Golden Castles?

Many wise observers and practitioners from Keynes and Triffin to Roubini and Grantham have thought of Gold as a barbarous relic. Let it be said, to the delight of Goldbugs, that I frown upon such a pejorative (at least for the duration of this post). Gold is championed as a store of value because as Goldbugs rightly point out.... it's always been a store of value. No need for further elegant rhetoric with such an historical pedigree. Circular, yes, but circularity is of small consequence in the search  for a universal store of value (so long, perhaps, as one leaves the little chestnut  called "price" asides). More pessimistic zealots, of say the Goldline variety, suffering both political and economic disillusionment, fear the worst Orlovian outcome - the one where BOTH politics and economics yield to chaos, (and for those so inclined if prophecy be requited, thereafter The Rapture). Gold - along with guns, ammo, and canned spam (not necessarily in that order) is seen as the best hedge of the former while "Just saying No!" may facilely suffice in the latter.

For the moment, I will not question the foundations of the fears that Gold fulfills, nor will I question the time-honored pedigree it has acquired through history. But in my travels this summer I believe I have found another [possibly] ignored asset that should  be considered by both the fearful and disillusioned alike. Quite simply, I am thinking of Strategic Castle Fortifications. More specifically, those which are typically perched above or adjacent to strategic trade routes and valley passes for they more than others benefit from geographical positioning, at least as rare if not rarer than the yellow metal itself. Whether at the mouth of an ascending pass through the the mountains, or an entrance to a fertile alluvial valley between hills, or above a narrows in a trafficked river, such fortifications have extracted rents in time-honoured fashion since man was able to construct them. 

It is hard to fault the quality of their materials as they were built to withstand both siege and full frontal assault. They boast excellent visibility for offensive and defensive manouevres, vast arrays of dungeons to imprison (and for the less politically correct amongst us, perhaps to torture) one's adversaries, as well as to cellar requisite libations to accompany the sunsets. Admitttedly it costs a few krugerrands to redo the roof, but that is true of any substantial villa or mas with a reasonable patina and square-footage beneath. Of course quality and utility aren't everything. Many of these fortifications sport some of the finest views and scenery in the land. Yes, the strategic routes beneath them have now evolved into autoroutes, autoipistas or autobahns of 6 lanes or more, with all manner of household and commerical traffic passing at great speed. And The State rather frowns upon abusing their full geo-strategic potential  but during more backward and less progressive historical times, the return of which the fearful are most afeared, these could be seen as giant tollbooth - a function to which like the hopes invested in Gold - they might readily return. 

But the similarities to Gold do not stop with their historical, novelty, and aesthetic qualities. Much to the Goldbugs delight, it takes great effort and expense to excavate and elevate such a fortification and engineer it, just as it takes enormous earthmovers and energy to coax the miniscule concentrations of gold from the surrounding ore in which it lies embedded. And of course, like the small Brinksmat army, and London Vault required to protect one's Golden hoard, so too does it take a small army to extract fees for passage and guard against would-be usurpers. Piracy is not easy. And just as Gold has been subject to seizure and confiscation by governments and brigands alike, so too, the biggest risk to extracting tolls from such a property is insuring that appropriate tribute (and respect) is given to the State or Lord or the land.  

Granted, Gold's main advantage is its divisibility. But, in Orlovian post-modernity,  there may be a social model that would allow some (and just like gold, but a choice few) similarly minded folk  - i.e. those with a hyper-active foresight, perhaps with a white-collar occupation that might be irrelevant in an Orlovian future, who want a share in a hedge against such societal breakdown, to pool their resources and potentially pursue a new occupation as a co-proprietor and partner in an enterprise that extracts tribute from prescient geographical investment.  

Channelling Levi Strauss

I have  long been a proponent of the Levi Strauss approach to most highly-sought-after though long-odds pursuits. Of course I do not mean the Structuralist-School member of the Academie Francaise, but the utiilitarian SF-based purveyor of dry-goods, who kitted out the miner-forty-niners searching for the motherlode out west. Most never found what they sought, but Mr Strauss (the retailer) did mighty-well supplying the essentials clothes and tools for them to dig for their dreams. 

So as we remain amidst a modern-day financial gold rush, IF one is skittish about the utility of gold itself, the probability of hitting the proverbial home-run with the yellow metal already at multiples of its former price in less-stressed times, or if one is concerned about more practical aspects of converting it into usable bits come Orlovian outcomes, or if one be in the camp that believes eventually that inflation and fiscal yawn will be met with either tight money or market vigilantism - devil take the hindmost, it may be worth thinking about how to channel the spirit of Levi Strauss (the dry-goods retailer - not the philosopher).

One of the main challenges with bullion is where to keep it. The home is frequently not a safe place - not without the retrofitting by Diebold or such. Saftey-deposit boxes are better, but ownership is recorded and in a banking holiday, could be opened and seized by the State. The banks are capitalising by increasing their vault capacity to cater to the new owners, distrustful of keeping it ummm errrr anywhere.

  

One could open a a family of Gold ETFs. Although Mr Einhorn dumped his for the physical because he found it cheaper to store than the mgmt fee, there is no reason why a 10bp management fee ETF for physical Gold bullion isn't out there already. Heck with GLD now with a market cap of $50,000,000,000, 10bps is $50,000,000, a cool fee for a passively-managed investment Fund with a single yellow asset.

The late Mr Strauss would have appreciated a chain of Retail Gold Storage Vaults that provides storage, exchanging like quantities, assaying, market-making. It is obvious that a largegold bar would be useless at the town market, and even 1-oz eagles or Krugerrands  are overkill for daily business. Hence the need for a real nationwide retail bullion bank that would exhcange local IOUs in claims on smaller quantities. Of course the Fed might have something to say about this...  But here, the brand extension possiilities are large. For example what about Beretta Bullion Bank? One could deposit their bullion and withdraw some ammo? Free weapon with large deposits etc. Or Smith & Wesson Bullion Bank. Now, what idiot would tempt their fate trying to rob an institution guarded by heavily armed Sam Elliott-type (see photo right)?

There is room in the brave new world of Gold $5000++ for speciialized transportation services.  Everyone knows that Brinks guards are fat, lazy and given their wages, are wholly not committed to their job. And why should they be?? In the world of Gold $5000, you want bad-ass motherfuckers like Blackwater (or rather XE Services as they are now known), with no qualms about shooting first and asking questions later, or queasiness regarding torture, guarding your hard-earned speculative savings. Indeed you may have to pay them more than Brinks, but as the rather pertinent saying goes: "Fifty percent of a Gldmine is better than one-hundred percent of nothing...". 

If not a proper bullion bank, then perhaps a more Professional Retail Shop. At least make it look serious. Makle it LOOK more like a bank rather than a bad stamp collectors or used baseball card shoppe, in the low-rent dead-end section of the mall. With Gold $5000, this baby should have brand-new neon, and be front-and-center, next to the big fountain in the central plaza. 

There are still other ways to ride the Gold $5000 bandwagon. You can start up your very own Canadian (or Australian) Junior mining company, where all you need is a piece of derelict land, a hole, a press release, a PO Box and a Vancouver listing. If ever you wanted to sell pennies for a dollar, this is the way. Or, you could broker mining machinery, trade/distribute heap-leaching chemicals, sell your own version of "Miracle Bullion Polish" on late night TV or QVC. Or better still, you could, like my old boss in my very first post-university job, hire a bunch boiler-room snake-oil hucksters to harass gullible senior citizens via telephone to part with their meagre savings by buying bullion from YOU at heavily-marked-up prices, and with exhorbitant storage contracts, something they did while riding exer-cycles in a windowless, furnitureless room in what was once known as The World Trade Center. Some people have no shame.... 

Ten Commandments For Fiscal Adjustment

Never more relevant than this precise moment, the Ten Commandments for Fiscal Adjustment (in advanced Economies) have been proverbially carved into a semi-official tablet by IMF Director of Research,  Dr Olivier Blanchard, And they are good, wise and just. Sufficiently so that the general polity should take careful note, else the Austerians,  the facile macro-vigilantism of the electronic punting herd, or the GlenRonPaulBeck's of the world gain sufficient traction to insure that a new-normal arrives amidst sufficiently grandiose [and probably unnecessary] dislocation.

Do pass it on to your nearest legislator, elected representative, candidate of choice, beneficiary of fiscal promises or privilege now-untenable, or so-called fat-cat who has benefitted asymmetrically from the previous fiscal regime in the US (and UK +Japan too) that rather obviously low-balled the revenue side of the National Income Statement for nearly a decade, or uber-protectionist. The abyss beneath the inflation/deflation ridge-line we are collectively navigating is just that - an abyss. And such a good map, followed carefully, is the type of sensible guide that might just prevent the type catastrophic tumble looming in its absence.

Newton Rules!

The inflation vs deflation debate rages unabated. Inflation skeptics buy bonds (even zeros!) whilst inflation bulls pile into gold, art and, for example, rare anythings. Austrians prescribe global vomit, whilst Keynsians seemingly prefer more of the same. If anything, the camps are becoming more polarised, with the World's Best PMs launching gold and gold-class shares, at the same time as the Europeans get a headstart on the US Feds and thheir States on long-neglected austerity, while JGBs gravitate anew towards 1%. Hmmm. Are we at that moment where Dr. House blithely prescribes steroidal treatment (after the requisite spinal tap, of course), only to reverse course when he sees the patient crash resulting from the prescribed meds? I think so - for it seems that whichever side of the inflationary-deflationary ridgeline we slip down (or are pushed towards by markets, policymakers, tea-party-ers or teutonic teatotallers), the results are unsatisfactory from the viewpoint of the patient, which will cause our metaphorical Dr House, to try yet another course of action.

IF this analogy is true, might we liken our situation to anything more real in the world around us - something more than a dramatic TV series (however popular) - something we might relate to more easily? The answer is yes, there are some splendid examples.

First and foremost, we can look to the Carny. Recall (at least those of my vintage) the infamous "Salt-n-Pepper Shaker". One needed a strong constitution, lots of peer pressure (or both) to ride this, defined by gravity and counterbalance. Like the prevailing financial and political systems, it is a devilish creation bordering on the absurd. Yet patrons willingly queued up for the "pleasure", thrill, or mere experience. Note that the motors and hydraulics that allow one to temporarily defy the natural state of entropy are impressive, and requiring the generation of some serious force and inertia to turn the complete loop, though ultimately gravity rules irrespective or uneventfully smooth operation or mid-stunt morbid mechanical failure.

For the musicians out there one need only to look atop their piano, or inside their violin case to the lovely archetypical metronome. It too provides a reasonable approximation to the predictable timing of both policies and, in turn, markets back-and-forth movements, despite the former's apparent Brownian attributes in the shorter-term. Like policy, with its weight, and forces that set in motion, both the musician and the practiced observer can see the limits of such forces and their movement through space, caused by the primary large static weight's pull upon the smaller adjustable weight, which will, eventually, in rhythmic fashion return the undulating staff to its rightful place.

However, the metronome is but a simple form of pendulum: a reasonable, though perhaps insufficient abstraction. More apt, might be the mesmerizing Newtonian Pendulum (more technically known as "An Executive Desk-Toy") popularized in the 1960s for errrr ummm obvious reasons. Here we see the interplay between momentum, and kinetic energy within a reasonably simple mechanical system of man's construct. We can tangibly witness the transference of energy, and its eventual dissipation through the device's inability to conserve it. No, it is not perfect. It is on but a single plane, but it remains a good likeness of the transference mechanisms of financial markets and resulting political phenomena unfolding before us.

There is also, of course, the classic See-Saw (though the pictured one here is rather more elaborate than those of our youth and present-day playgrounds. It is worth mentioning if only because the eventual outcome path, while ruled by gravity, is heavily influenced by the relative mass of its human counterweights and their forces thus applied (and counter-applied). As a result, the relevance here is of the caveat that is my mantra: "shit happens", and as such, riders do from time-to-time end up in the emergency room, an outcome of which the public, and policymakers should remain cognizant.

But the best analogy is perhaps the lead or sand-weighted Punching Dummy. Humanity, in general, their households, and their sovereign and corporate institutions alike will undoubtedly take hits - many hits, and from all sides - but life will go on, and as in post-war Europe, Lebanon, Argentina, Turkey, Serbia, and other seemingly unimaginable examples to our unpracticed imaginations, it will rebound and rise again, in fits, starts, almost randomly lurching to' and fro', before balancing upright again - if only to have the collective shit kicked out of it yet another time...

Irony-Watch #6: Deactivating the Activists

As readers will know, I dislike the sentiments of undeserved entitlement. Not that I include health-insurance, public transport or a basic social safety-net as entitlement, despite its pejorative coinage. Rather, what I find loathsome is the sense of entitlement that, for example, certain senior corporate managers display that abuses both shareholders and employees for the primary purpose of parochial gain, or the type where political representatives abuse power for private gain at the expense of the public interest. The latest research into the psychology of power (as summarized by The Economist magazine) discusses results that show marked differences in corruptive behaviour depending upon whether the person in a position of control believes they "deserve it". In other words, power only corrupts the so-called entitled.

Activist investors historically purported to ferret out such senses of entitlement at the expense of shareholders in order to challenge managers where it was believed egregious AND of course, where a buck could be made (though not necessarily in that order). A potentially noble pursuit complementing its lucrativeness, if indeed as Elvis Costello sang, their aim is "true".

Yet, curiously, all is not well in Tara where Carpetbaggers such as Christopher Hohn's TCI. Atticus, Warren Lichtenstein's Steel, and Baran's Symphony Financial (SFP) are finding themselves in - how shall we term it - interesting positions visa-vis their very own investors, many of whom did or would like to get their money back, yet are faced with gates, lock-ups, etc that preclude such actions - at least to the letter of the prevailing Information Memorandum governing the rules of the letter of their investment. Of course while the spirit may suggest other courses of action, the letter is permitting the manager to hang on to the assets, collecting not-insignificant management fees (read: a lot by mortal measures), whilst the investor whose many resides in dubious, concentrated, often illiquid, positions stews, fumes and waits.

All which raises the possibility that the garden variety of activist's aim may NOT be so true, and hypocrisy may be prevailing for the sake of squeezing yet more (if at this stage of underwaterness only management fees) from hapless investors. Of course I could be wrong, and shutdown, orderly liquidation or simply distribution in-kind to shareholders may pose more problems and be more costly than staying the course, than I am presently able to conceive. But then again, maybe not. There is certainly no shortage of capable, more competent people willing to watch the paint dry on such large concentrated illiquid positions for a fraction of the prevailing management fees currently be collected.

Perfect Imperfection

As a humble financial critic, I don't really "do" book reviews. But I will share a secret (though it won't be one for long) which relates to Tom Rachman's recently released (and amazingly, first) novel entitled "The Imperfectionists". In a form of literary "Pay It Forward", I chanced upon a review a few weeks ago in a broadsheet, a review that was so effusive as to pique my bullshit detector, though I remained sufficiently intrigued that at first chance I nipped into Blackwell's on Charing Cross Road, vaguely describing the subject to one of the staff. Fortunately it was the Fiction buyer who has intimate recall of what he's bought, so I plopped down my depreciating sterling in exchange for a hardback copy. 

The novel revolves around a selection of mostly unendearing characters that have intersected four decades in the life of a fictional Rome-based old-school newspaper (presumably modeled, at least in part, upon the International Herald Tribune for whom he reported). The fact that they are unendearing (my spell-check denying the validity of this description) on the surface violates a golden rule which is the audience needs to care about his characters. Yet, Rachman has miraculously stood this imperative on its head, and opted for, as the title suggests - highly flawed subjects - who, one by one, are enviscerated by his narrative, their dialogue events, their choices and actions. Perhaps, this is not incongruous, for it is their flagrant flaws which lure the reader.

Literature Nobel-prize-winner  Elias Canetti, in The Earwitness, unmercifully caricatured behavioural archetypes in a parsimonious but brutal assault upon human flaws and their product. It is dark, and however sympathetically critical the reader may wish, there is no attempt to amuse, leaving the reader deeply unsettled, perhaps like Canetti himself. Rachman, focused upon his caricatures, employs satire, wit, punctuated with measured philosophical observations imbued into the dialogue, to reveal their flaws that, unlike Canetti's archetypes, are so real and close-to-the-metaphorical-bone that that reader cannot help but be interested, whether out of morbid fascination or voyeuristic schadenfraude for those harsher judges, though in the honest, I believe there will be sympathy whether deserved or not.  

I will not spoil any plots by championing this effort further, but I will advise you - whether for entertainment or to help [temporarily] purge oneself of the knot-in-the-stomach like consequences of systemic discontinuity, to buy it and read it. And Mr Rachman, if you chance upon this plug on your behalf, I will gladly buy the beers if you can reveal even in part, just how you pulled this off. 

Farewell Then Hatoyama Yukio

So farewell
then
Hatoyama
Yukio

Now
the ex-
Prime-
Minister
of Japan

Despite
making promises
you couldn't keep -
you achieved
more than
you
know...

Primarily
by giving perspective
to sentiments
regarding our own
FUBAR
system(s).

(with apologies to EJ Thribb aged 380 days)

P.S. For proper insight and analysis on the subject, visit http://shisaku.blogspot.com/

No Soup For You!

They wait nervously in line curling behind them outside the shopfront. A straight and orderly queue. No pushing. No standing too close to the counter, or unnecessarily entering the kiosk before one's moment. Eyes wandering everywhere but the server. Whatever you do: Don't stare. No smelly perfumes or wisecracks. And no idle chat or loud laughter while in line. "What's on today?", the young Greek -looking girl discreetly whispers into her Italian-looking friend's ear, careful not to offend the Soup Nazi's sensibilities, the wrath of which has the most dire consequences for the soup-needy and soup-desperate alike. "Mediterranean Bean...I think...", comes the reply out of the corner of his mouth, making like a ventriloquist. The customer in front takes his bag, shuffles left to the cash-register as if mid-waltz, and politely hands the server his crisp ten-dollar bill. "NEXT!" She steps forward. His gaze focuses upon her, she hesitates, "One large soup, please..." she blurts out finally....and errrr ummm do you accept Travelers Cheques..?!?!" He stops ladling. Nostrils flare. Eyes narrow. "WHAT??? Travelers Checques...Where do you think you are....GREECE?!?! NO SOUP FOR YOU!!" "NEXT!". Her friend follows behind as they depart empty handed. Now, the American steps forward: "One extra-large soup please....."

Japan Watch: An Important Emergent Trend

There is a most troubling trend afoot in Japan. No, it is not the further perplexing descent of JGB yields, the failure of a newly appointed Finance Ministers to survive longer than the time it takes to slow-roast a nice Gigot, the SFP Value Realization Fund's attempt to block Matsuya's takeover defense provisions despite their inexorable slide into the sunset, or the lack of a third-handle on the Yen. Rather, I refer to the peculiar practice of merged companies failing to find an appropriate moniker, resulting in tortured names for time-honoroured companies that resemble legal partnerships, or, even worse, the adoption of mneumonic abbreviations that could be mistaken for the chemical designation of food colouring, or a UN NGO.

I cannot say when it started, but bank mergers were perhaps first. Recall the 1990 merger of Mitsui and Taiyo Kobe Bank into, yes, Mitsui-Taiyo Kobe Bank which morphed, briefly into "Sakura"before  melting into Sumitomo. And of course Sanwa, Tokai and Toyo married to become UFJ, and like the Monty Python knight with "only a flesh wound", survived phagocytosis by Mitsubishi to yield "Mitsubishi-UFJ". The venerable Takugin, early banking casualty of the Bubble, partly dismembered and disemboweled lives as Sapporo-Hokuyo.  Chuo-Mitsui (Trust Banking), Sumitomo-Osaka (Cement), Hokuetsu-Kishu (Paper), GS-Yuasa (Batteries), Isetan-Mitsukoshi (Retail), Konica-Minolta (Precision), Kyowa-Kirin (Pharma), Sumitomo-Mitsui (Insurance), Maruha-Nichiro (Marine Prods), Daiichi-Sankyo, Dainippon-Sumitomo (both Pharma) are further examples of corporate diplomacy insuring that the preservation of tradition, organizational honor and management face trumped any meaningfully rational attempt at branding.

Some have rebranded when the "Wa" has been disturbed and reputations irreparably tarnished. Daiwa Bank, which not blew through its capital (and then some!) but was the residence of Toshihide Iguchi, one of the first to hide mammoth-amounts of [losing] trade tickets in desk, became "Resona" when the government merged it with Nara, Asahi, and Kinki-Osaka Banks. Ditto the merged near-bankrupts Nissho Iwai and Nichimen who agreed upon Sojitz, (meaning "Double" or "Twin") presumably to demonstrate it was a merger of financially pathetic equals.  However, the most notorious was the creation of Aozora (literally "Blue Sky")and Shinsei (meaning "New born") out of the rotting putrid carcasses of LTCB and NCB.

Cellular giant KDDI - the merger between the KDD and DDI - could be forgiven since both firms were themselves acronyms to begin with, and the merger resulted ostensibly in major savings by eliminating 2 upper-case "D's" (presumably one "D" from each for the sake of equality). Seven & I, the merger of retailing affiliates Ito Yokado and Seven-Eleven were ill-advised by their branding consultants (if they had one), for the result is an alphabetic number with an ampersand and a dangling consonant. Ummm, yeah.

J-Front raised my eyebrows, choosing unusually to ditch their legacy parents of Daimaru and Matsuzakaya (the joke of the price-weighted Nikkei 225 in 1990). The attempt was valiant, but there is something unsettling about the result, at least in English, for "Front" while possibly meaning store front, or two battle fronts, commonly has more nefarious connotations as in a fake or dupe. Clearly they didn't go out to any English focus groups on this one. Kawasaki & NKK Steel's merger into JFE was more successful in jettisoning the baggage of legacy for the future - whatever may be implied by JFE (Japan Ferrous Enterprise?). But somehow the acronym seems to fit the technical nature of the steel industry.

JX Holdings is entirely more mysterious, even sinister, with the association popping into my head being the evil Baron Silas von Greenback, the toad playing foil to Danger Mouse and Penfold. It was the result of Nippon Oil and Japan Energy which itself arose from Nippon Mining's earlier acquisitions. I suppose it IS economical in this age of the slimmed-down new normal. Heck, only two letters! Imagine the savings on stationary, business cards, and more importantly, signage.
 
But the coup d'grace goes to the insurance sector, where imagination and vision has always been in short supply. Where there were thirteen there are now four. Mitsui F&M and Sumitomo F&M, became yes Mitsui-Sumitomo, whereafter they joined with Aoi (itself the result of a merger between Dai-Tokyo & Chiyoda) and Nippon Life affiliate Nissay Dowa, to become, yes, you guessed it:  "MS & AD Holdings".  And since it is important not to rock the boat, "Nippon F&M who only a few years ago bedded Koa F&M, the progeny imaginatively known as "Nippon Koa", decided to merge with Yasuda ("Sompo" after gobbling minnows Taisei and Nissan F&M) to become none other than "NKSJ Holding".  

Financial Mother Goose

Hello all. It is a lazy Sunday. And so I thought I'd share some amusement between finishing a great read "My Father's Island" (which only took six years to get around to finally reading from Galapagos trip), and the springtime yard work which awaits...

HUGE DIDDLE DIDDLE
Huge diddle, diddle,
The CFO fiddles,
The 'counts to be released very soon;
The CEO laughed
To see the report,
Knowing his share price will be launched to the moon.


HA1 HA! QUANT MAN

"Ha! Ha! quant man,
Have you any tools"?
"Yes sir, yes sir,
Three disk fullz";
"One for my trading",
"One to entertain",
"...And one which will be the cause
Of my firm's financial pain."


I SAW A MAN A-TRADING

I saw a man a-trading,
Trading on the CME;
He thought he was so clever
When his winnings he could see !

He dreamed of comfits in his cabin,
And Red Ferrari's he might hold;
The clothes which would be made of silk,
And buckets filled of gold.

But short four lacks of silver
And a billion of the dollar
levered huge, Without a stop,
Felt like concrete upon his collar.

So the man-a-trading,
now empty was his sack;
Said to his investors,
"Just one more - I'll make it back!"


OLD WARREN BUFFET

Old Warren Buffett
Sat on his tuffet,
Eating the turds that others threw away;
Along came a prosecutor,
Querying bogus finite deals and ummm errrr,
Frightened Mr Buffet ran away.

[ed.: leaving Ferguson to the wolves...]

OLD KING COAL

Old King Coal
Was a very cheap fuel,
And a very cheap fuel was he;
He smoked from all pipes,
dug up from earth's bowels,
setting tons of CO2 free.
Each burner, he had a riddle,
And a very fine riddle had he;
"Is there nothing that's clean and as cheap??!?" ,
Oh, there's none so rare,
As can compare
With old King Coal and his cheapness thee!


A TREND IS....

A Trend is like an onion:
You taste it with delight;
But when it's gone you wonder,
Whatever made you bite


THIS LITTLE PIGGY

This little PIIGy was slammed by the market;
This little PIIGy sat tight at home;
This little PIIGy made some budget cuts;
And this little PIIGy made none;
But this little PIIGy cried, "ouch, ouch, ouch!
All the way to the IMF's home.


THE SEC DOESN'T PEEP

The SEC doesn't keep, the safety of peeps
in sight, in order to defend them;
They left their charges alone, so they could hone,
multitudinious ways to fleece 'em.

The SEC didn't peep, since they were asleep,
only dreaming of frauds committed;
But when they awoke, they found it not a joke,
For the customers were still being pilfered.

Then up they took, their little crook,
Determined for to find them;
They found them indeed, but it made their heart bleed,
For Goldman had deleted all their e-mails behind them.

Please feel free to contribute your own....

Awe and Wonderment (A Brief History of)

On October 19, 1987, I was driving home from work looking across the bleak industrial landscape beneath the Pulaski Skyway, with its flat-black stealth paint absorbing the last light of the day. Traffic moved normally, despite the momentous events of the day. No one was stopping to leap into the abyss below. I'd printed a Quotron sheet detailing the carnage for posterity. Jim Grant was being interviewed on NPR (rightwing rage-a-holics were as yet non-existent, and the Beeb unavailable on US mediumwave). I'd stopped by his office to see him only weeks before, admiring his the large taxidermified bear which was the centre-piece of the main room. He spoke with characteristic clarity, analyzing not the cause, but rather articulating upon the awe and wonderment that define markets. I hear his words in my head as if they were yesterday.

The failure of the UAL buyout but a few years later caused a similar albeit less-manic panic, but HAL's cables had been disconnected, and L.O.R. disgraced. It was mostly the risk-arbs and short-premium option market-makers who were skewered. Wondrous awe was perhaps the most apt description again in fall 1998 when the Yen moved fifteen big figures overnight as puked carry trades presumably pushed other short yen positions over the get-me-out precipice. "Shit happens", it must said. So "Leverage is poison!" became the watchword, (for a year or two). The tech-wreck was tame and in slow-motion by comparison. Reality bit slowly, and in any event, the bear market in most stocks began in 1998. The melt-up was the thing most noteworthy. The tail end in fall 2002 displayed some pyrotechnics, but these were at the individual stock level, and (perhaps rightfully) reflected the portfolio craters once Enron, WorldCom, and Adelphia (to name a few) once filled.

Despite various spikes, dips and swoons, it wasn't until the summer of 2007 that "awe and wonderment" were again applicable. Crowded trades, too much capital, too much leverage, and evolved (not necessarily for the better) market mechanisms conspired impale many naive and/or overconfident quants to impale upon the proverbial hot-poker - one that remain stubbornly lodged in its orifice causing the largest continue delevering and amplifying the cascade for quarters more until being overshadowed by Peak Credit its profound private deleveraging and transfer onto the public balance sheet. This need not recounting since the blogosphere was fully oiled suffice to say the authorities prevented further feedback-induced cascade selling of position to make position that would have led to even deeper systemic financial insolvency.

Again, last week, "awe and wonderment" were apt descriptors of the action (or lack of it) in the S&P and Euro-Yen cross. More than 10 handles on each in a seeming vacuum during but a precious-few minutes. Ouch!, indeed. Most leave school thinking markets (of major instruments) more or less infinitely broad and deep, with multitudes of participant types - each with different opinions, yielding liquidity functions that draw out size deepening bids or offers the more price moves, thereby dampening volatility. Except when it doesn't. When "shit happens" as it inevitably does. We live in a brave new world. A world where black is white and where white can be black at the flick of a switch (or the triggering of threshold panic response in an trading strategy or risk-management algorithm). Predatory sniffers intensify their efforts. Normal buyers are forced to puke and become sellers. Further stops are triggered. More systematic trend-following programs are triggered initiating new positions in the same direction. Normal liquidity providers suspend activities. It is the market equivalent of Alan Shepard's six-iron drive on the gravity-less moon, prices untethered by buyers and sellers knowledgeable of their transactions. And one watches with awe and wonderment, at the edifice which has evolved, quite certain that this is the shot across-the-bow exposing the inherent systemic instability of the machines, who are only as good their young masters.

Sovereign Shock and Awe

I have long argued that preemptive action - in the form of a good (read: conservative) policy mix - should be the preferred route of governments. The upside vs. downside of pursuing pedal-to-the-metal policy mixes is now being witnessed (in Anglo-Saxon land). The marginal upside (and its positive externalities), on a probability-adjusted basis never, in my opinion, outweighed the risks to systemic stability engendered in neglectful policy pandering to the present at the expense of the future. Europe too must accept its culpability, unable as it was to resist the Siren's call of me-too spend-now, worry-later goosing. But that was then, and this is now. Democracy in complex modernity (again, not solely in Anglo-Saxon land) has failed to deliver prudent management of the State's affairs (for different reasons). Libertarians may still argue markets were not free enough, but the reality of prolonged markets distortions by mercantilists that man-slaughtered bond market vigilantism, should have been enough to seek redress through tighter fiscal policy, tighter monetary policy (as implied by the Taylor rule), or both. Regulatory neglect, across financial centres, too played its part in the [hopefully] now-regretful feedback loop.

But pre-emptive action - the brave type witnessed in Germany's VAT rise several years ago - has been almost wholly absent for almost three decades. Since the days of Carter's malaise speech, and his subsequent electoral spanking, pulling "a Mondale", that is, even suggesting that taxes might need to rise to prudently satisfy the financing requirements of the State's expenditure has a been a political death-wish. The people have got what they asked for (more for less) year-in and year-out - and they should be both mindful and regretful in their culpability. A few developed countries have (politically) managed better, but this is likely a vestiges of collective memory or austere protestantism. I have recognized this, and thus argued, in particular, that the US will not, indeed cannot, fix the problem until the proverbial wagon has lost its wheels evidenced by an exemplary Team America Vomit-scene extraordinaire.

What should have been done has been evident to grown-ups (and some children) in the realms of fiscal, monetary, regulatory policy for the past decade-and-a-half. But again, that was then, and this is now. The present medicine is far more painful now, as any practitioner could forecast. And so despite knowing what is necessary, and the pain such obvious solutions will cause (no matter justly apportioned and implemented) discussions with a wise man yesterday raised an interesting question in regards to their acceptance and adoption by the polity. He posited that shock-therapy (not in the IMF sense), but in the sudden event occurance sense inherently is psychologically easier for humans to bear to bear than, how shall I call it, a prolonged gradual stoic voluntary austerity. The shock whether default, restructuring, etc. he argued, removes the oppositional barriers, and focuses peoples attention more clearly on the future and solutions, than on protection of parochial interests.

I have been somewhat idealistically prejudiced towards a northern-european rationalism, hence believed that neglect and financial demagoguery was more of a failure of political leadership and communication than of will. Regretfully, the political processes and media failures within our democracies coupled with general financial ignorance and the belief in The State Tooth Fairy cause me to relent, and seriously entertain the superiority of Shock-and-Awe as an motivator and aggregator or requisite political will, not just in the USA.

What Glitters Is...Sweet??!??

I met a chap while waiting in the queue to ascend the Grand Montets, after a particularly heavy snowfall. Unlike the ultra-gregarious Swedes, the loud but polite Brits, or the serious and contemplative back-country types with the Phat boards, shovel and extensible avalanche pole, he had his nose buried in Soros' latest book, as good as a conversation starter for an obsessive financial type as there is.

Starting with the [now seemingly forgotten] crisis, we talked of many things, before it turned to "Gold", which he volunteered, he thought was dumb. Not that he thought the vaulting price was stupid. He offered no opinion of that. But, he said, the war years were tough. Really tough. (He was not of Serbian descent, as it would happen). He'd seen his friends, he explained, do the smash-n-grab (not literally) thing following the disintegration of what was Yugoslavia, rolling up ill-gotten gains into (amongst other material objects) hoards of gold. Their hedge. Their so-called mad money, for which he said chided them at the time, though to little effect. But, he went on, when things got really dire, there was no market for it. There was no way under the circumstances to reasonably convert the hoards to what one really needed. As a result, the going rate was all over the map, but half-ounce or ounces were commonly traded for sugar and flour in ratios that would make the wealth-hedging gold-bug weep. I listened intently, though it was just an anecdote, but an interesting one nonetheless.

And so it is with some wonder that I notice that a great number of admirers of the most precious metal also seemingly (if I might take liberty with a generalization) are predisposed to believe that coincidental to the impending fiat money collapse will be a breakdown in the Rule of Law. Admittedly, gold may serve (or already have served) well as a tonic against large monetary dilution, incessant quantitative easing, continued unsterilized central bank consumption of newly-issued Treasury debt or merely fears of the aforementioned. But but do they think will happen when they really need it, like, trading those coins pure-gold coins (bling broach, or watch), for something tangible. If history is a guide, they will get sooooooo totally hosed. There is a non-sequitir in their belief structure that somehow a few guns, bit-a-ammo, stash-o-gold, a Kazcynski-cabin maybe some C-4 and a coupla' detonators, will keep them more-than-buoyant during ummm errr the re-ordering.

Viewed from this point, gold is a trade, for ruminating upon my Bosnian acquaintance's anecdote, there is a point - call it the "Oh Fuck moment" beyond which Gold is quite sub-optimal, and sugar, petrol, some vegetable seeds, a goat or two, an alembic, all make seeming better sense. Or, perhaps in the extreme, the best hedge in the event (if you believe in the event) of a breakdown in the rule of law, is to BE the baddest thug, and/or join/align yourself with the meanest thugs around, a paradoxical feedback loop that leads one down a disturbing rathole indeed.

But what is Jim Rogers thinking will happen when and if law and order breaks down? Does he expect to cross the border (on his motorcycle?) to the (recently nationalized) Swiss depository holding his metal, and expect it just to be handed over to him? "How would you like it, Monsieur - in the big shiny bars or the shiny petite pieces??" Will he put it in his sidecar? How will he get it home - to Singapore? He would presumably need a small and loyal army, which if well-organized might, themselves, think twice about prevailing errr ummm distribution of wealth. I say this somewhat tongue-in-cheek, but I am sure readers can conjure others.

The fear trade is obvious, but it's a fear trade. I have no answers. But I can spot a financial non-sequitir from a distance, and it deserves some exposition and further mental kneading.

CDA Biz to CDA Gov: Raise Taxes! (Wot?!???)

According to the Globe & Mail, Canadian business executives say it's time to raise taxes? What?? Surely this is some mistake. What could they possibly be thinking? Is there something wrong with the water? Don't they know this is pure unadulterated heresy? Don't they believe (like their southern neighbours certainly do) this is akin to declaring "war" on their class and the future of the nation? Don't they understand what higher taxes actually mean....and what they lead too? (Answer: bureaucracy, give-aways, free-lunches, Nancy Pelosi's, yada yada yada,  and more SOCIALISM, of course). The poll must be tainted. The Globe & Mail must be biased, run by Che Guevara fashionista Marxist-Lenninst sympathizers. And all this time, we've been looking at that long divide to the south, when, the REAL menace has been lurking to the north. It's clearly time Americans locked down their northern border or else we will soon be over-run with....ummm...... errrrr......prudence and, heaven forbid, common sense.

We Are All Zaitech Now

Repo 105 has come and gone in the media - a mere Tourette's tic-of-a-reaction. Lots of shock and indignation (in which, surprisingly, NY law firms came out looking good), along with calls for some good ol "hang 'em high" Fuld-targetted vigilanteism, but not the amount of introspection one might expect. Former bank analyst, John Hempton, now CIO at Sydney Bronte Capital made the very important point (in Repo 105's Antecedents: Ken Lewis) that Repo 105 was an old trick, commonly used by many firms to - without mincing words - brazenly deceive.  "Bed & Breakfast" trades are of course common in equity-land too, by hedge funds and banks, used to tart things up for prying eyes when out in public. John points the finger at Bank of America as an example (and what he believes is MUFJ on the other side) highlighting the difference between average assets over the quarter and end-of-quarter measures (witnessing the inverse at MUFJ). There are of course other explanations, but John's sleuthing makes sense, conjecture though it remains.  

The natural question implied by Repo 105 and by John's accusation, in the bigger picture is, "How endemic is this raping of the spirit of the law", not just in finance but across our society ? Wasn't Enron and Sarbox was supposed to usher in a new era?

I remember the scathing denunications and indignation coming from the USA in regards to the arguably laughable and ludicrous zaitech shenanigans in Japan, at its height during the early 90s. So pure and transparent was the US by comparison (so Japan's critics argued), that by comparison, one could have no confidence in the Japanese accounts. And after Yakult, Olympus, and admissions by other companies that the financial assets on their balance sheets were not real, the skeptics were proved right.  

But that was then.  And (despite Boesky and no shortage of similar dithering in the grey netherworlds) then), "What is Normal" now, in the USA (particularly in finance) has travelled a long long way, as a mere inventory across the timeline reveals (noting that these were systematic crimes - not idiosyncratic:

- Tainted & conflicted analysts passing off conjured fiction as "research"
- Largest mutual fund companies complicity in mutual-fund timing scandals that systematically defrauded longer-term investors for the benefit of the management company and short-term trader;
- Rampant, options back-dating by managements for self-gain, systematic balance sheet and income statement fabrication across a wide universe of securities whether channel-stuffing or any other manner of creative accounting;
- Systematic altering of pension-fund return assumptions to reduce required corporate contributions to pad EPS;
- Ludicrous, unbenchmarked and grossed-up executive comp schemes, structured by boards appointed by management themselves;
- Endemic abuse of SPVs and tax-havens for balance sheet distortion and tax avoidance;
- Bid-rigging by brokers (supposedly working for their clients) across the entire reinsurance industry with complicity by the reinsurers themselves;
- Acceptance and use by major companies of "finite-insurance" to directly smooth earnings, at best willfully deceitful, and at worst, completely fraudulent;
- The wholesale capture and corruption of the ratings agencies who were at the very center of financial money markets;

This is before one even talks about the abuse of securitisation-run-amok, and the shadow banking system. And I have undoubtedly left a few out. All these things were/are criminal in the spirit of the law, and most to the letter. It has gotten to the point where one must look very hard for the honest company with real down home values, I suppose like Berkshire Hathawy. Ahhh, yes, one points to Warren Buffett and that pillar of sobriety, Warren and Berkshire Hathway. Errr ummm, except that even the revered WB was front-and-center to the finite reinsurance game of providing earnings-smoothing "insurance" and earnings management to those in need. Anything to make a buck.

At least the Japanese bowed their heads in shame, and eventually fessed-up and took the painful medicine. Mr Buffett, as the example of the American solution by contrast, disavowed himself of all knowledge of these activities, for crimes which his loyal underling is now rotting in jail. With Repo-105, only the number of zeros have gotten larger, and the fact that they were caught red-handed. However, the pattern of behavoiur of what is normal, remains completely out of bounds to what prevailed, and what is required in modernity to enforce the rules of fairness and what remains of trust, else the entire system unravels towards lawless chaos, or an authoritarian nightmare arbitrarily awarding the spoils to the cadre of cronies. How have we fallen so far? How is it our society grants the rights and privileges seemingly without the responsibilities? These are the questions we should be asking ourselves when looking at Repo-105.... 

"Serving the Nation's Dreams..."

Did anyone else find irony in the [proposed] agreed acquisition of British National Lottery concessionaire, Camelot, by the Ontario Teachers Pension Fund? One wonders whether this presages the possibility that the hapless teachers will, in the future, find their benefits awarded as much by games of chance as by the investment acumen of their managers? "Serving the Nation's Dreams..." is Camelot's motto, though Teachers' beneficiaries will undoubtedly hope theirs are not left to similar spins of the wheel.

Leaving the tongue out of the cheek for moment, Teachers' are a clever lot. And there is much one might infer from such bids: that asset ownership of quality or monopoly concessions (call them utilities) are a better and safer bet than cash, bonds or government credit; that these assets have inherent properties that hedge (partially) against inflation since revenues (and hence margins) are nominally indexed; and that IF this given the safety profile, is a cash proxy, there are as few short-term yield-plays with asset-backed safety anywhere near those of such a deal. But as a quasi-government organisation, perhaps the most interesting and ironic inference (if the preceding is correct) is that is signifies a distrust and skepticism of government itself by government. Governments would be well-served to heed such growing sentiments of distrust, else they lose one of their most important assets: trust.

In Praise of Free Lunches

I enjoy skilled writing as much as I enjoy good debate. Former Ms. Equity Private, author of the occasional Finem Respice, and I believe more recently, ZeroHedge co-conspiratress, "Marla", provides both. In the past, I was flattered that she took yours truly to task over my lyrically-nostalgic view of the nobility inherent in Japanese paternalism, and the derision I heaped upon certain so-called activist carpertbaggers. Judged by the resulting comments, her reply was met with certain suspicion by readers.

Now it is my opportunity to return her favours. Consistent to her beliefs, Madam EP zealously champions the primacy of the market in general, and a view opposing The State's role in Health Insurance detailed in this very articulate though, I believe, ultimately misguided post, in which she draws comparisons between risk-bearing insurance, (whether marine or catastrophe), and healthcare. Subsequently she forecasts incipient doom to those who tread the interventionist path, which for her, is but an entree to indict all manner of so-called redistributive free-lunches, with the focus remaining pejoratively upon "socialized" medicine.

It is hard to disagree with the logical veneer of many of her points. For example, there is much merit in the thought that were one to...

"Kill risk pricing information, insurance is doomed."

While utterly true in capial-intensive lines, this has little to do with health insurance, which, from the health insurers perspective, (particularly where the risk pool is wide and deep), I will argue, is essentially a TPA (third-party administrator) function.

She oh-so-rightfully points out that

"Risk pricing is tricky at the best if times."

This is indeed true the sparser the event set, and the more remote on the tail the probability of loss. It's trickiness (along with bog-standard human greed, and shortsightedly constructed asymmetrical incentives) are some of the reasons why there are feast and famine underwriting cycles in many lines, with reinsurance being most exemplary. However, the deceptively simple truism ignores that the more perfect the information and the more diversified the risk pool, the more one approaches perfection in the pricing of risk. Admittedly, even with the best models and information, it is likely that it never will be possible to bulls-eye the odds on a satellite spontaneously combusting during launch, or a Tokyo Quake laying waste to the night-owl haunts of Roponggi. But healthcare IS decidedly different. So-called underwriting losses ARE highly predictable across the population, as are both sides of the income statement (particularly where there is a single-payor with intimate knowledge of the cost-side of the equation). And unlike Lloyds or other Catastrophe Insurance examples, the implied leverage in Healthcare across the population is extremely low. Insuring Florida or GOM Wind, or California Quake and other peak risks are the opposite on all accounts, which is why (in these lines) capital is almost always insufficient relative to the potential required cover, and one of the reasons why peak-risk reinsurance prices, are elevated. Her lack of appreciation of these differences is revealed as she attempts t0 apply her classical definition of insurance.

the presence of some probability of loss (risk) and the ability to transfer it (typically for a fee or premium) to an entity or entities with capital (one hopes) across which it can then be diversified.

It is not picking nits to suggest (even yielding at least some uncertainty) that capital requirements for the optimal diversifying entity across the risk-pool are miniscule in comparison to that required to make good on a tempest-tortured or pillaged fully-laden East India Co. vesse,l Northridge Quake, or a Cat5 named "Cassie" ploughing through Miami.

Mlle. EP rightly (no pun intended) continues that

Healthcare isn't and never was a "right"

a sentiment which I violently agree with (at least, to-date, in the USA), and so point out, by extension, that "cheap" healthcare therefore cannot be a right. Indeed Healthcare is no more a right than Liberty or the sanctity of owning property which become rights when men (sorry girls, but it was men) declared it thus. I would argue that hierarchical domination is the natural order within human and similar branches of the animal kingdom, and that individual "rights" ascended only through the organization of society and the extension of laws to guarantee present cornerstones such as freedom and property rights. Healthcare follows in this vein of argument. Liberty, (and in other nations) universal health insurance covereage and public finance of basic insurance for those unable to pony-up, are not naturally-conferred, but societal constructs not as a result of their ordination by a deity-of-choice, but because they yield meaningfully large positive externalities far in excess of their costs.

She continues with yet another correct observation that

"Mandating myopic risk pricing for political reasons is nothing more than a rank subsidy."

which is undoubtedly correct when she indicts subsidized prop-cat insurance that encourages the brazen to construct houses on known flood plains, or exposed coastal areas prone to extreme disasters, privatizing the gains and socializing the losses through the insurance subsidy. Though such political intervention in the prop-cat markets are certain vote-winners where interest-intensity is elevated, this is not the primary driver in regards to health insurance, where the intent is precisely the opposite. The public policy objective (given the very low underwriting risk) is NOT to legislate subsidy, but to finally price the so-called risk at its true actuarial cost, and extend the savings to insured AND as importantly, to the taxpayers who are currently insuring parts of the market due to market failure, information asymmetries and the like. There is nothing myopic about the desire to know the price across the population. Armed with the true costs of basic coverage, a relatively simple actuarial exercise for a single-payor even before tackling the systemic inconsistencies and conflicts (e.g. doctors owning hospitals, etc.), one can then discuss the quite separate public finance issue of how to extend insurance to those presently unable to afford it. This is not to say that one could not conjure an image of a hideously comprehensive and unaffordable system that makes little sense either in terms of systemic incentives or finance, but this is NOT what currently exists in France, Germany, Netherlands, Belgium or Canada, nor what should be considered for implementation in the US.

Miss EP then capitulates, stating the obvious that

Habitual reimbursement for regular, recurring costs is not insurance, people.

Indeed, not for a PE professional customer's viewpoint perhaps, but for the meaningfully large percentage of Americans who live paycheck-to-paycheck, it is. Her point was my point: health insurance is essentially a TPA function. Premiums in, claims out. play the float (when there is one), carve-up and cherry-pick the risk-pool and capture the fat tail. But this very fragmentation does precisely what Libertarians purport to detest: privatize the gains and socialize the losses.

Then Miss EP gets contentious. She asserts:

"...it actually takes very little wattage to understand that discrimination is the very purpose of insurance. In fact, insurers employ legions of experts toiling away to practice the most base sort of discrimination every day. They are called "underwriters."

Not to be pedantic, but actually, the ones toiling away and finding the anomalies are called "actuaries". The underwriters are the ones with the gift of gab, who cut class at uni (if they went to one), buy the drinks, and pay for the less-than-salubrious forms of entertainment on behalf of their clients. (Apologies in advance to my friends who are underwriters, if you think this an exaggeration). Yet, while discrimination is indeed the route to profitable underwriting, it doesn't follow that it is the route to better risk-pricing. It certainly yields a more profitable spread in regards to return upon capital deployed, but doesn't deterministically push prices towards actuarial value. Good discrimination is essentially predatory zero-sum behaviour - an exercise in torturing the data until it yields a profitable anomaly, one where the underwriter (thanks to his clever actuary) captures the lion's share, leaving the underwritten, begrudgingly, the crumbs. It also strikes at the heart of what makes Health Insurance patently different from other insurance markets mentioned which is that Health Insurance is a necessary exercise in Generational Smoothing. Tempests afflicting laden triple-masters, or natural disasters do not care in the least about the age profile of who is insured. But maladies of senescence do. Health insurance, therefore, is necessarily an exercise in everyone who can paying a percentage of the entire risk pool for the duration of the life-cycle, to prevent privatisation of the profits and socialisation of the costs, which is to the detriment of BOTH insured and the taxpaying "underwriters" of last resort. It is not merely fair, but it is seemingly the only way to assure that finance-able insurance is, in fact, finance-able, regardless of age, or existing conditions, precisely because one cannot know who, what, when or if one will be afflicted, and/or what side of the tracks one will be inhabitating when and if "it" happens. This, it seems to me, captures the more pertinent characteristics of insurance more relevant to healthcare, the insured, and it's associated social utility. To place underwriting profit in front of such practical utility is a rather bizarre approach to the problem--solving of quite real-world problems that the real world (in America, at least) has proven itself incapable of solving.

Universal health insurance has many positive externalities reasonably outweighing any unlikely negative errors stemming from the accuracy of the risk-pricing component itself. Enhanced family stability and reduced anxiety, increased corporate managerial focus as our enterprises are relieved of managing (though not necessarily contributing towards the finance of) legacy, current, future and burdens; improved health and productivity; freed-up emergency-rooms in hospitals; lower absenteeism; diminished costs resulting from earlier intervention; increased labour-force flexibility making part-time employment a viable alternative for many; a large percentage savings of GDP that can be usefully channelled into economically virtuous free-market things like venture capital and attendant enterprise creation, rather than funding Richard Scrushy-like vintage car collections for future healthcare contrapreneur wanna-be's gaming a broken system. It has the ability to create a consistent and honest accounting of costs, allowing the the forthright discussion of choices at hand, be it rationing of services or the trade-offs between the nature of the basic insurance coverage provided, and that which can be afforded. These are powerful and compelling reasons to NOT fragment the risk pool.

Miss E.P. is of course right to viscerally feel as she does about about discrimination, and the perceived unfairness of presently healthy people footing the bill for the unlucky, unwise, or just plain self-destructive. But these protestations are bogus. For in the real world of real insurance, life is far from fair as much by design as by chance. A Cat-5 rolling across Florida, or a well-placed 7.5 California quake will result in higher insurance prices everywhere, in primary and reinsurance prices alike. The cost of insurance IS at the least, the cost of insuring on an aggregate basis. Only happenstance and serendipity separate winners from losers in this game. Healthcare insurance by contrast, benefits from low implied leverage, low volatility of losses, a reasonably short-tail, and de-minimus capital costs which on a practical basis diminish contrary protests due to solvency or fears of implicit or explicit guarantee. Importantly, there are many knobs to turn in order to attenuate the potential mismatch between side of the income statement: premium levels, co-pays, benefits, usual and customaries, are all within the arsenal, and all can be turned at a moment's notice where the public interest is concerned. There are indeed fault-lines over whether the a 45 year old should be granted the right to fertility treatment, whether the requirement for Viagra is merely "a shame" or a legitimately reimbursable expense. Wiser folks than I have agreeably determined this in the systems of our peers, and so I am certain that we, too, if pushed would be able to appropriately decide as well.

Yet, Miss EP doesn't stop there. She makes a further great big leap from gubmint disintermediation in the health insurance market (consolidation is perhaps a more accurate term) to a Glenn Beck-like conspiracy that healthcare reform is merely a guise for politicians to gift out $20,000 per family- in a paranoid belief that the primary purpose of a national health-insurance scheme is a stealth wealth grant to the masses clamouring to suckle the teat of the government milchcow. She has, by the end of her missive, seemingly missed the obvious virtue in simple risk-sharing, and the necessity of bringing some order and rationality to costs, in lieu of a mantra that resembles "...don't get sick...don't get sick, AND don't get old.."

If a well-functioning, reasonably cost-effective system of national health insurance was merely a utopian dream, or if the current American system was viable in any way other than providing prima-donna services to the top veneer of the income scree, I could empathize with the skepticism of Miss EP. But it's not. The chaotic American model of healthcare and its finance is irredeemably broken. There are many examples of meaningfully better-functioning systems providing universal coverage with excellent care and outcomes, while spending far less - well-organizaed systems in between the UK's 9% of GDP achieved with near-draconian rationing, and the 18%-plus of GDP consumed in the US while still leaving a meaningfully large percentage without coverage. The existence of such tangible realities amongst our peers, all with levels of intervention between these extremes, provide a well-worn path for us to follow, and reap the subsequent benefits if we choose to suspend the misconceived belief that social insurance is a "free lunch" replete with only negative externalities, abuse and fraud that will ultimately lead to an America ruled by a Politburo headed Fidel Castro, Jr.

The containment of systemically unaffordable, unsustainable privilege (as we have seen in Greece or Detroit) is always met with with righteous indignation, whether they are unions (the whipping boys of the right), bankers (the whipping boys of the left), or service providers who (in the case of healthcare feel it appropriate to discriminate pricing in ways that humiliate the uninformed (and even the informed) with seeming randomly-generated prices that bear little relation to the cost of services provided.

To be certain, cost-cutting can be painful. And one can conjure some possible negative externalities. But do not be frightened by threats conjured by medical, medical device, and pharmaceutical lobbies, as societally we attempt (finally!!!) to share market information amongst ourselves in order to drive health spending from >18% of GDP to some OECD median. France, with its single-payor has no shortage of doctors or nurses. No shortage of quality pharmaceuticals available to all at dramatically lower prices than in the USA. No shortage of pharmaceutical or biotech innovation. No paucity of stents, surgical bypasses, nor cancer treatment centers. And no shortage of sensibility when it comes to non-partisan pragmatic design, and implementation of public health policy. Obviously, mistakes have been, and continue to be made. But they are, generally-speaking, corrected in a forward-thinking, iterative process. And the fact remains they spend 4 to 5% of GDP LESS than the US (combined public and private expenditure) and achieve universal coverage with better overall outcomes, at least as measured by independent healthcare advocacy groups.

How much longer, and what calamity will it take for genuine non-partisan pragmatic reflection from all sides to meditate upon others success (and failure) then emulate and implement accordingly?

Matsuya - An SFP Pre and Post-Mortem

Once in a while, whether by happenstance or serendippity, one does hit the proverbial bulls-eye. A few readers were kind enough to pay a compliments to yours truly over posts related to SFP Value Realization Fund and their Russian Roulette fun-and-games with one of my long-favored shorts, Matsuya Co Ltd (8237) published in late 2007 under the title Matsuya (8237) - Good Luck - (You'll Need it....!!), which painted a scenario eerily close to that which came to pass. I reprint it here by request...

Matsuya (8237) - Good Luck ! ( You'll Need It....)

Symphony Financial Partners 'SFP Value Realization Fund, is a buyer of what, to a growth or GARP-investor is micro-cap and nano-cap detritus. It does so in large, concentrated and, once-acquired, unmarketable sizes. This comes with the attendant benefit of creating what (I have termed as) "market-impact options" where once a position is acquired, the manager can typically use their persistent and concentrated buying-power that results from unused leverage, self-generated market-to-market profits, topped-up with cash from additional subscriptions to their Fund, to goose the prevailing stock-prices of companies in which The Fund already has large positions. Fortunately (mostly for SFP management) investors have been none-too-inquisitive about such practices, so long as they've been able to report P's rather than L's when crunch-time (at quarter-end) arrives.

Their biggest (reported) commitment to-date has been the lamest and least-profitable of remaining department stores, Matsuya Co. Ltd. (TSE Code# 8237), which seemingly has absorbed perhaps a fifth to a quarter of the fund's gross long assets. The rationale for said position is a belief (which I have no reason to doubt) that their flagship Ginza store is worth far more as a veritable hole-in-the-ground, than it is as a time-honored Tokyo shopping and dining destination. Optimistic rumor has it that the block-long site-alone is worth upwards of USD$1.5billion, set against a current market cap of $1.1 bn.

Now I will admit to being a sucker for such "hidden asset stories", particularly in under-covered small and mid-cap names. And I am not alone for there is a (or used to be) an entire slew of funds focused on the so-called hidden asset game in Japan. So much for efficient markets, I guess. But given that some of these funds have been in existence for a decade and half, with fees far outstripping any investment return, it might be wise to ask the question: Is it a reasonable expectation for a carpetbagging gaijin portfolio investor to be successful in pressuring a time-honored Japanaese company to restructure or otherwise disassemble itself for the short-term parochial profit of foreign cage-rattlers?

Many - mostly those accruing management fees from their investors on Saturdays & Sundays - take an optimistic view as one might expect them to. They see positive change, management that is more sympathetic to "creating shareholder value" (the vernacular for asset stripping), despite the sh*t-kicking that activists have received on TOC (8841), Bulldog (2804), J-Power (9513), Fuji TV (4676), amongst other forays.

What IS true, once one dispenses with the hyperbole, is that some good companies continue to evolve into even better companies, but I, personally, harbour large doubts as to the overlap between these enterprises, and the low-hanging rotten no-growth fruit targeted by Steele, SFP, and other seekers of embedded-value-on-the-cheap.

I do not pretend to know the inner workings of Matsuya. So obscure is it - despite its billion$$+ mcap - no one has written a research report on it in a decade. But it appears to be a time-honored way of life for the minority family owners and its extended constituencies, rather than a business that appears to be voluntarily willing to commit ritual suicide and so shutter itself in favour of yet another, large-scale glass & steel real-estate development by Mori Trust or similar. The time-honored web of corporate and personal obligation extends deep and far, but this is not visible to those who see it as US$1.5bn parcel of land.

It is currently held by a cross-section of TeamJapan, that for all intent owns it for legacy reasons, but is still NOT likely to sell Matsuya Co. Ltd. to the foreign devils, else the same thing kharmically boomerangs upon them in the future. And even if someone pays full-market value for the site, there are the legacy pension costs, outstanding short-term and long-term debts to settle, inventories to write down, and redundancy costs for full-shuttering, thereby decrementing net proceeds to common shareholders by a large dollup. But SFP must surely have taken this into consideration. Right? Their investors should hope so.

In the meantime, aside from the paltry shares being repurchased by the company itself, SFP is the only buyer, and their stake - painfully acquired at ever-higher prices - is unimaginably large relative to what might be realizable in the market were something errr ummm unforeseen to happen, such as, for example, their largest investor were to redeem their interest in SFP Value Realization Fund in order to allocate, for example, to the Enhanced-Leverage Super-Senior Mortgage Salvation and Redemption Turnaround Fund (Euro-Class). Any estimate is, of course, a whimsical exercise, but my guess is that they would be very lucky to realize an average sale price of YEN1000/shr (or 50yen on the 100) in the market were they to become a distressed seller, under current market conditions.

I could of course, be wrong. SFP might have a trade-buyer in hand, one keen to acquire the site, and ready to "pay-up" for any and all shares, at a "fair price" far-above my estimate. But, investors would be wise to pay attention to the interim risk here, which is that there appears to be a large fat-tailed accident waiting to happen, as the race between the patience of SFPs investors, and the success or failure of their very large punt comes to an end. Personally, I would wager that SFP's investors lose patience before Matsuya's management gives up the proverbial ghost. Anyone with the bull-side of this story, please do divulge the particulars...
Posted by "Cassandra" at 11:24 AM

I followed this up in the fall of 2009 with a sort-of Post Mortem entitled "Every Day Has It's Dog", and is worth a read too, though it held little interest to most given the prevailing Bailout Rage and mass-finger-pointing at the time.

Farewell Hummer

Farewell then
Hummer,
BLING
wheels of choice
to arschloecher the
world over.

You
aspired to be
a monster-truck,
which you achieved
through
monstrous symbolism.

You began
life as
a large "Willys
with four-wheel drive",

But you ended the
the same as other
AMC flops...
the Ambassador
the Pacer,
the Matador (5.9 litres!!!),
the Spirit and, of course,
the Gremlin.

Yankee Triumphalism Returns

It wasn't but a few months ago the American Financial Press and critical observers (led by the seeming financial tabloid, the WSJ) were quiet as dormice given the great unraveling in the economy, markets and hubris. But with the double- top in the Euro spawned by Greece, and a [brief] interlude of global de-risking in fear of a double-dip, helped along nicely by a veritable gang-bang of the Euro by group-think Macro investors pulling along their trend-following henchman, American triumphalism spewing forth from the press and observers is back with a vengeance, and not without some schaudenfraude.

I am not here to defend Greece, Italy or Spain, their shameful financial engineering, or the practical difficulties of implementing a single currency atop imperfect political integration. Nor am I here to attempt to extol the albeit painful benefits of internal adjustment vs. devaluation, which while not ideal have proven possible. But it seems to me American commentators are in a rather weak position to be triumphantly trumpeting what are essentially political logjams on the periphery of the Eurozone, when the very centre of the American system can agree on absolutely nothing, before ignoring the rampant left-coast denial that makes Greeks feel as if they've done nothing wrong. And it must be pointed out that the Europeans (ex-anglo-saxons) are prodigious savers and can reasonably self-fund their apparent profligacy, unlike the fiscal folly of their new world relations. As such they retain more independence remaining less-beholden to Asian benefactors.

But at least the Europeans are attempting to pragmatically deal with some of their issues: Latvian and Irish internal adjustments, while painful, are moving things in the correct direction; UK tax rises are a precursor to more painful cuts to come - both at the national and local authority levels; retirement ages are being raised (and not just in Greece!). Benefits and spending will almost certainly endure a manicure, if not a larger crop. Yet, in Washington (and New York) demagogues and financial free-riders lobby to retain the status quo, preventing change, thereby forestalling adjustment. And as has become a culturally-defining trait, it seems as if the entire polity awaits the excrement-hitting-the-fan moment before setting aside their petty partisan squabbles and beginning to tackle fiscal insanity, the prevailing inexorable inequitable healthcare vortex, and pitifully-low carbon taxes that prevents more rapid progress towards greater efficiency. "Pre-emptive Action" might as well in sanskrit, it is so foreign. All the while the WSJ ever-more resembles Radio Pyongyang its anti-european rhetorical anathema devaluing the more valid non-sequitirs requiring attention..

Americans can learn many lessons from the world if only they disarm themselves of their sense of triumphal superiority. Austerity, non-partisan pragmatism, issue-confrontation and political compromise are but a few if they cease misplaced victorious chortling and open their collective eyes.

The Snookerer and The Snookered

Traffic court where I used live was a real hoot. Everyone guilty of speeding, careless driving, driving without a license or insurance, illegal turns, (or yet worse) was hauled before the magistrate where he or she was presented with the opportunity to plead guilty or contest the charges. Fines were arbitrary, and there was a higly amusing in-between plea of "guilty with an explanation" - one that the accused plying this route hoped would tend the magistrate towards leniency, or more miraculously, dismiss the case altogether. It was a double-edged sword, however, for if one frivolously delayed the natural course of justice, said magistrate would use the arbitrariness of the fines to make the punishment yet more painful. Yours truly had the dubious pleasure of making several appearances, most of which remain vividly in my memory. One of the funniest witnessed was a guy accused of doing 57 in a 35 zone. Magistrate: "How do you plead". Accused: "Errrr...guilty with an explanation, your honor sir". (Magistrate, in robes, sighs, rolls his eyes and awaits the excuse): "Get on with it then.." Accused: "Well errrr ya see I was going down the road to work, and errrr errrr errrr the cops, they's wuz hiding in the bushes down there errrr ummm by the school, so, errrrr like, I couldn't see 'em..." A big grin breaks upon the magistrates face as he slams his open hand down upon the bench. "That's PRECISELY the point, my friend" said the judge before proclaiming: "That's a 250 fine to be paid by Friday or thirty days inside.. next....". Priceless indeed!

And so I read that the hedge funds are suing Porsche (Elliott Associates LP et al v Porsche Automobil Holding SE, case No. 10-0532) in U.S. District Court for the Southern District of New York for their financial ambush of the best and brightest. It seems EVERYONE had the trade on (judging by returns), though NOT everyone is suing. The premise of the case, in the simplest of terms, seems to be that they never would have put on the trade if they'd known either (a) the true extent of Porsche's positions, or, (b) Porsche's intent with respect to VW, and that Porsche was obliged to tip its hand on both accounts. Yet in the filing, they derisorily say everyone knew Porsche was lying - for years - even VW. Ummm, errrr everyone, it seems, except for the professional hedge fund investors. They also accuse Porsche of manipulation because they used multiple counterparties. I would call this smart, given the demise of Bear & Lehman, and prudent even if they had remained in the realm of the living.

Aside from being sore at getting snookered, when funds such as Singer's Elliott in particular are accustomed to doing the fine-print snookering, (most notably in LDC debt), one must wonder why they are pursuing this. It seems obvious Porsche has crossed their t's and dotted their i's. While in some countries, such a case would have obvious merit, in Germany, they appear to have been on-side of the rules as one does not have to disclose one's position in cash-settled options. Moreover, it appears BaFin was informed by the company of actual position accumulations. So it is surprising that Mr Singer, a lawyer by profession, who plays "Gotcha!" for a living (and plays it well), cannot graciously accept that he lost this one and move on. In polite circles this is called being a "sore loser".

Perhaps they are angling for some quick cash - which they believe Porsche might may to avoid management distraction and bad press. Perhaps (more remotely) Mr Singer still has a Gotcha! in his pocket, though this does not seem like a sympathetic atmosphere for an aggressive hedge fund to win the sympathies of a an American jury, even if it went to trial. But egos are unpredictable evidenced by SRMs Jon Wood still chomping on the Northern Rock bit, and big egos, one's accustomed to winning don't like admitting failure where failure was ultimately the result of their own culpability for not heeding the "fuck-you factor" of a determined shareholder, and a restricted float, in a foreign country amidst a way-overcrowded trade. Yes, as I've painfully experienced in traffic court, I feel aggrieved when the speed trap is set on an open road, at the bottom of a hill, with the a tailwind helping the vehicle, but in actual fact I've little recourse. So I eat it. For it is highly doubtful that the nuances of Porsche's intention would have altered the Funds opinion that Porsche could/would never bid with such elevated values so it was easy money, and their civic course of action should be to voice strongly their [apparent[] opinion that market rules and regulations should be tightened in the future - an odd position indeed for such a prominent Libertarian as Mr Singer.