Saturday, December 25, 2010

This crisis that looks like that crisis

I was spending my morning reading when I came across the following passage. See if you can guess what countries it is referring to and then scroll down to the bottom (after the jump) to see the answer.
The [debtors] argued that the collapse was proof enough ... that for them to pay the amount owed was impossible. The [creditors], by contrast,  saw the collapse as the evidence of capital flight ... How could it claim to be bankrupt when so many rich [debtors] seemed to be wandering around Europe? ...

Y took the approach that the simple and direct approach would not work. The total figure owed, $xyz billion, was too politically charged a number, particularly in [creditor A]. Tampering with it would inevitably lead to confrontation To challenge [creditor A] at this stage of the negotiations would bog them down in the sort of wrangling that has produced no results ... Instead, Y proposed that the committee focus on the very limited but achievable goal of reducing the amount [debtor] would have to pay in the immediate future to a more manageable level.

The committee would jettison the whole concept of "capacity to pay," he argued. It was impossible to know what this number was. Too many imponderables entered into the calculation, involving such questions as: How much could taxes be raised without triggering mass protest? How tightly could imports be squeezed without precipitating a collapse in production? How far could wages be reduced without provoking labor unrest? No one could agree on the answers to such cosmic questions. ...

In it's place, Y proposed an alternative criterion: the [debtor] public should be required to shoulder the same tax burden as [creditor] taxpayers. [Creditors] had to tap their tax revenues to pay interest on their own debts. [Debtors] had [devalued] away its internal public debt--the [debtor], therefore, had a natural surplus from which they could afford to pay their debt.

Friday, December 24, 2010

5 Unlikely and unexpected events that you should consider in 2011

I saw a few lists making the rounds of low-probability events that are generally unexpected as predictions of potential 2011 surprises. Here is my list of potential 2011 surprises:
  1. Increasing reserve requirements in China, in conjunction with excess lending in the last year and lower balances amongst household depositors as a result of negative real rates and increasing inflation expectations result in a sharp rise in interest rates as demand for credit increases and cheap deposits are scarce. Credit becomes difficult to obtain, causing the expansion to slow significantly.
  2. Credit crisis in Brazil. Attempts at controlling inflation by Dima Rousseff's new government lead to tightening and in the process expose massive overallocation of credit by the banking sector. Increasing rates make certain parties unable to refinance without sacrificing profitability or at all and a trigger wave of defaults as a result, particularly in consumer credit. Uncertainty spreads to other LatAm countries leading to significant losses in dollar and local currency-denominated debt.
  3. Q4 2010 Retail sales disappoint as increasing volumes are more than offset by margin compression as a result of online competition leading to very low net-income. Poor retail earnings releases kill sentiment and start a snowball that leads to a 20% sell-off in the S&P. Aggregate S&P earnings still increase, but PE compression stays and the S&P ends 2011 at 1150. 
  4. Lackluster global growth lead to Aussie property market weakness. EU banks dump Aussie MBS at steep losses to limit exposure, leading to continued weakness in the European banking sector and a new wave of Gov guarantees, further stressing sovereigns.
  5. An EU member state defaults after receiving aid from the EFSF. Resulting haircut severly impairs EFSF capital base. Member states, under obligation to make EFSF bondholders whole, suffer rating downgrades as a result of the liability (France, Italy, Spain, Netherlands, Belgium) excluding Germany. The EFSF becomes uneconomical and is abandoned as the German public protests about the risk risking becoming a guarantor to an increasing number of EU member states.
Please understand this is all wild, wild speculation of technically possible yet very unlikely events. In particular #4 and #5. These things might happen, but they could take multiple years to play out.

Tuesday, December 21, 2010

Someone at the BoJ doesn't quite grasp supply and demand

From Bloomberg:

Bank of Japan Pledges to Steadily Buy More Assets"...The BOJ’s purchases of real-estate investment trusts and exchange traded funds have bolstered stock prices, a sign the stimulus has supported sentiment even as global growth slows."
Uhm. I guess it's nice they are at least buying some hard-assets instead of government paper as far as the Yen is concerned, but someone ought to tell the peeps at the BoJ that if you have a stable, aging (and soon to be declining) population while you forbid foreigners from buying real-estate, chances are you are not going to have much luck supporting real-estate prices. Especially not when interest rates are already at record lows. It's that supply and demand thing you can learn from Mankiw's book.

My suggestion? Start letting immigrants in. Seriously.

Sunday, December 19, 2010

Just for fun: 2011 Predictions

Well, Bespoke got a cute little round-table thing going on and they forgot to consult me. It's OK, I'm used to it.

We'll review these again next year, along with a review of other people's too and see if the "wisdom of crowds" is for real. I suspect most of us will do no better than a dart-board.
  • Fed funds: Flat. Benny Bernanny wouldn't dare and he'll err in the inflation side, just like the  King of Knifecrime Island did. I truly believe he cares more about achieving full-employment than price stability and he his hell-bent on weakening the dollar, supporting asset prices and holding short-term real rates negative at all costs.
  • Dollar: Mixed, but generally flat. General downtrend with high spikes up if Portugal is forced to go to the EFSF or if haircuts for Euro debt happen, although I doubt that will happen. I haven't had a chance to update the maturity schedule for the PIIGS because, being unemployed, I can't afford decent health insurance, much less Bloomberg, but I'll try to sneak in somewhere when I get back home--currently on vacation
  • Long bond: Up. Right now I think it's oversold, but I could see it oscillating in this space, although I think the downtrend in interest rates is going to keep going (thank Europe!). The 2-30 curve is already at historical wides and I really don't see it getting much wider, especially because I think recovery hopes are a dash too high. In August I bet a trader at my old job that by next August we'd see the 2-30 spread around 200bp. In retrospect, that was too aggressive.
  • Munis: Definitely up. Conviction buy. In fact, if you follow me on twitter, you would have seen me ranting all last week about buying Munis and selling Tsys if you wanted to hedge the curve. Default fears are way overdone and I think that they are definitely undervalued on a relative basis. My preferred play here is lightly levered CEFs selling at a discount.
  • S&P: Up. I got my money on a range bound market with an upwards trend. Slower earnings growth. The story here is going to be multiples. I wouldn't be surprised to see PEG compression. So I think companies will be in better shape, but I think valuation won't keep up. Overall I like corp bonds, convertibles and HY (although I think upside here is limited). I think "Wall of Maturity" fears are way over-done. Best places to play are are CEFs with 20-40% of leverage and selling at decent discounts (> 7%). Good opportunities to trade in and out.
  • Light Vehicle Sales: 13.5M total, but steady and steep uptrend in SAAR. (Previously)
  • Euro crisis: Mostly unch. I expect upward creep on spreads. I think that the catalyst for Portugal to go to the EFSF is going to be really high rates on a refinance, not high rates on current-year deficit financing. 2012 is when I see that happening, the fund-raising necessary in 2011 is limited enough that Portugal could probably stomach the pain, so if they go to the EFSF it will be because of political pressure from peers to stop contagion fears and volatility, not market pressure. I think Italy is going to see the biggest widening (in % terms), followed by Spain. If Portugal front-loads and can pull-off a successful auction in Q1, I doubt anything drastic will happen.
  • UK: There is so much sad face to be had there. I expect continued weakness in the Sterling vs Euro combined with high inflation and a limited recovery. The VAT rise is fucking asinine. The only thing Brits are getting for Christmas is lowered standards of living. Banking exposure to Ireland is big and they still have their own housing issue to deal with. I see little probability of a recovery in UK housing and in fact expect significant further weakening. I wouldn't be surprised by additional write-downs, buuuut there is an upside. Banks that have deposits (liabilities) in Sterling and hold assets with Euro exposure will benefit from said weakness as losses in Euro denominated assets are partially offset by movement in the Sterling. I suspect this is deliberate.
  • Spain: Increase in spreads, banking problems no EFSF assistance necessary, but expect the FORB to get plenty of use.
  • Latin America: Continued boom. Inflation leading to central bank tightening will be a theme, at least in Brazil. Argentina up (PEOPLE ARE RETARDED!!!!). Increasing interest rates risk attracting more hot money and further aggravating the situation. Brazil's bond-tax was a great idea, in my opinion, I hope to see it elsewhere. I think the Automotive recovery will be a nice tailwind for Mexico. (I'll update with production graphs when I'm back home)
  • International Economics: I expect capital controls to be a continuing theme, particularly in the form of taxes similar to Brazil's. It makes perfect sense to me, curbing funding local assets with foreign liabilities and vice-versa will increase currency stability by creating "speed-humps" for capital and limiting the volatility caused by hot money flows.
  • China: Pettis already did it, so I'm not going to bother. My only prediction is continued inflation. Just look at the money supply growth. You can also look at all those Chinese IPOs happening recently. If that's not hot money, I don't know what is. Expect price inflation to lead to wage inflation which will lead to some exporters and manufacturing moving inland, South and possibly abroad. This is a good thing. Expansion outside of the currently-urbanized centers could maintain investment expenditure high, which would be good for nat. resource producers. The whole issue of Yuan appreciation might go away as a consequence of price inflation.
  • Housing: Mixed. Suburban McMansions down, multi-family up. Expect people to avoid big suburban houses in gated communities with expensive fees. Foreclosures will keep putting downward pressure on prices and there will be a lack of demand as people look for smaller, cheaper housing. Community Association fees got to outrageous levels and the upkeep on big houses is likely to be a deterrent to people in debt, or getting out of debt. Apartment rents up. I think a solid investment would be non-luxury condos to rent out. In South Florida, you could can definitely find properties that have positive carry. (rent > taxes + mortgage + fees).
We'll see how I fare next year!

Friday, December 17, 2010

Shut-up, TNR: Lady Liberty is a perky-titted, skinny chick with hairless labia

Outraged over their privacy being violated, The New Republic publishes a cover of an x-rayed Lady Liberty to show how our precious freedoms are being taken away. Normally, I'd be OK with their sensationalist outrage, buuuuut I was put on this earth to rain on your collective parades.

Not to get all Steinem/Levy on you, but I'm just kind of wondering, was it really necessary to use a skinny perky-titted model for this shoot? Also, I guess you can't blame TNR editors for not knowing much about physics, but I'd like to bring up the issue of hair. Normally, you can't see hair in x-ray images, but this image clearly shows Lady Liberty's nice 'do. Curiously, though, that's the only place where the Lady has hair. So, I'm left wondering whether seeing Lady Liberty go bald was so heinous that it had to be stopped, or whether outlined labia were acceptable for a magazine cover but pubic hair wasn't. Seriously guys, fuck you.

Thursday, December 16, 2010

In response to the Athens riots

Unrestrained idealism, explosive temperament and no much to lose will get you that way. I don’t know if its better but its definitely sexier than polite complaints uttered quietly about the state of things. - Srta. Batsouli

Tuesday, December 7, 2010

China Money Supply: October 2010

To see the latest data please see the label Chinese Money Supply
I was going to stop publishing these, but after looking at the blogger statistics, I noticed they were the most popular recurring item in terms of pageviews, so I decided to update them again. As always, the data is released in an unpredictable schedule--often late--so I can't predict when the next update will be.

You might notice that I changed the scale of the nominal graph to a log scale. It made sense. The only reason I hadn't done it before was because the formatting was poor, but I finally gave in and decided function was more important than form in this case.

Light-Vehicle Sales: Population-Adjusted November 2010 Sales

Monthly sales per thousand people at the SAAR rate. This is done by people and not number of drivers because statistics on licensed drivers are only released every two years. A fair estimation, for the present year, is about 68% of the total population (~88% of 16+ people are drivers and ~78% of the population is aged 16+). This figure has held fairly steady since 1990, before then drivers as a percentage of the population were as low as 50%. It is my opinion that the downtrend in the number of sales per thousand people ist he result of lengthening replacement cycles and a slowdown in the growth-rate of new drivers.

For more on driver demographics and trends in sales please see the Auto Sales Special Report posted in  late October.

Saturday, December 4, 2010

Don't dump your moral problems on the legal system!

I came across this blog post about Four Loko today on Modeling Behavior, where Adam succinctly summed it up:
This is because while the regulation is ostensibly about caffeinated beer, as Robin Hanson argues, it’s actually about regulating a “particular vaguely-imagined classes of people”. Politicians want to regulate Four Loko drinkers, not caffeinated beer.
So yeah, kids are drinking Four Loko and getting pretty drunk and caffeinated. When I was 22 we used to do these things called Jagger bombs where we gulped down a shot of Jaggermesiter and a half red bull in like 2 seconds. Other times we simply drank a 20oz Rockstar and then took a couple of shots of cheap vodka before going out. Really, it's no different. 

People like getting fucked up, they really do. The problem of substance use is a purely moral one, and it's mind-numbing that this country still insists on trying to use the legislative system to tackle moral issues. I mean, people are free to try to legislate things they find unsightly away. People are also free to make the retirement age 40 and provide free housing for everyone. Neither is going to work.

This is one of the reasons I would support legalization of all drugs. I don't want kids hooked on heroin any more than the next person, but I think using legal prohibition to control that is largely an exercise in futility. Some drug being legal will not automatically mean that people are going to run into the pharmacies in droves to buy it. Alcohol is legal and you don't see people--other than college students--stumbling around drunk all day and night. Your coworkers probably don't show-up to the office after downing half a pint of vodka, either. And seriously, I doubt the productivity lost to new cases of intoxication will even compare to the productivity lost to gossip websites and online shopping.

Yes,  drugs can be addictive and all that, but that's what education and medical treatment is for. To be honest, I don't really think that legislators are really so concerned about the people's safety, I think they are really just afraid that someone, somewhere, is getting fucked-up and enjoying it. Especially if that someone is young, poor or brown.