Teaching The Monarch's Horse to Talk

"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