's FOMC will meet this week and Wall St is expecting Bernanke to announce a doubling of the Fed's program of monetizing US debt.
Currently, the Fed is monetizing about $40 billion/month in mortgage debt, and has continued its program of monetizing an additional $45 billion/month of US government debt by swapping short-term US debt for long-term US debt under its continuing program (sorry, the name escapes me as I type this).
But this week, due to the on-going weakness in the economy (yes, the same one Michelle Antoinette termed a "huge recovery"), Wall St is now expecting the Fed to begin a NEW program of monetizing even MORE US government debt. It is widely expected that the Fed will monetizing an additional $40-$45 billion/month, to be announced this Wednesday!
This is why, despite worsening economic indicators since this last summer, the stock market has continued near five-year highs, and Wall St has continued its Pollyanna Party, dismissing the endless parade of bad news as just "temporary" ("Hurricane Sandy did it, Mommy") or merely anecdotal singular events.
The Fed has so pumped up the stock market bubble that news, data, and analysis are no longer even relevant in this "bubble" mirage economy. In a November 2010 op ed in the Wall St Journal, Bernanke boasted of his ability to endlessly pump up stocks, even referring to asset bubbles (stocks, housing, and remember the now-forgotten "sub-prime" mortgage bubble?) glowingly as "the wealth effect". Bernanke literally considers all his bubble blowing as a GOOD THING!
When Bernanke, in one of his few interviews with the news media, told Scott Pelley that 1) he wasn't printing money, and that 2) he wasn't monetizing the debt, he was boldly lying to the American people, counting on the ignorance of the vast majority of them.
While technically, he was correct in saying that the Fed doesn't literally "print" money any more, he intentionally misleads people, because the Fed DOES create money out of thin air. They do it in a computer now, not with a printing press. But this same Bernanke gave his now-famous "helicopter" speech by boasting of the Fed's "this thing called a printing press" (HIS own words). He then denied to Pelley what he had previously boasted about?
And in #2 above (Bernanke's claim that the Fed is NOT monetizing the national debt), he blatantly and LIED bold--faced to the American People. The Fed has monetized more than 90% of the issuance of long-term US government debt in the past 4 years, adding nearly $3 trillion of government-issued debt to the Fed's balance sheet, and plans to increase its balance sheet of US debt to more than $5 trillion in the next two years. If that's not "monetizing the debt", Mr. Bernanke, what IS? Ah, that's right! We "sophisticates" call it "quantitative easing" now! We've become so much more svelte in our deceptions, now! As long as it sounds arcane, it just MUST be good, now!
Overnight, when markets tanked again in Europe, stock futures tanked along with them. Here is the result:
But not for long! It's Bubbles Bernanke to the rescue. Stocks were soon pumped higher again beginning at 6 am EST, while nearly all Americans were still asleep, and stocks are now back to flat for the day, just in time for the NYSE to open 30 moments from now. Here is the most recent stock futures chart a few minutes ago:
This endless money pumping ultimately does NOT yield jobs or prosperity. It brings inflation and Dollar devaluation, and it only empowers politicians to engage in still more destructive spending, taxing, and pandering to economic ignoramuses -- Obama's legions of leeching lemmings!
Sunday, December 9, 2012
Transcribed from a speech given by Paul Singer of Elliott Management
Investing is an art, more so than a science. And for me, what I get paid for is managing the “dark art,” if you will, of risk management and trying to be a visionary and having a dark vision at all times about what can go wrong.
It’s a particularly fruitful and impactful time to be thinking about risk management and the thing I want talk about today is what I’ve described as “The Shape of the Next Crisis.” That doesn’t mean we’re going to be talking about the timing of it or exactly what to short or how to make money from it. But it’s to provoke thought about what the elements are, the current landscape, the various aspects that will shape the timing, as well as the amplitude, the predictability, the suddenness of the next crisis.
It’s not something that I can talk about in any kind of hierarchical fashion. There are a number of elements that are in play, some of which are novel, completely new in virtually the human landscape.
But they combine in what I think of, when I’m thinking of risk management and how to hedge my portfolio, what I think of as kind of “an evil stew.”
But here they are, and it should be obvious when you really think about it, but you have to bring these elements from other facets of life to see how they impact trading and investing.
On Modern Communications and Information Processing
On The Financial System And LeverageIt is increasingly the case (and I’ll give you a couple of recent examples) that people coalesce, form, and reform ideas in a much more powerfully focused, and abrupt, and stark way than they ever have in the past.
One of the most interesting examples of this is the so-called “Arab Spring” where the forces underlying these societies – totalitarianism, security services, violence, oppression, etc. – have existed in the countries that have been affected for decades. All of the sudden it started in January with a singular small event in Tunisia. And now it’s a few months later and there are 11 countries in various stages of more or less similar wide-spread revolts.
And how did this happen? You speak to experts in the Middle East, you speak to experts in that area or in those particular countries, and you don’t get a satisfactory answer. You get “totalitarianism.” The answer, I believe, relates to social media and the way people are connected - it’s the Internet, it’s Facebook, it’s Twitter – and the way people process information enabling people to develop the same thoughts simultaneously and to act and coalesce physically as well as emotionally.
The vector changes with something like this are virtually instantaneous. In 6 months, for 11 countries that have been more or less family run or totalitarian, to be in revolt is a very, very powerful illustration of this point. The Flash Crash about a year ago in stocks, where all of the sudden, the technology of the marketplace and the way the exchanges had their rules about processing orders in relationship with other exchanges, coalesced one afternoon, to have hundreds of stocks virtually evaporate all at once - within seconds or minutes or five minutes or half an hour.
This is a very powerful element and will serve as an accelerant in the next crisis so hold that one up on the blackboard, metaphorically speaking, while I talk about the next elements.
On 'Orderly Liquidation' And How Dodd-Frank Has Made The System More BrittleLet’s talk about financial institutions and the financial system. The major message that I want to give you (and I’ve invited challenge on both parts of my thesis here and I’ve never had anybody challenge it): The major financial institutions in the US and around the globe are utterly opaque; and The next financial crisis will happen faster, more suddenly.
We cannot (I have 110 investment professionals), and I surmise that you cannot, understand the financial condition of any bank, major financial institution. You can’t see the actual size of the balance sheet. You have no idea what that derivatives section means…it’s 10 to 100 times the size of the actual balance sheet.
So when people say, “Well, it used to be 40x leveraged,” (some of them were 90x leveraged) “but now they’re 15 to 20 times leveraged.” Well that’s just great. Except you go to the derivatives and see numbers in the trillions and trillions and trillions and there is no clue, you have no clue, no understanding, of what that is actually composed of. Is that composed of trades that are basically unwound where all you have is counterparty risk? Is that composed of actual hedges of upper tranches the way we would have in an admitted hedge fund?
So you are looking at balance sheets without any real understanding of how the balance sheets and the companies would perform in the event of a crisis. Which of these trades or trillions of dollars of trades, which in normal times oscillate like this [very small motion] and that’s why they’re so big, would in really bad times start going like this [large motion]. And if you actually have capital of only half a percent, or one percent or five percent of your actual footings, not just unwound trades that happen to still be on balance sheet, but actual footings, you’re in trouble.
The kind of thing that wound up the financial system three years ago is expected to be different in form than the kind of things that would unwind the financial system the next time. But I’m going to argue that the next time will be faster. If you think back to ’07 and ’08, it was episodic. It wasn’t just suddenly that in the second or third week in Sept that Lehman goes under and that’s the crisis and the whole world collapsed. No, there were several episodes leading up to that.
After that, what kept the entire financial system from coming to a grinding halt was quite simple. It wasn’t that all of the other firms were in much better shape than Lehman. It’s very simple, it’s that governments, here and in Europe, underwrote the entire system. Ben Bernanke, of whom I’m not a fan... at all, has been quoted as saying that in the absence of the government guarantee and underwriting, 12 of the 13 biggest banks in the world would have gone out of business following Lehman. Whether it’s 12/13, or 13/13, or 6 or 8 of 13, is completely imponderable, but the point is actually well-taken. In the absence of that guarantee there would have been a cascading collapse because of the opacity.
There are people in this room that are on trading desks or manage trading operations at investment banks. You know for a fact that you knew nothing about the financial condition of your five biggest counterparties. And so your relationships, and your willingness to trade, with those counterparties was dependent on rumor or credit spreads widening or not widening. And that’s a very terrible place for the financial system to be in.
So take the opacity, take the fact that you can’t really understand the financial condition, and take the fact that the leverage hasn’t really been rung out. And what you realize is that the lessons of ’08 will actually result in a much quicker process, a process that I would describe as a “black hole” if and when there is the next financial crisis.
The next financial crisis obviously can only happen if, believably, the governments either cut loose the major financial institutions - believably and credibly unwound the guarantee - or even more difficult and scary, if the government guarantee were not enough. And that’s one of the next elements in the shape of the next crisis. As you know, risk has migrated upward, it’s migrated from lenders and borrowers really to governments. It’s gone on the balance sheet of the US, the ECB (the various countries of Europe, particularly Germany, France, etc.). That the credit of Europe, the credit of America, is being called into question in the starkest way is part of what will shape the next crisis.
But before I get to that part, and explain how I think that impacts, I want to come back to the trader and trading part of this. The lesson of ’08, which is indelibly stamped upon every hedge fund forehead and trading desk head, is: Move your assets first, stop trading first, sell the paper first, and ask questions later. Those that moved from Lehman days or weeks before the end were happy. Those that sat there thinking that they were protected in prime brokerage accounts or protected in some other ways, or that firms like Lehman wouldn’t be allowed to go under were stuck in the company (of course Lehman is still in bankruptcy) with claims trading at 20-something cents on the dollar, depending on where you are in the capital structure.
On Japan And The Confidence-Destroying Implications Of Monetary PolicySo, I want to put one more element in place in the trading and financial institution part of the equation.
And that’s the law that was signed into law a few months ago, Dodd-Frank. I don’t know what it’s actually called, but it is the financial institution reform law and it is designed purportedly to make the system safer. “Safe” actually, not just “safer.”
In my opinion, what Dodd-Frank has actually done is to make the system more brittle and complete the picture, in my mind, of a black hole, meaning a very vicious, sharp and abrupt process if you put together all of the things that I’ve said so far.
So what is it about Dodd-Frank that contributes to this black hole, or contributes to this brittle, unsafe condition? It’s the “Orderly Liquidation Authority,” a very humorously named part of this law because what I think it actually represents is a very disorderly process. Under this authority, which was purportedly designed to provided a “not-Lehman” outcome (you know, no government bailout and a calm resolution of large financial institutions), under this process the FDIC has the authority, contrary to all US bankruptcy practice and law, to seize financial companies which are quote “in danger of default.”
Under previous bankruptcy law, companies had to default, actually default, or managements voluntarily put them in bankruptcy in order for them to be in bankruptcy.
“Danger of default,” if you think about that, plus with the other parts of this that I’ll describe, means that if a company is in trouble, and it’s large and opaque, then it’s in danger of default and can be seized any day. And if I say any moment it’s only a slight exaggeration, because by statute the process of throwing a company into the Orderly Liquidation Authority is about 48 hrs long, and is effectively unreviewable (even though there is an injunction attached to this process with the Treasury secretary and a couple of other people looking at it).
So companies can be seized that are in danger of default, and what is the FDIC ordered to do and what can it do? It is ordered to throw out management…quite bizarre. It is enabled to discriminate among classes of creditors similarly situated... strange. It’s enabled to move assets around and transfer assets to bridge companies. And it’s enabled to go against people in or out of the company who are quote “responsible for the financial condition.”
Let me define Systemically Important Financial Institutions first and then continue on. Under this legislation, the government is supposed to designate certain companies as “systemically important.”
I’ve been quoted as saying that I feel that’s nutty. It’s nutty because no financial institution should be too big to fail. All financial institutions should be governed by the same rules regarding leverage and risk. And companies can become systemically important, or un-become systemically important, extremely quickly in today’s world as a result of taking on leverage, changing their positions.
Let’s put that all together. If you are trading with a big company and that company or other companies have been identified as systemically important institutions, if you are observing a large company getting into trouble, what you know is that you have to pull your assets because those assets can be transferred (regardless of the financial condition of the subsidiary that your assets are a part of, whether it’s a prime brokerage subsidiary or otherwise). You don’t know how your claim will be treated, so you have to sell the bonds that you own; if the guy down the block, Bob’s Big Bank [is a similarly situated creditor and] has been designated as systemically important, that guy may be getting a priority recovery.
So the whole thing militates toward stepping away abruptly from any company that is designated as systemically important. So I think that the opacity, the lessons of ’08, the vicissitudes and thoughtlessness of Dodd-Frank, militate in favor of a very, very abrupt resolution.
And In ConclusionThere isn’t time to flesh out in detail the other accelerants of what the next financial crisis might look like, but let me just say a word or two on monetary policy. Monetary policy, which is now doing virtually all of the job creation work in the United States (in particular) and of course in Japan also, has created a very distorted recovery and some people think, including myself, that it’s been at least partially responsible for inflation in commodities and gold.
Quantitative easing which is this duration shortening mechanism, zero interest rates which is extraordinarily unusual and is now in the United States as well as Japan, as well as the long term entitlement insolvency in the United States, are platforms for a possible loss of confidence.
Questions And Answers Section...I think people who are managing money or investors who are trying to figure out what the next crisis may look like, should be processing these elements and thinking about how they can interact, together with the modalities of modern communications and the way people process information, to create something very sudden.
Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like. What I’m trying to struggle with as a money manager, who really seriously doesn’t like to lose money, is how to protect our capital and how to think about the next crisis.
If you think about some of these elements and how they might interact, you might come up with other paths of transmission or risk and pain. But I wouldn’t go about your business thinking it’s business as usual in a typical post-crisis, post bear market recovery.
Q: [Thoughts on Europe]?
A: Yeah, that’s really important. My view about Europe starts with my view 15 yrs ago (and by the way, on Wall St if you’re early, you’re wrong). My view 15 yrs ago was that the Euro was an inappropriate backdoor experiment on quasi-sovereignty. And all it would take would be a stark variation in economic performance or geopolitical or military considerations or interests. And here we are and there’s been a stark divergence and the Euro is in the process of centrifugal force and breaking up.
Will it break up? It’s entirely unclear, and I’m not going to predict that it’s going to break up or whether Greece is going to actually leave it. What I will say is that it doesn’t make sense for the underperforming countries to actually be part of this. Everyone looked like they were getting benefits during the period of time when there was convergence. Exports for Germany, lower interest rates for Greece and Portugal and Spain and the rest.
Big risks were built up, big variations in performance, and now Germany in particular is writing out checks. As long as Germany keeps writing out checks, the euro can limp along, Greece can limp along.
But the answer to your question is the fixes to this, even if to kick the can down the road, are deflationary, they’re harmful to growth despite the fact that a breakup of the euro would fall upon Greece. Pulling out by Greece from the euro would trigger other consequences in several of these other countries, would create a banking crisis which would have to be dealt with.
So there is near term pain in doing, in my view, the right thing. But the medium- to longer-term pain of writing out checks to insolvent countries like Greece (insolvent, it’s not a liquidity crisis, insolvency), is ultimately something that’s going to be dampening growth in Europe, dampening global growth, possibly creating the transmission mechanism for the next banking crisis. So I think we’re watching it. And by the way, how do I think it’s going to actually happen that the situation is resolved? It’s going to be from the bottom up, the political process. It’s going to be on the streets, it’s going to be hundreds of thousands of Greeks, or hundreds of thousands of Germans demonstrating against the bailouts.
The elites want to keep writing the checks because their paradigms, their desire to have this experiment (because that’s what it is, it’s only 12 or 13 yrs old) continue. That’s what their dream was: one Europe - sovereign. And they were going to get to sovereignty through the back door. It isn’t working out at the moment; I don’t think it’s going to work out. And the fact that it’s not working out is quite painful and the way they’re doing it is stretching out the pain.
Q: [Insights on using CDS on sovereign debt to hedge your portfolio]?
A: Very good question. The question was about buying credit default swaps on countries or companies in order to hedge your positions, as a general risk management tool. I think that’s a really great question, it’s one that people like us really struggle with.
One of the things that 2008 (I had forgotten to say this before, so thanks for reminding me) showed us about risk management was that some of the tools that we thought that we had for risk management were actually tools that could be harmed or defeated by the actions of governments. And governments have shown an increasing inclination to push us around, us as a community. Meaning overnight bans on short selling, statements and the beginnings of action against credit default swaps, so-called “naked” credit default swaps.
Credit default swaps in the abstract, or actually in practice up till recently, are very effective at bringing liquid tools for taking judgments long and short about securities, and countries, companies that otherwise would be completely illiquid. Borrowing sovereign debt to sell short is not easy.
When countries and companies get into trouble, it’s very easy and very standard to be blaming speculators and credit default swaps as one of the reasons, or the main reason why a spread is blowing out and why the country or company is in trouble (because when a spread blows out, financing opportunities and possibilities diminish, etc.). Who can say what portion of CDS trading is so big that it actually creates prices rather than just discovers prices?
But one of the very difficult parts about running a portfolio that is aimed to be absolute return or very risk conscious and trying to avoid the consequences of the next crisis, is that it’s very difficult to predict using tools like that, which of these tools will be left unimpaired, or which will be suddenly impaired or destroyed by government action.
One of the things that bothers me about running a gold position is (since gold is, really to me, a thermometer about how people think about real money versus fake money or versus paper money possibly for the first time in people’s lives of anybody in this room), if gold actually is starting to be priced at a price that would represent real fear about paper currencies, what will governments do to derivatives or actual gold to keep themselves from being subject to what they feel is inflation caused by speculators?
So I think everyone who is using these complicated instruments needs to understand that governments have sent out a shot across the bow that they are not in the mood to allow for free markets, when the free markets challenge the “everything-is-fine-and-we-can-kick-the-can-down-the-road” way of governing.