The Other Kind of [Inflation]

Grade inflation has been a growing problem through the Anglo-Saxon world for decades now. From the ridiculous "Everyone is a Winner" meme, to the intense distaste for grading on a curve it has become easier-than-ever for EVERYONE to do better [or at least appear to do so]. Perfection, it would seem, has become more ubiquitous, something to be cheered were it not for the total utter bullshit of the supposition. This is perhaps related to the divergence between a society's perception of reality, and that which resembles objective reality (at least that which can best be triangulated through the intersecting vectors of others experience and tangible comps). Even France has suffered from a lowering of the bar, where historically the perfect 20/20 was virtually unobtainable as an example of the belief that no one is perfect - least of all a novice. 'Tis a shame from my curmudgeonly chair.

"Free-ranging, massaged spring-veal milk-fed from the udders of organic mountain-raised cows, triple-lacquered in a traditional slow-cooked three-nation-three-fortified wine reduction emollient, served on a bed of  a trio of hand-picked high-altitude wild mushrooms scoured from pastures and surrounding woodland of the Haylesdaleford organic farm paired with a duet of Egyptian-garlic-braised Spinach from the Franciscan Monk's Abbey's Farm grown between 700 and 900m in altitude for the perfect tenderness, and hand-crushed Blue-potato mash...."  Errrrrr ......yum???!?? No, rather the opposite - as the embellishment upon more honest "Veal & Potatoes - let the prep speak for itself" nearly makes me vomit.

There has been, needless to say, inflation in humanity's waistlines, which is plain for all to see, perhaps related to inflation in portion sizes as well as calorific value. And there has been a grand inflation in expectations - not the traditional form that refers to future price expectations, but rather expectations of what the life will and should offer, and more importantly, in what they deserve.  This is not universal, though I put to you it is more prevalent in the Anglo-Saxon countries, where the divorce between expected effort and expected reward has inflated the most. Of course, no one can fail to have witnessed the rather frightening inflation in bullshit itself, evidenced chiefly by the rhetorical vacancy of the populist American Right and the "news" and information service pandering to its customers, though it must be said that they have no monopoly given the left's increasing drift from reality-based tethers such as confronting the ability to finance their initiatives without doing an electoral "Mondale". One could see this - across the tax-paying electorate as inflating selfishness - now in its third decade.   

The financial world is not immune, and in many respects, is the champion of inflating hyperbole. From Fund complexes stroking the virtue of their single top-quartile fund with a short history in a stable nexto to thirty-losers, to the near-universal confusion of beta for alpha, inflation is prevalent. Perhaps most notably has been the inflation in the boundaries of what grey-areas are SOP, be they front-running, cynically-bent research, or what BS is required to move the financial merchandise du jour out the door.   My own pet peeve, the one that makes my eyes roll in their sockets is the inane claim of the budding partnership of still-green MBAs in Get-Rich-Mode reaching for respectability by claiming "100 more than years of combined experience...." or whatever number in whatever permutation of ridiculousness. In any form, be it the Tear-Sheet of an emerging fund manager trying to raise money, or the bio of the management team of any start-up, this singularly bogus over-reaching phrase transmutes a potentially slick and informative presentation document into scrap-paper for utilitarian shopping lists, children's colourful doodles or electronic trash-basket-filler.   

So while markets remain on inflation watch, we, as citizens, should be more vigilant in fighting tooth-and-nail against the arguably more pernicious and endemic [other] inflation...

Limey Beans

The English are moaning about how expensive things are. They don't know the half of it. A small Bag of Starbuck's Italian Roast Beans at my local (ground at 4-1/2 for my lovely, well-machined stainless Alessi stove-top expresso device) in Switzerland sets one back CHF8.50 (more than USD$10 for American readers). Same bag (though sometimes I go for the even-darker Sumatra or French-Roast) in "high-priced" London is GBP3.70 (more or less USD $6.00. ). For the operationally challenged (who shouldn't have a CMC or ForexPro account nor be trading currencies in any event), this is a 66% premium for the Helvetian-sourced variety of Starbucks finest, deliciously-oily beans.

The Baristas in London, I can tell you, seem only to keen to ground the purchased beans, and it is also unlikely that Starbucks is magnanimously selling their bags at a loss there (though I read this week their >600 outlets are just breaking even). Yes, there are VAT differences, and labour-market differentials, but my bag'o'beans from Geneva was more or less the same price three years ago (as are the Limey Beans). Prices, evidently, are indeed sticky downwards, and profit margins evidently variable at the other end of the spectrum.

Firmly ensconced at the small end of the vanity spectrum, sporting an ancient anorak, failing footwear, tattered trousers, and a seriously-old-and-simple early-generation Swatch, I must confess to having  modest needs when it comes to trimming my locks - not because I resemble James Carville, but primarily - because I just do not care. A quick run through with a Number-3 razor and I'll be out the door five minutes later - perhaps ten minutes with a shampoo and a straight-blade scrape. The median in London (from my non-scientific experience) is GBP17.50 (USD$28) though the truly brave can do better at the risk of emerging a butchered Mohican.  Median men's price to be quickly coiffed in Geneva is CHF50 (USD$60). When in the dollar-zone, I used to pay $10, though admittedly I had to endure the incessant complaints and xenophobic right-wing politics that was part-and-parcel of the service.

There are no shortage of decent Pizzerias in London replete with iconic red-chequered table-cloths, wood-burning ovens and genuinely-accented servers. The median price for a reasonable fresh-cooked bubbling edible disc is somewhere in the GBP7.50 (USD12-) though this can rise to USD15 depending upon the venue and extras.  Our favourite (and we are not alone as it can be annoyingly busy and raucous) Geneva-based pizza fabricator, Luigia, will spin and prep his freshly-made offerings for CHF16.50 (nearly USD$20) with a topping or two taking you to CHF22 (USD26). Two glasses of Nero d'Avola (USD13ea) , a shared generous plate of Calamari (USD35!!!!), and departs significantly poorer than one entered. I would pity the Swiss, except most of the patrons are NOT local Helvetians. For they, I can tell you, are all in France shopping.

One could reasonably argue these examples have been cherry-picked. And they might be right. But they are the most obvious every-day manifestations of The Wrong Price I see in my weekly travels. One could of course, go on: UK airport sandwich $5; Swiss airport sandwich $9; Swiss modern italian chaise USD1,500, indentical in UK USD800. And so on. Switzerland is - in its entirety - the The Wrong Price. And not by a little. Perhaps sterling is cheap. Perhaps the dollar is VERY cheap. Yet Americans seem more than willing to supply both labour and goods as well as services at what seem like - on a relative basis - to be absurdly cheap prices and rates. And for the most part, this does not look set to change dramatically, not on the scale discrepancies. Granted taxes, energy and social costs are much diminished, but this is not so in the UK. It seems to be purely a matter of the Wrong Price, driven by financial flows, with the real economy apparently ignorant of these flows - excepting those who live on borders.

I am not saying the specs seeking a turn, the fearful who are paranoid, sovereign accumulators who are unspoiled for alternative choice-of-stores, nor the unsavoury who are delivering bucket-fulls as a patrimony for posterity into hopefully-safe-and-untouchable coffers are wrong to be doing WHAT they are doing. It is however worth scrutinizing whether WHAT they are doing, is being done at a decidedly WRONG price....

A Quarter of a Century Later....

In general, I admire the french civil service. Not everything. Not all the time. But both relatively and absolutely, their performance should give anti-Statists pause for thought about their position (not that such dogmatists will ever do so). Sometimes, however, they do fuck-up. Sometimes quite badly. Such as, for example, twenty-five years ago in New Zealand (youngsters see inset photo to the left).. Ummm errrrrr great plan guys!! A Franco Bay-of-Pigs of sorts.

Time travel back to the present, a quarter-of -a-century later, and after reading today's lead story, one must wonder whether Agents Prieur and Mafart have been seconded back into service - this time on an even more ignoble plan to sink (no pun intended) the political fortunes of DSK, presently polling several percentage points ahead of Mssr Sarkozy, even after the announcement of the soon-to-emerge mini-Bruni. Ouch! Decisive action appears to have been called for. Some shit that, once thrown, will stick stick stick.

I am not saying he doesn't have a dark side. You don't really know someone until they come an live with you (and even then there is still.....ummm errrr stuff that....). I am not saying he didn't do it. Heck almost everyone has something that might not withstand public scrutiny and microscopic examination. But this one just seems implausible. In all my years, and too numerous hotel stays, I've never been cornered in my hotel room by the J-Lo hot chambermaid (and, then, in the micro instant of having emerged clothes-less from shower, schocked by the instrusion, thought: Wow she's hot! Followed by "Hey babe wanna fuck??!? No? Really, no? Well then I'll just have to force you...." Oh, yea, and we gonna be quick, 'cause I got ze plane to catch". Perhaps that is because that lot are all swarming by the suites upstairs looking for the bigger fish (like DSK?),  rather than the plebeian closets where I hole up. But c'mon. In the run-up to an imminent election? When you are the the front-runner? And about to depart for an important meeting with Chancellor Merkel about some trifling matter about the future of the periphery of Europe? (Frau M can wait.....right?!??).  Forcible detainment?? After having been busted and having apologized for shagging a (rather willing, it would seem) colleague??  It just smacks of a set-up. A rather dirty, dirty-trick, that needn't be true, but merely cause some fence-sitters to come to the conclusion that the devil you know may just be marginally better than an accused rapist.

Any thoughts on this one guys & girls........??!?

'Tis a Shame There Is No More Shame

So the Home Team managed to salvage a categorical victory after the embarassing whitewashing to Michael Lauer's defense team. Bravo, chaps! Well done! Hopefully this might be the start of some more serious flogging of the at least some of the more notorious contrapreneurs and cheaters of this past decade.

It was sad (for the criminal justice system) that Lancer's Lauer slipped away. However, I cannot decide which of the black hats' perpetrations were more offensive. Lauer blatantly and cynically stole from those who had relied upon him as a fiduciary for his own parochial gain. He seemingly did this in a most premeditated and calculated manner such that there was (to the cognoscenti) no doubt about his intentions. This is willful fraud and deceit and should be dealt with harshly since failure to do so condones the behaviour and spawns others to pursue such malfeasance.

Raj, in his defense, didn't commit fraud, nor violate the trust placed in him as a fiduciary, unless potential disgorgement of profits is on the list, though it is probable that (like SAC) many investors knew he was stretching the proverbial envelope. Rather, he stole from the faceless market, though it must said, there were indeed willing others on the other side of his trades. The thing is, they were willing participants at the price, and, it is likely, would have transacted anyway with a counterparty. I was about to add "fair or foul", to that last sentence, however, it is almost certain they would NOT have transacted given the material non-public information teased from umm ...errrr.... it seems nearly everyone from every profession. But that is the risk to every trader's trade: someone knows more than you; someone can forcast better you, someone like Wayne Gretzky sees the play unfold better than you, seemingly in slow-motion while it  passes lesser mortals by until its too late. But Raj Rajaratnum is no Wayne Gretzky. He is a cheat, that knew the rules, but decided to clearly and cynically break the rules for parochial monetary gain and it would seem to feed his ego. By extension, it was also Fraud, since the many investors who did NOT know he was cheating were fraudulently deceived. They thought they were buying the services of a thorough researcher - NOT a cheating scumbag, who parlayed his position into a circle-jerk of favors to big fish and minnows alike. Like Madoff, the Fraud allowed him to create a larger fraud and leverage little cheats and deceptions into something systematically large, to the point where (like the reinsurance price-fixing scandal, or like Lichtenstein's Steel Partners ramping of in-portfolio shares in order to colelct more performance fees) it becomes entrenched, and SOP for the wanna-get-rich crowd pursuing a fatuous dream.

Whew...now that I have got that off my tits, I still cannot say who should be drawn and quartered first (though I lean towards Lauer for pure calculating cynicism).

One final thought: it is a shame there is no shame. I recall a youthful summer spent in Northern Ireland. On a visit to friends in lovely Armagh, in search of something other to do than drink endless pints of Guinness, I went for a tour  of the Observatory. When I returned to the pub with my tales, all the locals had a laugh as they recounted with glee the story of a local senior clergyman who'd been caught diddling some of the younger members of his flock (no pun intended). Rather than let him be shipped anonymously to the clink, or assigned elsewhere by the church, the townsfolk insisted he visibly remain in Armagh, and was assigned to tour-guide at the local landmark (none other than the Observatory!!) - one visited by school children from all over Northern Ireland. Such was the notoriety his case, he was, in effect, publicly shamed, humiliated, and ridiculed day-in and day-out for his remaining years, in a manner that arguably was more severe than jail. Though in Japan (and pehaps some other traditional societies) shame remains truly a stigma and a veritable deterrent to all manner of rule-breaking, we, in the modern west, have lost virtually all semblence of shame, and in many cases, are the worse for it.

And Michael Lauer, who despite losing the civil case, is planning a return to Hedge Fund Management.... 

Break Out

I caught a few moments of Tom Keene at the Milken Conference yesterday, on Bloomberg TV. I am ever-more amused by the ads run for the concentrated demographic of those who voluntarily watch real-time financial television, and have written about my indignation at the increasingly high-tech ones run by the FX Bucket Shops, a view sympathetically shared by my friends at FT-Alphaville.

Almost as amusing, though slightly less macabre than the coming retail FX train wreck, was Bloomberg's ad touting its own "Launch Pad" kit, a part of its professional service. As a user of Bloomberg since its inception, I have mostly respect for the system and what its management team have built - obliterating all competitors en-route.  Of course, Bloomberg has its flaws which are significant (and which I won't go into here), but the pitch was that you Launch Pad allows you to customize YOUR view of the market, and tailor their data to YOUR desires, in order for YOU to stay informed, so that when the market BREAKS OUT!!!! (yay! whooopeeee!!), you can spot it and TAKE ADVANTAGE of the MOVE. (end of the flashy bits and accompanying thumping escalating rhythmic dramatic music). Whew, now that our blood pressures are south of the near-month price of Cotton, perhaps we might examine what is wrong with this picture.

If I am to understand Bloomberg's ad agency, the world is sitting around passively. Drinking coffee. Making sexist (but not too-politically incorrect) jokes, watching talking heads on BTV tell us what is going to happen, or erroneous attributions about why something just happened. Then, quite randomly perhaps, the market MOVES, and everyone else NOW, AFTER THE MOVE, with the help of their Bloomberg system, takes note of the move, and decides how they are going to react to THE MOVE. And, according to Bloomberg, this is what THEY NEED, because this is the way THEY look at the market, and Bloomberg can help you stay on top.

Think of the absurdity of this. Think of it multiplied across the Bloomberg installed base. Across the number of trading rooms of banks and brokerages across the world. Wait. Watch. See somebody else do something significant, and then try to jump on the train. And then, when IF you manage to successfully get on the train, and the train is, by chance, going in the direction you expect, you then, one would suppose, go back to the water-cooler, and wait for someone else to do something significant in the opposite direction, which  you would, by extension, follow again trying to leap from the train to safety before a larger train wreck. Does that about sum it up?

WTF

So Michael Lauer is free, and clear and free and clear.  It is a shitty shitty day for justice, and a victory for extractors and contrapreneurs alike. Pump-and-dump is a rotten game cynically preying upon the ignorant, the greedy, ignorantly greedy and the greedily ignorant. Machiavellian schemes of orchestrated share ramping through related-party vehicles transacting amongst themselves is patently Fraud (with an upper-case F). It likely that it was YOUR pension fund that was hit and YOU should be mightily pissed off.

One might speculate that in the intervening years, events have conspired to make Mr Lauer's antics and pilferage appear petty by comparison. And this too is shameful, and dishonest in its roots. Oh, and what's up with the eight years it took to come to trial? It is a very long time. Too long. This also is sad. Fortunately, there is an amusing punch-line to the story: Mr Lauer says that he is going to get back into the hedge fund business!!!

I hope he gets what he deserves, because he didn't deserve what he got.

I *Heart* Jack Lew

Well-worth watching Charlie Rose's interview with Jack Lew. Consummately measured and balanced, uber-informed, politically astute and sensitive, Lew tackles most major political-economic issues facing the US, from taxes, deficits, inequality, healthcare, ageing & social security.  He comes across with a knowledge one sees in one's BEST history teacher, with the demeanor of the best coach/father one saw amongst the other kids - the kind that is thoughtful, but never yells (in public), and is always constructive and positive in his criticism, and champions the values necessary to the success of the team. Such a man (or woman!) is oh-so-needed in this position - less to  create consensus from amongst the vicious partisans across the aisle, but rather in order to appeal directly to the American people who will undoubtedly find sense in his patient explanation and no-nonsense communication style.

25 Things I Learned in the 25 Years After My First 21 Years

I have long wondered what they put in the drinking water at George Mason University. This recent post by Dr Bryan Caplan attracted much attention in the blogosphere. Whatever is in the water seems to be causing conjecture to morph into the realm of the categorically immutable. But perhaps this assuredness is merely part of his philosophical territory. It is so effective, it inspired me to reflect upon 25 things I learned in the 25 years after my first 21 years. This doesn't include the several years I spent unlearning many of the things I learned in my first 21 years (and note these are in no particular order).

Economics:

1. Supply and demand in itself fails to solve countless mysteries, particularly where externalities are rife, corruption abounds (both large and small), and markets rather less-than-perfect (which are many).

2. Almost anyone can understand supply and demand if explained calmly enough (and with stick-figure or cute warm-and-fuzzy "Hello Kitty"-like animation), except perhaps Art Laffer and Maria Bartiromo.

3. Poverty is terrible, but poverty amidst gluttonous plenty is worse such that income redistribution complementing economic "growth" (where "growth" results in increasing and unprecedented skewness of income distribution) is better than growth alone.

4. The causes of unemployment are varied and complex and include (amongst other things) high executive wages, oligopoly, corporate rent-seeking, and capital's excessive short-termism

5. Free competition that results in unchecked collusive oligopolies and de facto monopolies often results in the diffused abuse of consumers for the parochial benefit of managers and shareholders.

6. Free beer is always far superior to perfect beer.

7. Bad governments combined with a poorly informed electorate - with or without fiat money - have little control over real GDP or employment.

8. Hazardous morals,  particularly in insurance and reinsurance markets, result directly from the pull of greed and its tendency to adversely select unduly self-interested agents.

9. Optimism about the economy and the future, however true it may prove to be, is a poor substitute for critical thinking and trying to do better.

10. Communism was a disaster primarily because of poor fashion sense.

Philosophy:

11.  The greatest philosophical mistake is to ignore a Blinding Glimpse of the Obvious.

12.  The second greatest philosophical mistake is to believe that the prior statement is either philosophical or a mistake.

13. Betting on whether or not a debate will resolve "what's obvious" is easier than betting on the stock market.

14. There are no such things as an anti-empirical dualistic unicorns, and even if there were, they wouldn't resemble moral facts.

15.  If you look too hard for something, you end up looking up your own arse. (thanks to Iain Owings)

Politics:

16. Believers voting is, in itself, irrational, since whatever prevailed would have been divine will.

17  Libertarian (and farther right) beliefs that "The public interest is best served by no public interest" is total bollocks.

18. Government may not provide the best solutions to externalities problems, nonetheless, government's attempts to address such problems are better than waiting for "the market" to miraculously conceive solutions inimical to their parochial financial interests.

19. All government, existing policy and expenditure requires reflection and critical introspection to insure  its continued relevancy and appropriateness for the prevailing times that it serves: this applies to the structure, and institutions, as well as the programs and initiatives, despite its heresy to strict interpreters of the constitution.

20. Paternalism should not be viewed in the pejorative. A Parents responsibility is (quite rightly) to set fair boundaries, and subsequently [justly] encourage adherence as well as enforce them with consequences if violated. In addition to being fair and just, they indeed change over time and epoch. However, the Parent who neglects these responsibilities, as well as the children who rebel and/or subvert for fun or parochial interest,  very often conjure problems to majority of others.  

22. Archetypical Conservatives and archetypical Progressives are actually more different than cynics believe, traits distributed in roughly similar proportions across all societies of the world. By nature they are fundamentally predisposed towards different values, particularly with respect to preserving tradition and accepting change, respectively.

24. However, like Yin and Yang, both traits are useful and required to govern more optimally, via constructive embracing of change, but throttling its speed in order to avoid the upset that change typically brings.  Understanding this reality should encourage everyone to compromise rather than polarize.

25. It is quite obvious that America has a Government Revenue Shortfall problem, rather than a Government Expenditure Problem (since spending is bottom quartile, and revenue bottom quintile compared to peers), AND that the revenue shortfall is caused by historically low tax receipts collected from the wealthy, demonstrated by comparatively low marginal rates vs. last 8 decades of economic history. Far from stimulating growth (ahhhem....errrr Dr. Laffer...??!?!), these comparatively low marginal rates over the past decades have enriched a very few quite dramatically, while impoverishing the next generation of the many in terms of per capital debt.

(errrr... umm.... that's quite enough "things I've learned" hurled upon you)

Credit Where Credit is Due

Shame on Michael Lewis (apparently suffering a bout of PJ O'Rourke syndrome) for his woeful Bloomberg piece satirizing of the Fed handling of disclosure relating to liquidity provision in the heat of the moment. I am all for satire and criticism and satirical criticism is even better. But one must be careful to be "more or less right", else one becomes a demagogue - using a kernel of truth or plausibility to prey upon ignorance or misunderstanding   - say for example, like Glenn Beck.

To be certain, the US Federal reserve is not perfect. They have indeed made policy errors - sometimes in the pursuit of politics, some in defense of the moneyed class, sometimes  out of accidental miscalculation, while others in the pursuit of some strange misguided Randian philosophy cherished by the former Chairman. However, the provision of liquidity to almost any and all against well-relaxed collateral  - be they domestic or foreign - in the heat of the moment of monetary meltdown cannot and should not be fault nor belittled. In fact, everyone should take a moment and say "Thank You!" to Mr Bernanke (rather than Gordon Brown) not for savng the world, but most certainly for preventing more preventable depths of the crisis.  I wrote notes for a piece still sitting in posting drafts after I read Ron Paul's utterly inane remarks about the same upon release of the files suggesting that rather than a Thank You, his extension of emergency liquidity in the heat of the moment of the crisis demonstrated the Fed should be abolished.
If fault is to be found, it would be in the generosity of Fed pricing. They could have extracted a pound of flesh, and in my opinion, should have as a punitive slap to those surfing the edge of peak credit, or liquidity mis-match.

However, no public nor private purpose would have been served by allowing financial markets to cascade into oblivion due to system-wide requirements sell position into a falling market to make position. We would have needed to coin a new more-modern phrase for 21st century-style Herstatt risk, that would have been global, and grinded the real economy to a halt along with the financial economy. Sure, we would have recovered from that, and certain people that didn't lose (and perhaps should have) would have, but others (perhaps undeserving) would have benefitted, watering down justice. As it was, the dislocation took us way into overshoot, so imagine where it would have taken us without the liquidity provision. Is there a place where the tag line "I've fallen, but I can't get up" is true? Where is the Hayekian virtue in finding out when (the extreme outcome) is in fact preventable? Perhaps it will prove only a palliative. That is still alright as far as I am concerned, measuring "alight" against the public interest.  I am far far far more afraid of the deficits and the effect of interest rate shocks upon large, cumulative borrowings concentrated at the short end of the curve. QE still bothers me little.

So if Lewis et. al wanted to use their satire to greater advantage and good, they should give credit where credit is due, and set their sights upon diminished top-end tax-rates, a broken healthcare system, defense spending, and clipping the tail of future liabilities to restore confidence in fiscal future diminishing the risk of an interest rate ambush, or future loss of confidence causing a another cascade.

Flat Tire

One would have thought that the wisdom and experience accompanying age would improve one's wit and sense of humour.  Of course, P.J. O'Rourke maybe the exception to this inferred rule. Whatever the case, O'Rourke's lame diatribe against urban cycling hosted by News Corp's dearth-of-humour broadsheet,  the WSJ, makes one wonder why, with so many interesting events and ample public figures with foot-in-mouth disease providing ample fertile material, he has chosen to point his low-watt Petzl in the direction of the humble, utilitarian bicycle, and it's typically well-intentioned owners. One would be forgiven for wondering whether there is some personal hidden agenda which is at the root of his anger.

Was he perhaps vertically-challenged more than the average kid when his father removed his training wheels? Or maybe he has a simple case of Cyclophobia? Was he forced to ride his sister's pink two-wheeled hand-me-down with sparkly handlebar tassles? Did he have some traumatic accident while mid-teens involving a parked car attracting the unwanted attention of a female object of his desire? Was HE laughed at mercilessly in his own tight black shorts? Did some two-wheeled Sierra Club environmentalist best him by sleeping with his wife (or worse, marrying his daughter!)? The exploration of this petty tyrant, will, in any event,  make for an interesting discussion with his T. next session. 

It does, however, highlight a more general question: Do Conservatives and Progressives age more or less symmetrically?

So Long (and thanks for the all the....)

August 2008 now seems to be so far away (unless you are Jeff Gendell or similar). Most things have returned to "normal" (lower case "n"): Israeli's and Palestinians are fighting; Fox network presenters make nightly asses of themselves; Wealthy Russians battle amongst themselves for top rung on the BLING! ladder; BRICs (and most of what was formerly known as The Developing World") grow robustly; American party politics and State dysfunctionality plumbs new depths; kids and adults alike waste evermore time networking socially on-line, and the ratio of executive-to-line-worker-pay ascends higher. Markets too, have normalized, with most prices finding the place they left off before The Vomit Scene threw them off course: commodities march higher as BRIC demand conspires with all species of specs to vault levels upwards; the dollar descends; stocks globally rally; bonds remain relatively neutered by intervention. Indeed we could be in 2007 again, were it not for upsided-ness of middle-eastern politics, peripheral European CDS, and the American President's tan and articulateness.

Everything, that is, except the Japanese Yen (and by extension, the Nikkei), the former which remains at, levels incongruent with, well, everything else in the world. Of course most FX traders horizon is measured in units corresponding to the winding of the average mechanical watch (or less!). Even Google finance's "all time" historical data for Spot USDJPY yields the beginning of time as somewhere in 2004. The credit crisis took the USDJPY from 110 to 90. Many carry trades were necessarily puked. But not all. 2010 began with Short Yen being one of Drobny's "trades of the year" - a curse and sure sign of crowdedness for those seeking instant gratification or truly asymmetrical risk vs. reward. They, too, were puked out by the market's swap of the dollar for yen in carry trades, sending the Yen from near-term macro peak-crowdedness levels near enough in the mid-nineties to 80. This, accomplished all the usual things of further puking carry trades not unwound previously, and sucking in the mimetic trend followers. The quake, and subsequent market response, was probably the last hurrah, in comparison to a world of increasing relative normality. 

Timing is a of course bitch. When EURJPY was stupid in late 2006 it was a year and a half of topping and volatility before it moved decisively from 170 to 110. The Yen has been "up here" now for more than two years two major episodic pukes, reddening the arses of even the cleverest of specs. Big picture long term market memory has been erased from most grey matter. I do not make prolific calls, but I must exclaim, the time is now. The moons are aligned. Par (vs. USD) though 20% distant, will be here almost as fast as you can say "Jack Sparrow". It's spring, and it's a mighty fine time to sell some Yen calls and buy twice-as-many 1yr out-of-the-money yen puts, and then go do whatever it is you enjoy doing.  

Lipstick on a Pig

Cliff Asness & colleagues have just published a paper demanding critics rethink the "Japanese equity markets are a momentum graveyard" thesis. They attempt to salvage the pursuit of price momentum in Japan by arguing that momo and value should be seen as a system, and not in isolation. Fair enough. As a result, they argue, momo strategies have utility in such a system, and therefore, the nil return (before costs) that have acrued to momo in Japan over the past 29 years is a veritable virtue. IF, that is, a more optimal Sharpe Ratio is one's goal, and so it follows, therefore, that a nil-return dollar-neutral portfolio, which furthers this pursuit, shouldn't tarnish the pedestal upon which momo strategies rest, both in other equity markets and across other asset classes.

As Noam Chomsky is often revealed be, (a comparison Dr Asness will abhor), Asness is correct within the narrow epistemological framing of the question. But this is not setting the bar particularly high. Not in a discipline where descriptive information is abundant, and where the pursuit should yield something better than a "Dawkin's Skyhook" approach to describing the faceless catch-all that is in each occurance a likely alias of some more descriptively-articulate phenomena. Of course, we can foregive this oversight for Dr Asness, wouldn't be a very good business-man if he revealed what lay beneath this nebulous outer layer of the onion skin.

One would hope that, for their investors, they are delivering higher-calibre solutions to the task of delivering a more optimal - primarily value-based - dollar-neutral portfolio in Japan, for they do exist. But do not expect in this paper a monumental revelation, or a raison d'etre to crank up a 6-1, or 12-1 portfolio in Tokyo. This is just lipstick on the Japanese momentum pig.

Pyramid Scheme

"Corrrrr......Blimey DM! $30,000,000,000 to $50,000,000,000  $40,000,000,000 to $70,000,000,000 ?!??!!!!" That's what some were estimating the Mubarak family has smashed-n-grabbed (and pilfered and extracted) from three decades as errr.... ummm...Beach King in the land of the Pyramids.

That seems like a lot of zeros, at least in comparison to Ben Ali (and his wife's family) who are reputed to have walked off with $3,000,000,000 to $5,000,000,000, though they are comparable on a per capita basis insofar as  Egypt's 85mm population is roughly proportional to Tunisia's 10mm inhabitants.

Russia's kleptocrats, by the same measure, seem positively munificent in their relative financial benevolence, even without eye-poppingly large round estimates.

Keeping consistent with comparisons, the piggiest, however, seems to be the recently deposed Dr Ewart Brown of Bermuda, who according to critics is reputed to have extracted some $300,000,000 to $500,000,000 on a lilliputian population base of a mere 60,000 island folk. This is approximately $6,000 per head taking a modest midpoint, versus the Mubarak clan's almost $600 per head or Ben Ali's more modest $400 per head "contribution" (on similar midpoints).

In all fairness, Bermuda's 2008 GDP per capita was an eye-popping world-beater at $94,000, making their contribution to Dr Brown's retirement fund (should he survive an almost certain imminent audit) a mere annoyance at 6.3%, not far off US State sales tax levy.  Ben Ali's was a more substantial 10% tariff, not even half of the Egyptian leader's near 22% of GDP per capita. Of course one might counter that the former army officer toiled long and hard (or long anyway) for more than 30 years picking up those wads of large notes along the way to presumably stash in UBP where his daughter serves on the Board, though few of his opponents would cite longevity as one of his virtues. Finally, when one considers that the size of the average Egyptian household is substantially larger than the average Bermudian one, the size of his take per household appears even more egregious in relation to per capita GDP. And we roll our eyes at Mssr's Clinton and Blair's multi-zeros bouquet per speaking engagement!!

Pyramid scheme indeed!!

Bare Ruined Choirs

OK, it's not THAT bad (cotton is at 1.74lb!!). Day-job. Family obligations. An occasional hard night of drinking. Etcetera. More importantly, little perspective to add that is worthy of the volume required to rise above the ambient noise and chatter of those extrapolating yesterday's trends into tomorrow. Yet the fact remains that eleven of my last fourteen posts remain in draft form. Stillborn. Aborted satirical foetuses.  Wonder what W.P. Mayhew would think of that? If you need me, I'll be at"the Earle"...

Farewell A&P...

So, farewell then

Great Atlantic & Pacific Tea Co.

(a.k.a. A&P. Waldbaum's, Pathmark,

The Food Emporium, SuperFresh

and 

Food Basics).

Some would say 

that you were caught 

between 

a rock

and 

a hard place.

Others might 

suggest that

you were

just a hard rock

when you needed 

to be 

otherwise.

My five year-old self

fondly remembers 

eating cookies from 

open packages 

on the shelves of your

Confectionary 

Aisle...

But I doubt 

you will truly be missed -

except 

by 

your landlords

and 

creditors.

(With apologies to EJ Thribb aged 110, and Private Eye)

Gifts For Someone With (Almost) Everything

It's that time of year when loved ones buy loved ones that special gift...or, for the unlucky and ill-planned, whatever is left on the shelf. But buying gifts for the titans of finance, the men (and a few women) with almost everything (except a sense of thrift) is never easy. Enlightening books are likely to remain unread by the singularly-driven, whereas more thoughtful tokens such as a poem, one's favorite pressed wildflowers, a short story, or indeed a humorous or poignant blog post are likely to remain under-appreciated. Despair not, however. At least for those UK-based gift-seekers, yours truly has searched high and low (surely "low and high" -ed.) and acquired for re-sale, a selection of number plates assured to be highly prized by the large minds of finance for their Astons and Carrera's alike. Note: these are NOT garish easy-to-source personalized plates, but actually-issued specimens, randomly assigned in the course of issuance - serendipity that should make them all the more valued.   

Bids start at GBP10,000....

B0N U5E5

UG3 F33S

R15K 0NN

A11 B3TA 

G0T CH4

S3LL V0L

I1UV HFT

QE15 3NUF

B1G 5H0RT

AU5 O0OO

N0N D0M1

B41L 0UT

I4M HFM1

GR3 3DY 

Z3R0 T4X

EZ3 M0NY

K4B 0OM

Sinkhole

I have always been socially liberal and fiscally conservative. Not to the extreme in the sense insofar as I take no issues with debt raised for long-term investment be it education, R&D, trains, Chunnels, or the like, things likely to maintain value and use for many years, and which yield externalities that are in the Public Interest. Nor do I find fault with a bit of counter-cyclical intervention now and then. However, I take issue with credit as a seeming birth-right, and believe that pricing credit too low is more often than not, as dangerous and ultimately dislocating as setting the price of credit too high. I am on record as such for a rather "extended period" (in Fed speak). After all, I am a saver, so it is natural to desire one's savings afforded protection in real terms.

I say these things because in the process of the following provocation, I do not wish to be categorized as a perma-anything, excepting perhaps a perma-skeptic, but in particular do not wish to be labeled an apologist for overly loose money - something that would be patently false.

I must further admit in order to insure the proper stamping of my anti-easy-money-credentials that I am as concerned as anyone about the concept of quantitative easing. I understand that it can be seen as dilution. And in many circumstances - certainly historic ones, printing was hazardous.

But here, today, being inquisitive and hopefully provocative, I must ask the frank question, what is the big deal about a bit of quantitative easing under the present circumstances? Hear me out. Look back over the past 25 years . Witness the ballooning of asset prices. The credit that has been extended and therefore money created, has been, in a single word, enourmous. No, actually ENOURMOUS!! I do not need to reproduce all the graphs that luridly depict this vertiginous reality. And they [asset prices] are still high, as any owner Schiller-measure, or owner of an inner London 2br flat can testify to. This money has already been created. And not only has it been created, it has been spent. And the cascade effects too have already spilled over and paid for the beneficiaries' Porsches, and Hampton or Nantucket digs. Yes, these asset prices and the S&P 500, might continue to go higher. But credit is and will likely remain constrained for a long time. Deleveraging continues apace. Asset prices - both real estate and equity remain elevated, and could easily compress a great deal more under the continuing scenario of limited credit, limited domestic investment opportunities, diminishing construction and consumption spending as a percentage of GDP, aging populations, high and long-term rising energy prices and the perception of the fiscally-constrained state.

Now focus on Japan. Here, too, witness the slow inexorable grind of rates lower during, yes, twenty-five years. The aging of the population. The rising ratio of national debt to GDP. The falling asset prices. No matter quantitative easing. The conjured liquidity seemingly disappears into one black-hole after another, unable to have any meaningful priapic impact upon velocity of money, asset prices, inflation or economic activity. These are vivid images, but accurate depictions. And why? It is not clear we even know.

Lets look at some numbers on our turf. Not the real precise numbers because I am lazy and in a rush for you to contemplate my point before hurling insults back at me, but rough back-of-envelope numbers will do for illustrative purposes. US GDP is $14 trillion. Equities have quadrupled over twenty years. US public market aggregate Market Cap is, I don't know $14 trillion? And private unlisted values - maybe quarter to half as much again? US Bond Market values - combined Federal, corporate, mortgage, municipal, are probably close enough to $30 Trillion, and who knows what the size of privately extended loans are on US bank balance sheets, but it must be a couple of trillion. Net real estate equity value - the unencumbered portion NOT accounted for in market cap of listed and private companies, must be several trillion. These values reflect money already out there. Asset values that already inflated by the massive credit binge during more optimistic times. These, like Japan, are likely compressing in a very long term move. The aggregate net worth of $40, $50 maybe $60 trillion, could be compressing to $30, $40 and $50 trillion respectively. Or, like Japan, lower, and over a longer period. So, one trillion of QE has no bearing on anything (unless you are the guy who has sold them duff assets for real money that you can transform quite easily into a large edible Philadelphia Hoagie. For more or less the same price as one transformed it ten years ago. Would two trillion do anything? In the scheme of things, it would seem, probably not. Oh, sure it might get the speculative juices flowing for a nanosecond (as it did in intermitant intervals in Japan) when traders attempt to front-run this government stimulus package, special budget, or the much vaunted QE, but this would turn out to be but a small blip in velocity, as it flatlined, seemingly forever, or beyond the patience of any reasonable trader or even long-term investor.

So this must be good news, and you now think me an optimist, right? Well, if you recall, virtually all Japan's largest banks needed recapitalisations by ten years after-the-fact. As did the finance companies, and the brokers, and many life insurers. Some needed several and some still need them, twenty-five years later as the inexorable deterioration in asset quality and repayment was eventually reflected in diminished asset prices which was eventually reflected in capital conjurations by pen-stroke, to insure systemic "solvency". Quantitative easing? This was like throwing a few pebbles into a gigantic sinkhole, hoping eventually to fill it in. Inflationary fears? Yes. Inflation? Not in anything subject to Peak Credit and the overhang, like home prices, the S&P, or the wages you pay your secretary. At least that was the experience in Japan. Where did it all go? Why does it not, to this day, make people hyperbolic in their vilification of authorities who have, to the objective observer with no preconceptions about how large the BoJ's balance sheet should be, preserved a semblance of normality in what otherwise have been something else. Maybe that something else is preferred. Maybe that something would have been better. Tea-party-ers and inflationista's certainly seem to think so. Maybe Japanese asset prices are falling for other reasons, and our asset prices are different. Better. They will respond because, ummm, because they are American. Perhaps, but only if they were in aggregate NOT overrvalued by $10 or $15 trillion or some other equally large (or larger) number. I am not sure I would want to make the case that outlying commuter suburbs with no reasonable public transport links are fairly valued in an era of peak oil. What IS the right price? Who knows, but where is fat tail? Seems like the left side - before the right side, at least before desperation sets in, and a trillion here or there is hardly desperation in the grand scheme of market values. Is this better or worse than inflation? I do not really know...

Dear Mr Cameron

The Rt Hon Mr David Cameron
Downing Street
London SW1
UNITED KINGDOM
28 October, 2010


Dear Mr Prime Minister

Quite the performance during Question Time yesterday. Such Passion! Such Fire! Such Resolve!
You have started to make the most significant contribution of any politician in a generation (possibly two) to the cause of Austerity as a requisite cleanser for the moldy undergrowth of entitlement, mindless bureaucratic inertia, waste, and indolence, some would argue is necessary to prepare the land for sounder more robust growth than the Thatcherite assault on The Public Interest and new-labour's smoke-and-mirror attempt at wallpapering prosperity over cracked walls that rather obviously required sounder work and treatment than PFIs and Privatisations. I applaud your efforts which have exceeded any expectation. The British people are stoic and in the main understand and support your efforts, which I expect will kindle a similar flame across our boated peers.

Yet, I would highlight to you that the stoicism is not unlimited, and that your efforts will generally supported, have neither been implemented and felt, nor have the rippled through the chain of dependancies that will surely see the economy shrink by several percent as they are felt. My point is that you, and so your austerity and reforms, are vulnerable to the criticism of unfairness. While the working and middle class is, and will greatly impacted, mostly through unemployment, The Rich have only seen small rise in the marginal tax rate, a means-testing of benefit here or there, a tax on banks as payment for insurance backstop. You have left yourself vulnberable with little valid riposte when the moment occurs.

The stoicism is based upon shared pain, and with it, still disspipate. Since the pain is likely to persist, you do I will suggest need to share it more evenly, for both appearances and to legitimately justify fairness of truly shared pain inherent in national austerity. You have tapped VAT, income tax, fuel and sin taxes. There is little more to gain here. But the number of Swiss registered and number-plated supercars roaming Chelsea of Swiss-forfaited super-rich is significant. There remains great injustice and unfairness in walking through Chelsea past the gated mini-palaces in which uber-rich reside for their maximum days, yet paying little in comparison the benefit of maintaining their business, their lifestyle, and the protection of their property-rights from the great unwashed, no to mention the superior road-paving, rubbish collection, policing, and other fringe benefits for which they do materially contribute.

Yes, the time has come to raise property taxes - less as a means to revenue generation than as a means to showing the soon-to-unemployed that you are serious about fairness and burden-sharing. And do it in a progressive fashion, since in many cases it is the only means by which one my capture the flag from loop-hole dodging owners (many of whom I might point out are indeed non-voting foreigners). It probably will not raise a lot of revenue - though it will raise some. And you can let property-rich, cash poor grannies have exemptions if that is important to your constituency. But proceed you must, for without fairness, when the austerity shit hits the proverbial fan, your stoic supporters will soon be organizing lynch-mobs for your party ack-benchers who supported what will be seen as draconian recession-inducing reforms.

It is the time to call upon YOUR party faithful to make the sacrifices that the average brit will be forced to suck up. It would be such a shame to squander a truly amazing start, and significant public support for fear of a backlash amongst our constituents. They surely will understand if you explain if the vernacular of shared pain.

Good night and good luck!

Respectfully,

Cassandra

Chelsea is Dead! or Why I Hate Urban Outfitters

URBN has over the years been both a personal boon and bane. This City of Brotherly Love-originated retailed founded by selling incense, bongs, dope-leaf tee-shorts and ultra-cheap imported bohemian stuff to skint college students has been loved (nearly to death) by growth investors and momo humpers alike. For the reversion-oriented plunger this affection of seeming endless relative outperformance on the way up, coupled with short-covering during risk-off regimes is the proverbial Scylla and Charybdis to one trying to make a buck on the short side. Fortunately, capitulation eventually occurs and patience is rewarded with outsized lumpy returns.

Frustrating as this has been over the years for a skeptic who refuses to buy-in to the growth forever mantra of this slick schlock retailer, today, I hate Urban Outfitter for another, more significant reason. For this morning I went to visit the venerable Chelsea landmark known as the Chelsea Antiques Market where stalls run by passionate niche specialists from antiquarian books to art-deco cut crystal formed a charming maze in the heart of the Kings Road. So one can imagine my disappointment to arrive there morning in search of an overdue wedding gift for a dear friend only to discover that it along with all its old-world charm has been completely and totally obliterated in favor of a gi-normous URBN "Lifestyle" subsidiary Anthropologie store one blindingly bright, filled to the brim with shite. I stood for a moment in horror, thinking of all the cappucino's drunk at a friends Cafe which [formerly] dwelled within before I cried.

This must be the the final nail in the coffin called Chelsea...a now souless vapid pit-of-a-bedroom-community devoid of one of it's few remaining tethers to humanity. RIP Chelsea...and F@#k Y*@ Urban Outfitters

Time Standing Still

Serendipity took my family and I to our nation's capital city,Washington, DC, ostensibly for a family holiday. My son was taken by the shiny metal and technology of the Air & Space center, while my daughters preferred the Smithsonian Natural History museum. I was keen too, since although I had spent reasonable amounts of time in DC with friends who worked the political circuit, I'd never actually been a tourist. So I was quite excited to visit the ground-zero of politics: The Capitol.

While I'd always been deeply interested in politics, an overtly political career never appealed. I skirted it via academia and applied research, my studies in economics, and philosophy, but had little lacked the convitction, missionary zeal for bottom-up activism. For every time I thought I knew for certain what was what, I would without faily later  discover how much I didn't know. This is not to fault those with vision, or those fighting for causes with obvious benefit for the public interest, though I remain suspect of those with too much zeal on issues where the ratio of concentrated parochial gain is large in comparison to that of the public interest.

With a tour arranged via the internet booking system - one that worked well enough to temporarily silence critics of governement ineptitude, we set out. I had few preconceptions of what to expect insude the halls of the Capitol, outside the idealized images  remaining from civics class, which had somehow displaced the more realistic and sordid images of K-Street lobbyists at their most insidious. I did imagine that we would be met by a knowledgeable guide, who would focus their considerable enthusiasm and proximity to power to enlighten the visiting public about the political process as it is - even if sugar-coated.

Once past security, our guide began their show. Yes they annoyingly spoke to us as if we were idiots. Mind-numbing detail about the physical building, the statues, the paintings, the cornice work - everything EXCEPT politics. Amazing. Here we were in the center - and everything was form, not function. Perhaps I was unrealistic in my expectations. No visit to committee rooms. No view of the big chambers despite the absence of congressional sessions.  No descriptions of torture methods employed by whips tto tame party rebels. Nothing of what makes Washington Washington.

Two images stuck in my mind. The first was a lunch visit to the Longworth Office building which houses offices of members of the House. Somehow (wrongly) I imagined (or wished) our leaders and their staff more elightened, but what I witnessed in the cafetaria was perhaps unsurprisingly a reflection of the nation: fried chicken, hamburgers, slathered in ketchup or mayonaise accompanied by a 20oz bucket of Coca-Cola. No wonder healthcare costs are 18% of GDP for non-universal coverage. Sure there was lip service to healthier food, but these lines were short to non-existant in comparison to the fried wings, french fries, ribs, and the like. No wonder logic and pragmatism seems unable to assert itself and unseat parochial interest. How can lawmakers and their staff - nourished as such, fight the focus their better nourished lobbysists.

The second was that while civic and administrative life in Washington itself seems to function beautifully  - transport, cleanliness, gentrification, zoning, sufficiently so to challenge the convention wisdom of administrative ineptitude, I couldn't help but notice that in the Capitol building itself, two of the three large ornate clocks were broken - freezing time. And I couldn't help thinking just how emblematic this is of American politics. A bold experiment in its time, now ossified, incapable of introspection, or evolvultion beyond the prevailing sad state of wholesale capture by those who can. On the lower floor, beneath the rotunda sits the exhibit I was expecting from the tour itself. A history of laws, documents displays of important laws enacted in our nations history along with the embellishing colour to ehance one's understanding. But like the broken timepieces, this proud timeline of legislation - from emancipation, womens, suffrage through to civil and social rights  - trails off dramatically as we approach the 21st century with increasingly abusurdly-named acts like "The No Child Left Behind Act" or insubstantive focus like steroid-use in professional sports, or banning assault weapons from public schools. The US must surely be alone amongst advanced nations in misusing the people's resources for such legislative folly. Where are the adults. Who will fix the clock, so the important matters of State facing our nation can be tackled and discussed pragmatically as citizens who share a common nation and common reality, rather than as two species inhabiting entirely separate realities - one characterized by Murdochian Fox, and the other resembling some L. Frank Baum inspired Land of Oz, where the responsibility is wholly-separated from the individual.

This may sound jaded and harsh, and unfairly focused upon what I wanted to see. Yet the problems facing this nation require a pragmatism -  free from dogma - such as we've rarely seen for many decades. And not just at the Federal level, but at the State and municipal level too. And if we were as a people, the least bit curious and introspective, we would see other nations and people that are already wrestling with the issues we face, challenging the parochial interests to re-examine what we've promised and what is feasible, what is desirable. Even hear, other nations seem farther on the road to viewing the world of the possible and plausible through similar eyes. I can nly hope we fix the clocks, and begin to approach the problems through a common reality.