Thursday, February 28, 2008

marching to parity

two dollars are marching to parity ... australia and singapore. it's worth noting we stand in the midst of a major internation correction of the dollar and the US economy in general. the rest of the world is looking at us now, seeing our economy is cursed with heavy debt and a business sector that has perfected the art of growing without hiring US workers.

the signs of this have been clear for years ... throughout 2003 and 2004, the media was abuzz with talk of a jobless recovery while a growing percentage of the working-age population left the workforce. at the same time our main demographic engine, the babyboomers are now leaving their peak earning years, while the next big generation is still 10-15 years from their main period of earning power. compared with countries like brazil, blessed with both a young population and growing oil revenue, the US is a hard sell.

the last traces of the post-cold war economic order and the age of volcker are just now fading out.

perhaps the best signal of this is the fact both the australian dollar and singapore dollar appear on track to hit parity this year. I am just starting to pay more attention to currencies technically.

I've normally just looked at stocks. on that front, I think the sp-500 has seen its top for the time being... it may retest the 1386-1400 level again, but that level has been confirmed as serious resistance.

there's definitely a lot more downside from here, but I'm not sure on the timing. there are some very strong bearish indicators to me, including :

1-a retracement to the first fib level on the sp500's fall from 12/24 to to 1/22.
2-it bounced off the 500 day moving avg on 2/1-2/2
3-the 200 dma is now falling for the more or less the first since the market rallied in march 2003.
4-the 50 dma has caught up with the sp-500 ... this is bad because it served as resistence twice in december when the current downtrend really began.
normally, I don't think the 50 is all the important, because it was frequently breached to the upside in the 2000-2003 down trend. but when it falls right atop the fibonacci level and the strong period of consolidation at the 1405 area, it seems almost certain to be another nail in the coffin.

measured in global purchasing power, I this downtrend could be much worse...

first, unlike in 2001, the US is no longer the dominant economic power. at least 5-15 other major economies have outperformed the US over the last 4 years and will continue to do so.

second, commodities are priced in dollars. the more people globally who want commodities, the more the dollar will decline. another way to understand this is the world now wants hard goods -- and not services. while we do produce grain exports, our country imports so much oil and other merchandise that we still run a significant deficit in goods. this IS narrowing. but at the end of the day, the US still doesn't produce enough goods. as the rest of the world enters the middle class, they will buy the goods as well, reducing the percentage of the demand we control. as that happens, we lose purchasing power and economic relevance.

in other words, there used to be excess productive capacity in everything from eggs to oil. for a while, the green revolution and globally-replicated manufacturing rendered hard goods cheap and common. now as american innovations like corporate capitalism and free trade lift the lives of millions around the world, the demand for these items explodes. before, the US was the market.

third .... I repeat: commodities are priced in dollars... in fact, just about everything in the world IS priced in dollars. that means if things are going to change, it can only go against the dollar. so long the dominant currency, the dollar enjoys many little priviledges like that. no other coin has such global relevance. but, they've already established a market in iran that used rubles. one has to think many other countries will follow. that will trigger an entirely new wave of dollar negativity. throw it all together, and we could be looking at a dollar index worth 10-20 in the next 2-3 years. it sounds crazy now, but once these forces get cut loose, they become completely irrational.

speaking of irrational revaluations is the the fourth and most important point: the world has been making a winning bet against the US for years now. at every turn, we have let people down ... weak job growth, companies hoarding piles of cash without investing in the economy, relatively low interest rates, and -- until recently -- ever widening trade deficits.
like every other trade, this one has to run its course. I don't see any reason to think this one is anywhere near the end.

when a market turns, like the nasdaq in 2000, there are both technical and fundamental red flags. right now, the anti-dollar trade is showing none.

finally, I suspect the dollar has become the new yen. I wonder whether hedge funds are shorting it to finance higher yielding assets outside the US... the new yen -- one more reason to doubt the dollar!!

the loonie has already done it.. even oil's done it... it seems inevitable AUDUSD and USDSGD are next to cross the line.

Tuesday, February 26, 2008

a solution for financials?

one of the interesting things about this credit crunch is how little debt has actually defaulted. the market is pricing in a more cataclysmic seizure than has materialized so far. it's hard to see how the looming mortgage resets won't create waves of panic, so everyone is dead certain a major seizure is coming.

of course, these conditions quickly become self fulfilling prophecies, as the macklowe experience teaches us.

the biggest problem has been the panic about the mortgage bond insurers. I have no idea whether the emering recovery plan will work.. .but here's an idea, borrowed from the california power crisis.... why can't they create a statutory asset for troubled banks and monolines?

essentially, the governemnt guarantees they will not fail: the fed simply decrees that ambac has $50 bln of assets. in case of bankruptcy, the Fed or govt will pay up to that amount to creditors.

yes, this would clearly increase the money supply and be inflationary. but it seems better than just lowering short term rates and opening the monetary floodgates.

this would instill confidence back into the financials and drive away the vultures. and, it would delay the creation of money until a later date ... probably not a bad idea with every measure of inflation blowing past expectations.

it's also worth noting something about this credit meltdown... the last two kinds of debt that blew up seem to be the ones with the fewest problems: corporate credit and commercial mortgages. home mortgages previously were considered the stable assets. it is precisely the fact that people considered them stable that the bubble formed. ... in fact, a similar argument could be made about the dollar. after 2001, the post cold war bubble finally burst.. its final surge had been fueled by the asian crisis. it will probably be 5-10 years before commodities reach a similar status.

Monday, February 25, 2008

decoupling returns

during the month of january, all anyone heard was that decoupling had been disproven... a US recession would definitely slow the rest of the world.

this is true for many -- china and south korea in particular. both look pretty broken. china is already very expensive and seems poised for real downside. china seems sure to slow after the olympics, potentially triggering bank failures ... I thnk they will struggle to grow earnings and money will flow from their stocks, especially in the case of a US recession.

but the decoupling story seems alive in brazil and russia. I think the unexpected story of 2008 will be brazil continuing to blast higher. it could be like the US in 1996 or 1997.. still plenty more room to go. maybe it will.. they're still like 13x earnings and interest rates are coming down, so now is the time for multiple expansion.

russia also looks good. the RSX also appears to be developing an uptrend.

Thursday, February 21, 2008

a new scarlet letter?

I am listening to history of the colonial criminal justice system...thinking about how they used shame as punishment, making someone wear a mark in the community?

how about next time, instead of locking someone up for selling crack, you make them wear a sign or uniform that everyone else recognizes?

what happens if the mugger or common thief must always know can't get away with it? thieves know they get caught sometimes, but when they get out, no one knows who they are? what if they are always recognizeable?

so far, the deterrent we've used isn't working... locking people up often accomplishes little. we've sadly created an entire criminal, prison-based class of people. men will stand up and fight if you push them. so many americans are born into a system that forces them into conflict with the police and establishment. it's really no wonder many figure it's just as right to become a criminal instead of bending to a corrupt system. that's how young men react...

it's just a quick idea and I have to go to bed, but is that not an idea: a return to the scarlet letter and community-based moral-sanctioning. let people police their own.. let the police help to do it.

it's not much like 1931

I know this sounds heretical and somewhat insane, but someone must say it:

the fed has to raise rates now instead of cutting them.

I know this will never happen and we're bound to repeat the mistakes of latin america in the 1980s, printing money with abandon and creating years of gnawing stagnation. but imagine this other alternative:

the fed raises rates and the dollar rallies. immediately, all of these hot AG trades and anti-dollar trades such as gold and oil are crushed. they're such crowded positions that the selling could take years. this would drive down the non-core elements of CPI and would also slow the global economy.

this policy would render inflation much less of a threat. right now I think few fully understand how much of an inflation problem we're facing right now. cheered on by wall street, ben is about to lead the US down a trail already blazed by latin america and weimar germany, printing money with abandon and getting nowhere in the process.

another, seldom considered reason to raise rates: it would flatten the yield curve. when 2yr notes were yielding more than the 10yr, it was simply too hard to make money in the bond market. everyone searched for yield and eventually wound up selling their souls for the extra 30bp they'd get from AAA subprime paper. the insurance companies and pension fundes were the clowns who forced all of this money into the mortgage market... bored with corporate debt, which grew increasingly expensive in 2003-5, they sought their supper in cmbs, then cdos and subprime -- oh how they especially loved those pre-payment penalties!! aided with chinese and japanese liquidity, (oh, the global savings glut!), they channeled vast sums of money into houses and counsider debt.... CDOs and CDOs squared!

all fruits of a flat yield curve. so, I think: if it could get us into this mess, it can help get us out of it.

instead, the fed is steepening the curve, depriving the risk markets of their billions when they're most needed. I know it sounds insane that raising rates will free up lending in the mortgage market, but it's actually true -- honest!

so, why is ben bernanke luring them away a huge yield curve?

the explanations for easing are orthodox enough:

-the slowing economy will push prices lower... or will they? ask yourself: how will a recession in the USA make the chinese eat less wheat and pork? these people have entered the middle class. this is a new permanent appetite.

-it will encourage people to lend. will it? mortgage rates are higher and loan volumes have plummetted.

-it will help the banks .... ah, yes -- this is, in fact, the right answer. it is they will will profit from the steep yield curve ... they might even dare to borrow at overnight rates and buy 10yr notes!! risk-free carry! what's a better way to recover after getting burned in last vegas, florida and detroit?

meanwhile, prices will rise across the board, americans' purchasing power on the global stage will decline and growth will languish as we repay trillions of debt. deleveraging isn't fun.

in the end, the banks win and the economy looses. after all, who owns the Fed after all? the banks.

it's time to explain the title for this post: it's not much like 1931. bernanke grew up learning about how the fed worsened the depression by boosting interest rates. but consider the difference: then, oil cost pennies per barrel and grain was burned en masse. back then, deflation was something really to worry about. all the central bankers know this story now. but the current commidity-price environment is completely different than back then. we have to stop fearing deflation. if anything is certain going forward, it's this: deflation is not our problem.

I should also note raising rates will cause plenty of short-term pain. many LBO companies etc would go bust with higher libor, and stocks would suffer. but in the macro, long-term picture, this is what needs to be done (and will happen eventually anyway. )

over any period of time, the benefit of monetary stability is far more important ... oh that vexing dual mandate that plauges not the fortunate europeans!

I fear gentle ben will prove another arthur burns... swayed by what others want. then we'll need another volker strangling the economy with high rates so everything gets blown out and starts again.

but wouldn't it be nice to avoid the whole mess in the first place?

it's not 1931. it's time to get real about inflation and raise rates soon.

Monday, February 18, 2008

lessons from fish jaws

I just found this in an amusing NYT science story:

Spurring the evolution of the vertebrate body plan, Dr. Shubin said, was a benefit of being an active predator. The origin of jaws and teeth “was a great equalizer,” he said, adding, “It allowed smaller fish to eat bigger fish.”

whenever I hear people speaking in favor of non-violence, or anti-militarism, I cannot help but ask where we would be without conflict as a force for change.

here are somethings to which we can thank war:

modern aircraft
satellites
space exploration
nuclear power
the cures to diseases such as yellow fever

and, of course...
the internet

I don't mean to promote war in any of this. but I do mean to recognize the importance of conflict as a source of change and improvement. murderous fish invented teeth and skulls, and now used by herbivores above and below the sea.

wars and milititary organization produced the modern state. I don't have time to go on now, but war was the earliest function of the state. once it accomplished real authority with force, it grew. in their earliest days, england, italy, egypt, and the fertile crescent were awash in warring tribes and groups. individidual men, lusting for violence and conquest, expanded power and build states. they pacified large areas of land, freeing people from fear of attack. this allowed them to focus on more productive sedentary lives.

on the individual level, conflict is an inevitable part of human existence. on the macro level, wars are universal and serve as milestones on the road of history. they are the vanguard of change.

it is time to stop speaking so negatively towards war and violence and to accept it as a normal part of history and the experience not just of humans, but of all life. it is time for the whining liberals to stop complaining about war. just as we were told to accept that homosexuality and adultery will always exist, so just get over it -- now it's time for conflict to be accepted as an inate part of life. it's time to stop repressing it and casting a dark pall over war in the public culture.

the change may, in fact, already be starting...


UNL Reacts to Marine Recruiting Protests in Berkeley
by Kristin Limoges, Zach Oliva and Calli Lounsbury, NewsNetNebraska
February 13, 2008

Efforts to ban Marine recruiting in Berkeley, Calif. are in retreat after a change in heart by the Berkeley City Council.
At a meeting Tuesday night that ran into Wednesday morning, council members changed their mind on an issue concerning a Marines recruiting center....

The council decided not to send the letter, saying they understood the Marines right to recruit. They said they were in opposition of the war, but supported the troops.

Friday, February 15, 2008

the future ground beneath our feet

many thoughts about the future.. here are some things we need to see:

artificial land

ocean-borne civilization and agriculture, including seaweed

public composting to fill in need for fertilizer

organizations that will pay people to garden/farm suburban spaces. for instance in easement areas between subdivision.



I tend to think the world will face a shortage of food and good land. we need to start thinking about how to live in a world that's scarred by ecological damage rather than focusing on prevention, which is impossible as long as no one is willing to stand up to india and china. why isn't anyone talking about cutting off trade with them completely. why must the US and europe carry the mantle of environmentalism, while they replicate car-based american sprawl?

why can't one banker on wall street, one CEO, or one politician say this? why do we stand by idly while new coal-fired powerplants and buildings are constantly coming into existence? perhaps our culture has become so corrupted with cynicism that no one thinks there's anything they can do about it. it's pretty pathetic to me as an american. we are the country that went from having a tiny military in 1940 to becoming the global superpower in 3-5 years -- less time than we have been in iraq now.. and we're so scared of pissing off beijing that we allow our planet to be destroyed and a new enemy state to emerge in our gaze. these are the same people who stormed into north korea in 1950 against our marines. they wish to see our country weaker and to challenge us. why are we helping them become our rival? can someone please ask that at davos next year?


regarding american cynicism... this from nyt about susan jacoby on why americans hate knowledge:

But now, Ms. Jacoby said, something different is happening: anti-intellectualism (the attitude that “too much learning can be a dangerous thing”) and anti-rationalism (“the idea that there is no such things as evidence or fact, just opinion”) have fused in a particularly insidious way.

my simple observation on this, which I was unable to post on the nyt website is that she is describing the dark side of the cartesian american conciousness described by de tocqueville. he said americans only care about what is of immediate importance to them. there was a time when people were concerned about real things like growing food, etc, because they had a direct relevance... growing up on a farm, there was never ambiguity in terms of what had to be done and what worked. people knew that swamps could be drained, crops could be planted and towns could be built because they were accomplishing it. greatness and progress was a very real thing and self-evident. since this perception derives from what the individual perceives, it's inherently cartesian.

what happens when kids no longer grow up milking cows, fixing fences and clearing fields? what happens when the conciousness of children is spent in artificial environments like videogames and television? reality is no longer something out there that you conquer and control yourself. people don't see themselves changing the world, standing up for greatness or influencing the course of events. there's simply a sense that "everything is crooked" and "it doesn't matter"... I think this is a big part of what jacoby is saying

one more thing I think that can't be ignored is the protestant heritage of the USA... this country was settled by men with nothing but a bible and a shotgun. these were people who despised popery and mystic authority. there was always a sense that legitimization and authority comes from the individual rather than an ordained figure. when people are being rational and fair, this can produce some great outcomes... for example, large numbers of middle class whites from the north signed up to help the civil rights movement in the 1960s. they didn't care that it was in another state and that it had always been that way. they didn't accept history or tradition as authority. instead they used their own sense of right and drove history forward.

but this kind of self-directed thinking also leads to extreme myopia and disregard for things like the location of iraq and kenya on the map.

one other thing to think about in terms of the protestant heritage in the USA is to contrast it with venezuela ... their adoration of bolivar and other notable leaders reminds one of priestly authority. they have always had a facination with vulgar quasi-philosophers who rambled about the proletariat in history ... busts and monuments of strange intellectuals with glasses are found throughout central caracas. it's simply a reflection of how another country seeks out authority from an idealized metaphysical realm. they seek mysticism and higher authority. just as american protestants hated the pope, we avoid such notions.

Tuesday, February 12, 2008

the tricorder is born

I recently found a story that has attracted virtually no attention. garmin has created an iphone-type device that serves as a phone, gps, camera, blackberry and mp3 player. it uses google's new local search capability, so you can find local businesses easily just walking down the street.

it amazes me how little attention this device has gotten. if it's well-recieved, this product could become as universal as the ipod. on that front, it would serve to benefit GRMN and add to AAPL's recent woes.

but aside from that, the change in how we live our lives will be enormous. this device will allow people to live in a new world of both freedom and information. I am having trouble expressing why this is so important, but it is. just like there was a world "before TV" or "before the internet".. there will be a world before everyone had convenient access to everything from everywhere all the time. these are it's final months....


http://www8.garmin.com/pressroom/mobile/013008.html

Thursday, February 7, 2008

decision making in american democracy

the biggest lesson to me this election cycle is the inanity of our party-based democratic process.

the candidates and pundits go on for hours with little discussion of the real issues facing the country... nothing about how to really fix healthcare, social security and jobs.

the media facilitates this by obsessing over their polls and perceptions, but doesn't remind people "this woman is a criminal", or "republicans hate john mccain". some people might call them opinions, but to me both can be proven to any reanable person. one need only read an article as recent as this one:

http://online.wsj.com/article/SB118826947048110677.html

which chronicles how people clearly at the lower end of the income scale giving hundreds of thousands of dollars to hillary and the democrats. one has to ask if a mail carrier earning about 50k can give that kind of money, when he's still living in a miserable cramped house next to the airport. how can one explain that kind of donation, other than to assume it's not his money... and, if it's not his money, why would someone want to hide a donation?? I would imagine that money has some nefarious origins. and before hillary is elected, I'd like to see someone address this story.

the same goes for mccain. as someone who used to enjoy radio shows like jim quinn and rush limbaugh, I understand how the middle american conservative thinks. they didn't like john mccain in 2000 and still don't. that's why mccain failed to carry any of the key republican states on tuesday... huckabee won the perennially red GA, AR, AL plus the often-red TN... mccain won in places like CA and CT. now some are speculating about joe liberman as VP, which would be insane. but if he were running against hillary, he would probably still collect major support.

anyway, this is just part of the bigger phenomenon I'm examining: how do people make decisions in our democratic system? there are different environments for making decisions. when deciding whether to be married, buy a house or take a job, most people have a deep innate sense of what's right and will lead to the best outcome. they know how their life is now and how they want things to be.

decisions like that are easy to make wisely.

an even better example is corporate life, where people choose how to spend billions of dollars of other people's money efficiently. there is an institution, an intellectual framework, that guides people to make sure they don't make the same stupid mistake of enron, penn central, _____name your favorite financial meltdown. in most cases, people just want to avoid getting sued or fired, so they serve the organization and make the right financial decisions.

in cases like this, people have both knowledge about the question and a strong incentive to see it answered the right and most accurate way. little carrots and sticks like this are what keep society running as a regular entity.

this may be how effective and beneficial decisions are made ... but even more important decisions are made in a way that's much less conducive to successful outcomes.

compare the kind of decision a person makes about a job or marriage with the amount of energy and thought they put into a political candidate. people get a sense they like someone and is never forced to defend that position. millions of americans are voting for hillary knowing perhaps she was persecuted by some mean people like ken starr in the past, but now she'll bring back the good old clinton days...

decisions like this are shallow and quickly developed. in real life people know they'll have to live with their job or their spouse, so they make the right choice.. in elections, they just chose one person. they have no sense that it will AFFECT THEM the way it eventually will does

this disconnect exists in a symbiotic relationship with the media, which can go on for hours about a campaigns and polls, but never gets into the issues. someone like huckabee wants to overhaul the tax code and really fix things. what do the other stand for? people might think huckabee's tax idea is crazy, but the truth is at some point we need to fix our current morass. I'm sure he'd accomplish something much different from his current plan. but what matters to me is at least he wants to do something. what exactly are the elements of obama's health care plan? can I please get a single full-screen with bullet points? the media can spend hours covering campaigns and speechs, yet tell voters none of these basic facts.

thus is the inanity of our american democracy.... it's cobbled together from all these different states. why can't america look at itself and ask: why are the only country in the world with such a fragmented state-by-state party system? why are we the only body politic that uses electors rather than direct polls? why must we fight to get 50 distinct jurisdictions on the same page for national elections? and... why is it that neither our constitution nor our declaration of independence contain "democracy," or any related word?

is it not time america, to look in the mirror and ask what's going on?

people wander through their lives, doing what's right for them. they give little thought to bigger things like whether hillary committed crimes. they don't see that it's not wise to give such a person power over their lives and fortunes... when the harm she will cause is upon them, they'll blame whoever's in power at the time....

this is essentially how history progresses. .. most people are just going along for the ride, making small decisions that shift the entire mass. what worries me is that once people have accepted hillary, if she travels any dangerous or truly evil direction, many of those people will stick with her. many will be sheep and stay with her no matter what.

of course, in history, these same people are fortunate when the leader is a lincoln, roosevelt or washington -- one who gives you the opportunity to fight for a truly great cause. but when a bad leader comes along, those same followers are also willing brownshirts.