"A story is told of a man sentenced by his king to death. The latter tells him that he can keep his life if he teaches the monarch’s horse to talk within a year. The condemned man agrees. Asked why he did so, he answers that anything might happen: the king might die; he might die; and the horse might learn to talk. This has been the eurozone’s approach to the fiscal crises that have engulfed Greece, Ireland and Portugal, and threaten other member states. Policymakers have decided to play for time in the hope that the countries in difficulty will restore their creditworthiness."
Martin Wolf, Financial Times May 10th 2011
Below are articles/reports I have found interesting over the last week:
1. Profile of Bill Ackman, founder of the seven year old Pershing Square Capital. He can never be accused of lacking hunger/ambition [thanks ML].
*As mentioned in the report, it all started for Ackman at Gotham Partners in 2002 when they took a huge short position in the federally backed agricultural insurer Farmer Mac, then released a report titled "Buying the Farm." For those interested, here is the report (conclusion and background to the company are worth reading at the start of the report). They made $75m on the trade.
2. “Copper is King”: Niall Ferguson wrote a timely piece on copper dated April 24th: “All over the world, central banks are applying the brakes. The European central bank has already raised rates. The Fed seems intent on ending quantitative easing in June. The People’s Bank of China, meanwhile, has not only raised rates but also increased reserve requirements for banks. Remember, this comes as fiscal policy is also being tightened in the developed world—even, belatedly, in the United States. Remember, too, that higher commodity prices act as a tax on consumers in importing countries. Higher prices plus lower growth equals stagflation.”
3. “Silver Finger by Harry Hurt III - September Issue 1980 - Playboy”: Over 30 years ago, a man by the name of Nelson Bunker Hunt hatched the perfect plan: protect his inherited wealth (which then was one of the largest legacy fortunes in the world) from the inflationary destruction of "paper" assets by converting his assets into silver, and in the process cover the silver market, and send the price of silver to an inflation adjusted price of over $140 (nearly three times higher than the nearly record nominal silver price hit last week). Understandably, Hunt's name has appeared very often in the popular media in recent months. This article tells his story.
4. Corsair Capital – Q1 Letter: Corsair returned 6% in Q1: “"The global economy’s strength leads us to believe companies will exit the sidelines with renewed confidence and deploy cash for strategic acquisitions. Market multiples remain below historic averages and the capital markets are open; companies can now afford to strategically position themselves to benefit from higher growth in emerging markets, gain access to resources, improve cost structures, and so forth." They own Six Flags and Readers Digest, amongst others.
5. “Ireland's future depends on breaking free from bailout”: he is at it again! Morgan Kelly writes a damming and despairing article in the Irish Times.
6. “An Overview of Behavioral Finance and the Economy, What Worries Us, Our View of the Market, and Some Stock Ideas”: Presentation by T2 Partners. A few notable comments:
- We Think We’re Likely in A Range-Bound Market – And With Interest Rates Low and P/E Multiples High, It’s Hard to See How a Sustained Bull Market Could Occur;
- Based on Inflation-Adjusted 10-Year Trailing Earnings, the S&P 500 at 24x Is Trading at a 44% Premium to Its 130-Year Average of 16.3x.
The presentation then details some of their investment ideas – Berkshire and Microsoft. Go to slide 59 and see if you can guess what company they are short.
7. “Civilization: Is the West History”: Niall Ferguson has a new six part documentary. Each of the six 45 minute parts represent the six “killer apps” that had allowed Western powers to dominate the world: Part 1 (Competition), Part 2 (Science), Part 3 (Property), Part 4 (Medicine), Part 5 (Consumerism) and Part 6 (Work). This week’s must watch.
8. “Go East Young Man”: by Steve Galbraith of Maverick Capital from their Q1 Investor Letter.
9. “The Governance of a Fragile Eurozone”: Paul de Grauwe of Leuven University recently published this paper: “When entering a monetary union, member-countries change the nature of their sovereign debt in a fundamental way, i.e. they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries’ sovereigns into default. In this sense member countries of a monetary union are downgraded to the status of emerging economies. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple equilibria arise. I analyze the implications of this fragility for the governance of the Eurozone. I conclude that the new governance structure (ESM) does not sufficiently recognize this fragility. Some of the features of the new financial assistance are likely to increase this fragility. In addition, it is also likely to rip member-countries of their ability to use the automatic stabilizers during a recession. This is surely a step backward in the long history of social progress in Europe. I suggest a different approach to deal with these problems”.
Interestingly Martin Wolf in the FT critiques this report’s contrast between the current positions of Spain and the UK: “The yield on Spanish government 10-year bonds is almost two percentage points higher than that on UK equivalents, at 5.3 per cent against 3.5 per cent. This is a bigger difference than it may seem. If one assumes that the Bank of England and the European Central Bank both meet their 2 per cent inflation target, Spain’s real interest rate is more than double that of the UK. Do the fiscal positions of the two countries explain the contrast? Not obviously: Spain will have lower ratios of net and gross public debt to gross domestic product until at least 2016. It will also have lower fiscal deficits until 2014 and a lower primary fiscal deficit (before interest payments) until 2013. True, according to the International Monetary Fund, the UK fiscal deficit is forecast to be 1.3 per cent of GDP in 2016, against Spain’s 4.6 per cent. And differences in primary deficits explain 2.9 percentage points of this gap. But even this is not solely due to a difference in fiscal effort, since Spain’s economy is forecast to grow on average by 1.6 per cent between 2011 and 2016, while UK average growth is forecast at 2.4 per cent. As Prof de Grauwe notes, the liquidity of debt markets is vital. If, say, a government rolls over its debt every six years and also runs a fiscal deficit of about 3 per cent of GDP, it needs to issue new debt equal to a fifth of GDP every year. Suppose new buyers disappeared: we would see a “sudden stop” and a default. Suppose creditors think such illiquidity is indeed a risk. They would refuse to buy the bonds, rates of interest would soar and the economy would collapse. But it makes no sense to buy bonds at high interest rates either: the higher the interest rate, the more likely is a forced default.”
10. “Why Silver Might Crash – Critical Events in Complex Metal Systems” – a report from Hinde Capital.
Regards
Thursday, May 19, 2011
Saturday, May 14, 2011
This Time Had Better Be Different
“Bank shares are also in a class of their own in this bubble, even after the sharp fall from 2007 till 2009. In terms of how high bank share prices climbed, this bubble towers over all that have gone before, and even what is left of this bubble is still only matched by the biggest of the preceding bubbles, the 1890s and the 1970s”.
Steve Keen, "This Time Had Better Be Different", below.
Below are articles/reports I have found interesting over the last week:
1. "The Liquidation of Government Debt" - latest paper (March) from Reinhart (and Sbrancia): "Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).".
2. T2 Partners presented at the Value Investing Congress last week. The St Joe analysis is fit for Hollywood.
3. Australia Housing: “This Time Had Better Be Different: House Prices and the Banks” - Part 1 and Part 2. Superb two part analysis from Steve Keen. This week's must read.
If you’re really interested in Australia, attached below is a report from Fisher and Kent: “Two Depressions, One Banking Collapse”, that looks at the variation in the performance of the financial sector during two previous depressions. Differences in real external factors and government policies were not sufficient to explain variation in the performance of the financial sector. The depression of the 1890s in Australia was associated with the collapse of the banking system, whereas problems in the financial system during the 1930s depression were far less severe. This is despite the fact that the initial macroeconomic shock during the 1930s depression was at least as large as that during the 1890s depression.
4. Crispin Odey's Q1 2011 Conference Call - transcript: "So our forecast is that inflation, far from being 5% at the end of that, it will be at 11%. Which means at that moment interest rates have to rise because that is the moment that the central banks have got that mandate. If interest rates rise from 0% to 7%, you can be sure that at round about 35% to 40% of that rise will make its way again through to inflation. So our cry is that you move into a very different kind of cost cut inflation coming through in which essentially the central bank remains behind the curve even if they are raising interestrates which themselves are much higher, the rises are much steeper and faster than people anticipate but I think that is the shock bit and that is why I hope with all of you, I spend my life worrying about that bit, not really about where we are now but about that and making sure that we have got the right franchises.".
5. Last week George Soros spoke at the Cato Institute in Washington DC on a panel about Friedrich August Hayek's "The Constitution of Liberty".
6. Jim Rickards latest interview on KWN.
7. “ The Caine Mutiny (Part 2)” – Bill Gross for May continues on from his Skunked April piece.
8. “Low foreign debt means State will not go broke” – Daniel Gros writes in the Irish Times.
9. Greenlight Capital Q1 Letter: David Einhorn's hedge fund Greenlight Capital struggled last quarter, returning -2.5%. Their short positions caused a drag on performance and as a result they've covered some of their lower conviction names. "We are in a particularly difficult environment for shorting stocks. In response, we have reviewed many of the names in our short portfolio. We covered more than a dozen lower confidence shorts during the quarter. We exited four successful shorts in the for-profit education industry, two foreign bank shorts (one at a small gain, the other at a large loss), a domestic bank short (at a loss), and a technology short (also at a loss). We also covered several others where performance exceeded our expectations. We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above).". They also added new positions in Best Buy and Yahoo.
10. Niagara Capital Q1 conference call: Overview of Q1 performance but also poses questions for Bernanke that weren't but should have been asked in the recent Q+A (1. why did we need QE 2 and now stilll accommodative monetary policy if deflation risk averted 2. why doesn't the Fed examine global inflationary impact of US monetary policy).
Steve Keen, "This Time Had Better Be Different", below.
Below are articles/reports I have found interesting over the last week:
1. "The Liquidation of Government Debt" - latest paper (March) from Reinhart (and Sbrancia): "Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).".
2. T2 Partners presented at the Value Investing Congress last week. The St Joe analysis is fit for Hollywood.
3. Australia Housing: “This Time Had Better Be Different: House Prices and the Banks” - Part 1 and Part 2. Superb two part analysis from Steve Keen. This week's must read.
If you’re really interested in Australia, attached below is a report from Fisher and Kent: “Two Depressions, One Banking Collapse”, that looks at the variation in the performance of the financial sector during two previous depressions. Differences in real external factors and government policies were not sufficient to explain variation in the performance of the financial sector. The depression of the 1890s in Australia was associated with the collapse of the banking system, whereas problems in the financial system during the 1930s depression were far less severe. This is despite the fact that the initial macroeconomic shock during the 1930s depression was at least as large as that during the 1890s depression.
4. Crispin Odey's Q1 2011 Conference Call - transcript: "So our forecast is that inflation, far from being 5% at the end of that, it will be at 11%. Which means at that moment interest rates have to rise because that is the moment that the central banks have got that mandate. If interest rates rise from 0% to 7%, you can be sure that at round about 35% to 40% of that rise will make its way again through to inflation. So our cry is that you move into a very different kind of cost cut inflation coming through in which essentially the central bank remains behind the curve even if they are raising interestrates which themselves are much higher, the rises are much steeper and faster than people anticipate but I think that is the shock bit and that is why I hope with all of you, I spend my life worrying about that bit, not really about where we are now but about that and making sure that we have got the right franchises.".
5. Last week George Soros spoke at the Cato Institute in Washington DC on a panel about Friedrich August Hayek's "The Constitution of Liberty".
6. Jim Rickards latest interview on KWN.
7. “ The Caine Mutiny (Part 2)” – Bill Gross for May continues on from his Skunked April piece.
8. “Low foreign debt means State will not go broke” – Daniel Gros writes in the Irish Times.
9. Greenlight Capital Q1 Letter: David Einhorn's hedge fund Greenlight Capital struggled last quarter, returning -2.5%. Their short positions caused a drag on performance and as a result they've covered some of their lower conviction names. "We are in a particularly difficult environment for shorting stocks. In response, we have reviewed many of the names in our short portfolio. We covered more than a dozen lower confidence shorts during the quarter. We exited four successful shorts in the for-profit education industry, two foreign bank shorts (one at a small gain, the other at a large loss), a domestic bank short (at a loss), and a technology short (also at a loss). We also covered several others where performance exceeded our expectations. We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above).". They also added new positions in Best Buy and Yahoo.
10. Niagara Capital Q1 conference call: Overview of Q1 performance but also poses questions for Bernanke that weren't but should have been asked in the recent Q+A (1. why did we need QE 2 and now stilll accommodative monetary policy if deflation risk averted 2. why doesn't the Fed examine global inflationary impact of US monetary policy).
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