Distilled Roadkill, Monetary Velocity, and a (Coming) Bonfire of the Vanities…

The long-promised exploration of monetary velocity!  Starting with a quick shot of “Animal Spirits.”  And no, that does not mean some bearded hipster’s liquor distilled from dead squirrels and other roadkill.  But we desperately need a swig of the stuff…

Animal Spirits” have been THE key missing factor in the economy (and stock market outlook).  The term is often narrowly confined to investor sentiment.  That in itself points to how much investors tend to (wrongly) conflate “the economy” with “the market.”  The original coinage was by John Maynard Keynes.

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.[1]”

That “spontaneous urge to action” is what leads a consumer to take the family out for dinner or a CEO to build that new plant.  And you really don’t need a chart to tell you we are still suffering from global angst…  But a chart does offer a way to track the (hoped for) return of those happy feelings.

Which brings us to the woeful tale told by monetary velocity….Chart: Monetary Velocity 

Monetary velocity is my (imperfect but informational) tracker for “animal spirits.”  Velocity is “the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.”  If velocity is high, money is changing hands quickly and the economy “feels” like it is humming along.  A lot of that activity may be non-productive “taking in each other’s washing” but the pace is a powerful social cue and economic driver.

If velocity is really high?  Look at 1999 and 2007 in that chart and sniff a remembered whiff of the electricity (or crack cocaine/meth) in the air back then.

And if velocity it low?  Per the Fed “A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.

The Fed has been printing money like mad since 2008.  The chart above tells you its just not circulating.  It is possible the world has changed irrevocably (the “secular stagnation” thesis).  It is much more likely that we will eventually revert to our free-spending ways.  Velocity starts to trend back up.  With an eventual mania to follow.

Think of low velocity as potential energy that could/will convert to kinetic energy.  Kinetic energy that feeds animal spirits.  That drive the real economy and (probably) the stock market.  “Dry brush piling up” in the absence of a spark to light that metaphorical forest fire.  The assumption is that a spark comes along eventually – hopefully lower oil prices, rising wages, and higher employment.  Pumping more of that money into parts of the economy where it is likely to circulate faster.

  • Low velocity explains why that M2 supply (all that Fed easing) isn’t translating into more economic activity.  They are printing money like mad, but it is circulating a whole lot slower than in the past.
  • Why the slowdown?  A weak multiplier effect from the sectors where the Fed is pumping that money (multiplier = how much a dollar of spending is “multiplied” by follow-on dollars of economic activity).  Instead of re-spending that money back into circulation, it has just pooled there.  Deeper and more stagnant over time.
  • A lot of that money came to rest in the hands of the top 10% (via wealth effect), banks, and commodity producing countries.   It ended up going to “assets” not “activity.”  They pooled it in squirreled-away “savings-like” activity – bonds, bank balance sheet repair, high end Real Estate, offshore slush funds (see “high end real estate”), and sovereign wealth funds.
  • The historically lousy multiplier effect in those sectors only got worse as the money pooled deeper and stagnated further.  Their response was to squirrel away more money, further slowing velocity.  Cue today’s negative long-term interest rates.  Rates aren’t negative because of central bank “manipulation.”  At least not long-term rates (which are set by markets not central banks).  It is because the stagnation has gotten so bad and deep that people are paying to store money.  A bit like the cost of oil storage keeps going up as oil pumping goes deeper into glut territory.
  • Those stagnant pools represent tremendous potential energy.  Dam’s waiting to burst.  Dry brush piling up waiting for a spark.  Oil stores waiting to hit the market.  (Insert your favorite metaphor here).  Take another look at the chart above.  Velocity is clearly low.  Getting back to 2000’s level of velocity implies a 50% increase.  Getting back to peak is almost a double.  Even 1980’s levels imply a hefty jump.  That’s a nice heady feeling we just don’t have today.  Animal spirits.

My hope (and it is just a hope) is that a shift of that money flow to the pockets of broader-based, lower 90% developed world consumers will lead to faster circulation.  Animal spirits re-awaken.  Velocity turns upward.  Things start to hum again.  Ordinary consumers have a MUCH higher multiplier (higher propensity to spend on an incremental “new” dollar).  And they spend it on higher-multiplier stuff than fancy real estate, art, and tasting menus.

How does that happen?  Fiscal stimulus?  Government borrowing (at negative rates = free money) to fix our rotting infrastructure?  I’d say “insert guffaws here” but it really isn’t funny.  Even our central banker’s can’t summon up the courage to state the obvious need for fiscal stimulus.

But maybe, just maybe we can claw our way there via lower oil prices.  Higher minimum wages.  Higher employment.  Slower and with (much) more lasting damage done than if we’d followed the smart playbook of fiscal stimulus.

And admittedly consumers haven’t being doing much obvious spending so far.  But every week that gas stays cheap is another week the money piles up in the pockets of someone who might actually (gasp) spend it on something useful.  I am hoping last week’s GDP report (stronger consumer spending offsetting weakness elsewhere) is the start of a velocity upswing.   All big moves start small.

If animal spirits do start to revive, that catalyst will convert huge stores of potential energy into kinetic energy.  The stagnant pools drain in a flood.  The dry brush burns.  And the animal spirits course faster and faster.  Velocity returns!

It could get out of hand and drive silly-stupid stock market valuations until it all comes crashing down.  It probably will.  Today’s mis-match between paper wealth and productive potential seems too great.  You need a bubble (and subsequent bust) to destroy paper wealth on the appropriate scale.   We probably end up with a bonfire of the vanities.   So sell that art collection….

Of course, a lot of paid shills for the wealthy “serious observers” argue we are in that bubble now.  My sense is they are confusing that squirreling-away-of-money-activity with the forgotten art of actual-investment-in-productive-assets.  Regardless, low/negative long-term rates and that velocity chart say otherwise.  They’d both be riding high and happy if we were in bubble territory.   And they aren’t.

Admittedly, the stock market might or might not follow along with rising velocity.  It may already be partially discounting in a positive scenario.  But my general rule is that market hasn’t topped out until friends and family stop asking you for stock tips and start giving you stock tips.  That hasn’t happened to me so far, so….


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Obama Has Delivered That “Change” He Promised. Just Look Ahead. Mission Accomplished.

Obama probably isn’t looking back at the last 8 years with much joy.  But he can look forward with a big smile and a happy heart.   He has delivered the change he promised.  And all he had to really “do” was simply exist.  And persevere.  His enemies did the rest.

Obama’s presidency will rank with Reagan’s – the start of an Era.  The Republican Party is imploding.  The political landscape is re-aligning.  The center has NOT held.  It is shifting left… Reagan marked a 30 year shift rightward.  Obama will mark a 30 year shift leftward…

I go to thinking about this while reading a WSJ column blaming Obama for “the tone of today’s politics.”  This is apparently a meme going around in the land-of-the-blind.  It is, of course, a laughable effort to shift blame.  Your classic 6 year old’s deflecting responsibility after acting out.  “But he made me hit him!”  But a grain of truth in there too.

Obama addled the Republican Party into implosion and ruin.  A fairly moderate, cerebral, compromise minded black man in the White House was simply too much to bear.  The Republican Party vomited out a torrent of purblind, vitriolic obstructionism in response.  They are drowning in it now.  

The Republican explicit, stated strategy was to de-legitimize Obama.  The Kenyan, Muslim, Socialist would win no victories.  Governing be damned.  That has boomeranged badly.  The Republicans didn’t just de-legitimize Obama.  They de-legitimized the very idea of rational, responsible government (at least with their base).   They de-legitimized their own governing class…  

That is the implosion we are watching today.  With horror, glee, or a bit of both – depending on where you stand.  And the Republican Establishment is (sort’ve rightly) blaming Obama for deranging them into it.  The wails of the damned – regretting their sins, but not (yet) repenting them.

Taking down a whole party.  Through jiu-jitsu.  That is is a pretty spectacular achievement for Obama.  Albeit painful and frustrating.  Especially as the next President (Hillary) will rack up most of the policy benefits (and the Supreme Court nominations).  But it will still be Obama’s epoch…

PS:  Still working on that riveting Monetary Velocity post.  Its so hot I can’t bear to touch it!

PSS:  Regarding “The Republican Establishment is (sort’ve rightly) blaming Obama for deranging them into self-immolation.”  Lets take these one by one – A fairly moderate, cerebral, compromise minded black man in the White House was simply too much to bear….

  1. Moderate.  Policy-wise, Obama is basically a early 90’s Republican.  Outside of skin-tone, he would have blended just fine into George Bush the 1st’s cabinet.  Heck, his healthcare plan is a straight Republican rip-off.  But the Overton Window has shifted so far right that those same policies are now labeled “socialist.”  The Republicans found themselves with no room to run further right.
  2. Cerebral.  Obama typifies a certain type of arugula-eating, urban-dwelling, knowledge worker.  Demographically, this is where America is going (or already is).  But you don’t want to go there if your personal American archetype is still stuck in the Marlboro Man era.  Cue the Budweiser commercial (and note that Bud sales are slipping while Craft beer is taking off).
  3. Compromise-minded:  Its hard to get past the vitriol, but a lot of Obama’s policy efforts really were actually a reach across the aisle.  Obamacare was (literally) a Republican-originated plan.  More interesting (and symbolic) was his (failed) corporate overseas tax reform proposal.  The (political) problem was that it WAS something a reasonable Republican could have supported.  But it would have given Obama legitimacy.  And the Republicans could not, would not legitimize this Presidency.  Obama could have arguably sent in Romney’s policy papers and still been denied.
  4. Black Man:  As much as the Republican Establishment can’t/won’t face it, this small matter of skin tone is/was something many in their base simply couldn’t/can’t bear.  And it’s hard not to see that as partial cause of their own implacable effort to de-legitimize him.  Remember that North Carolina Congressman’s shout of “You Lie” when Obama addressed Congress in 2009?  That wasn’t about a policy disagreement… That ugliness is also a big reason more thoughtful people are now edging away from the Republican Party…  Enough said on this point by me – others have unpacked it better than I could.
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Are We All On KAL 801 – About to (Very Politely) Hit a Mountain…?

The world’s central bankers are scaring the crap out of me.  Why?  They are being terribly terribly polite in a situation that calls for a little shouting.  Every indicator on the global cockpit is flashing “fiscal stimulus.”  It is right next to the one flashing “FREE MONEY – why the f**k aren’t you spending it?”  But the best the bankers can do is a little throat clearing nod in that direction…?!?

Monetary policy has obviously hit its limits (see negative interest rates, bond buying, etc. etc.) But fiscal policy (government spending) is stuck somewhere between “contractionary” and neutral.  Like a plane where one pilot is pulling the stick back while the other pushes it forward (that actually happened in a recent crash BTW).   Which brings us to Korean plane crashes….

There’s a useful anecdotal vein of “plane crashes because the co-pilot is too polite to tell the captain he’s f**ing up and/or the captain is too macho to admit the mistake.

  • The most infamous (via Malcom Gladwell) is KAL flight 801 flying into a mountain in Guam.  The captain thought he was on course.  The co-pilot and engineer know he isn’t.  Coming from a hierachical, polite culture, they couldn’t summon up anything better than polite hints; “ummm, well, maybe we might consider the idea of a mountain.  One that it wouldn’t be much fun to fly into?  No offence sir.  Just a passing thought.” Then they all died.  But they DID avoid acrimony.  No shouting in the cockpit!  Harmony preserved to the end!
  • The other classic case is a Columbian airlines flight where the crew were too macho to admit they needed help.  Instead, they ran out of fuel.  Then they all died.  But at least they didn’t have to admit a mistake!

Now consider this recent comment by the Fed’s “grey eminence” Stanley Fischer.  Is he a bit too worried about acrimony in the cockpit?  My emphasis added.

There was once a great deal of work on the optimal monetary-fiscal policy mix. The topic was interesting and the analysis persuasive. Nonetheless the subject seems to be disappearing from the public dialogue; perhaps in ascendance is the notion [IE – totally ideological]  that–except in extremis, as in 2009–activist fiscal policy should not be used at all. Certainly, it is easier for a central bank to change its policies than for a Treasury or Finance Ministry to do so, but it remains a pity that the fiscal lever seems to have been disabled.

“It remains a pity?!?”  “Notion”  WTF?  “Ah yes Mr. Scott, it remains a pity you didn’t pack more food, take sled dogs, teach us to ski, and otherwise listen to reasonable advice instead of your “notions.”  I suppose it just remains for us all just freeze to death like gentlemen.  Oh dear…” How about “It is pathetic and cowardly that Congress can’t face reality and authorize a stimulus program!  Replace some of that rotting infrastructure!  That huge backlog we’ll have to eventually borrow to replace anyway.  Why aren’t we doing it while we can borrow for free!  Are you all numbskulls!  Is it just because you can’t bear to give Obama a victory?  Or give up this unfounded “notion” that government might have a useful role during a crisis?  Is that worth penury?  This isn’t a game you fools.”  

How about the ECB’s Constanciao yesterday?  OK he’s not French, but you really need to insert a little gallic shrug at the end

To normalise inflation in the euro area we urgently need higher growth that can reduce negative output and unemployment gaps, using all really available policies. If not monetary policy, then what?”  [gallic shrug]  

That’s the best he can do?  How about “Hey Merkel, can you quit the Protestant morality play, pull your head out of your ass, and help steer us away from a really ugly crack-up?”  Is he worried he might offend her?

OR Draghi himself.

Instead, Draghi sounded resigned when asked about euro-area fiscal policy. That domain spans countries including Spain, France and Italy that are close to or beyond their legal deficit limits, and nations that can afford to spend more — read Germany — that have promised voters they won’t do so.  “The measured driver of the economy and the recovery basically remains our monetary policy,” he said.

Huh!?!  What does “measured driver” even mean?  How about “Well, we’re doing the best we can but what we really need is for the Germans to start spending some of that negative interest money we keep trying to shovel their way.  They need to give up hoping to export their way out of the problem.  Its their banks on the hook anyway, so why don’t they face facts and spend a little. 

The need for stimulus is no longer some fringe, lefty position.  It is consensus.  Even right-wing-y Wall Street economist types are gently trying to make oh-so-polite noises around how it might not be such a bad idea to, err…, spend on infrastructure and stuff.

The problem is that the Captain isn’t listening.  And no-one is willing to shout it.  To force the debate.  They don’t want to face the wrath of the ideologues.  Or admit they were wrong.  Or lose that invite to Davos.  So we fly on oh-so-politely into the night and rain.  Hoping luck will save us…

FWIW, I actually see a pretty good chance luck market forces will save us from this willfully blind/bad/blundering/bumptious policy failure.  To that end, I’ve got a truly riveting post on monetary velocity teed up.  But that seems more like Sunday night reading material.  🙂


KAL flight 801:  A Korean Air plane flying from Korea to Guam was going through bad weather and stormy clouds. The captain had committed the plane to visual landing, which meant that he had to be able to see the airport runway. Here is some of the conversation among the pilots. Pay close attention to a couple of comments from the supporting crew to the captain and to how the captain responds to them, or doesn’t:

First officer: Do you think it rains more in this area?

Captain: (silence)

Flight engineer: Captain, the weather radar has helped us a lot.

Captain: Yes. They are very useful.

What the first officer is trying to do is warn the pilot that it may not be safe to do a visual approach without a backup plan for landing, in case the runway is not visible. Such communication of hinting from first officer to pilot is not uncommon in Korean culture. However, driven by respect to authority and fear of upsetting their superior, the co-pilots ultimately contributed to the plane crash as they allowed the pilot to start a visual landing without an alternative.

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Who is That Man Behind the Curtain? It Certainly Isn’t a Shareholder (or a Voter)…

People love to rail about the evils of shareholder capitalism.  Very few stop to consider the real source of that evil.  It is rarely the shareholder side of the equation.  It is almost invariably management.

The formal name for this particular evil is the principal–agent problem.  It is THE key structural failure point for so much of our modern, spread-out, multi-actor economy and polity.   But it is rarely discussed and poorly understood.  Maybe that is by common, unspoken agreement?  Don’t pay attention to the man behind the curtain!

Whatever the reason the subject brings us naturally to the idea of a wholesale/retail split of telecom companies.  OK, not really.  But stick with me here for a sec.  A friend of mine, Susan Crawford,  has written a (generally excellent) piece about Google Fiber’s potential to catalyze a new model for telecom.  You Didn’t Notice It, But Google Fiber Just Began the Golden Age of High Speed Internet Access.  It is definitely worth a read (quick summary below**).  But one sentence stands out as a particularly glaring non-acknowledgment of the principal-agent problem.

In New York City, for example, it would probably make economic sense for Verizon, which has been struggling to establish its FiOS network in the city, to turn itself into a wholesale dark fiber provider whose pricing is overseen by the city. Benefits to Verizon: no more servicing of individuals or buying overpriced television programming, so overhead goes way down.

She is right.  But… what is the “overhead” of which she speaks?  More importantly, WHO is that “overhead?”  Pretty much every executive, middle manager, and associated hanger-on that encrusts the telco cost structure.  It is the consulting contracts.  It is the FCC and state lobbyists. It is the lawyers.  The thousands of middle managers keeping 20-30 years of legacy billing systems going.  Billions of pixels of Powerpoints.  All the way to the sports sponsorships and charities that know a telco is an easy touch…

So Susan is “right” that Verizon’s shareholders would make a massive amount of money from a wholesale/retail split.  But the shareholders aren’t the decider here.  Management decides.  Asking them to “choose” this model is asking an entire ecosystem of useless-but-remunerative activity to suicide.  They are going to work really hard to make sure shareholders never figure this out.  Per Upton Sinclair “”It is difficult to get a man to understand something, when his salary depends upon his not understanding it”  Shareholder value be damned!  I’ve got kids in private school!

The underlying error is this quaint, but wholly wrong idea that a corporation exists to make money and serve its shareholders.

  • A corporation’s first and primary goal is self-preservation.
  • Its secondary goal is to aggrandize as much wealth to its senior management as it decently can.  Arguably this is primary goal, self-preservation be damned…
  • The needs of the shareholders are best understood as an impediment to goals 1 and 2.

Conjure up some version of Jane Austen’s England and/or Downton Abbey.  Shareholders are the distant landlord with “an income” off in London.  Management is the estate overseer out in Piddling-Upon-Trent or the like…  The estate manager’s incentives are wildly un-aligned with that of his/her nominal boss.

  1. Extract as much as you can from the peasants…
  2. Send on a steady, lowballed rent.
  3. Never ever send any surplus – find ways to hide it and keep it for yourself.
  4. Focus most of your time and energy in vicious in-house politics to divide those spoils.
  5. Ensure the lord/lady never actually visits the fields and farms to judge potential vs actual productivity…

Believing corporations are run for shareholders is like believing that political parties are actually there to express the will of the voters [insert guffaws here].  Like voters, shareholders are a surprisingly powerless bunch.  Even if you are one of the plutocrats who can “buy” a campaign.  Politicians (and managers) just don’t stay bought…

If you don’t force the principal-agent problem into the dialogue, the debate goes nowhere.  You need to acknowledge the underlying problem head on.  In the telecom space, basically EVERY actor is somehow dependent on “not understanding” the value of a wholesale model.   They like the gravy train as it is.  They are not going to “understand” they are worthless overheads.

Most interesting is HOW the evils of shareholder capitalism might over-turn this cozy conspiracy of mediocrity.  And here is where I agree with Susan’s enthusiasm and conclusions.  Google Fiber does potentially open the door to a very different (and better) telecom model.  But it does so through the medium of those evil financiers…

The key event is not Google fiber partnering with Huntsville.  It is (hopefully) Google Fiber (and Huntsville et al) raising debt.  Showing good, steady, stable numbers to a bunch of greedy Wall St. types.  If we can get a documented track record of dull-but-profitable FTTH builds, then we can get the debt markets involved.

  • Debt markets don’t “care” about management’s tuition bills.  They don’t get paid to “not understand.”  They just look at cash flows.  And loan money up to around 70%-90% of their value.  Just like a mortgage.  As long as someone else is willing to take the risk on that last 10%-30% (the equity).  The more stable the cash flows, the more they will lend.  And telecom cash flows are VERY stable.
  • Greedy Wall St. types are a herd like anyone else (see the movie “The Big Short” – it’s pretty accurate on that point).  So the first few deals will be cautious and tentative.  And then the floodgates will open.
  • With all this fat, sexy debt coming out, shareholders will start to make murmuring noises in meetings.  Like a bunch of feudal property owners noticing that other fellow’s properties are throwing off much bigger bucks.  They start asking awkward questions next time their estate manager sends on the annual rent.  Maybe the schedule a trip to actually look at their estates…  And the whole edifice starts to slide downhill into a very dull, very profitable utility business.  Which is what is once was.

I know this is sort’ve what Susan was driving at too, but the dialogue goes nowhere without a sharper point on the motives and effects.  The facts aren’t in question.  It is the willful, self-interested. indifferent blindness of those who shape the narrative.  I’ll leave you to explore the obvious segue to the rise of Bernie Sanders and Donald Trump.  Enough tangents in this post already.   But I’ll leave you with this clip.

** Wholesale/Retail Split:  One company owns the actual fibers – earning a steady rental income like a sewer or water utility.  Another company lights those fibers and offers service over them, earning a (less steady) income as a TV/Internet provider.



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Boardroom Recession? Maybe Just Depression. Angst. Anger….

I’ve been worried about a “boardroom recession.”  The actual numbers show a decent/improving US consumer economy.  If nothing else, billions trillions of consumer stimulus from cheap oil.*  So how to explain the widespread gloom I encountered at a recent institutional investor conference?**  A lot of people seem genuinely convinced another 2008 crisis is around the corner.

Maybe I’m wrong?  Looking at the wrong set of numbers?  Should I be more worried about negative rates (competitive devaluations IMHO), Chinese bad debt (internally contained and eventually sustained by the Chinese government not investors), or tech unicorns tanking (valuations are down, but they still generate real revenues are aren’t going bust…).  But all these worries seemed to be more excuses for the general gloom.  What was I missing?

A good investor is supposed to be dispassionate.  Investing (and politics) isn’t like rooting for a sports team.  You need the mindset of an umpire, not a fan.  Call it like it is and bet accordingly.  A great investor realizes dispassion isn’t humanly possible.  So he/she develops coping strategies to counterbalance their own emotional biases.  Warren Buffet has feelings like everyone else.  He’s just better at managing them.

But there are a lot of not-so-great investors out there.  And lot of them are Republican elite-types…  And it hit me.  Doh!  These guys are mostly self-identified “moderate” Republicans.  No wonder they are depressed!   Investors are paid to look forward.  And they don’t like what they see.  Seen through this lens, “the market” is going through a very understandable emotional meltdown.

Put yourself in the shoes of a typical affluent, urban-dwelling, investor class Republican (or wiggle your toes a bit if you are already wearing those shoes).  The Trump hijacking has forced out a lot of ugly truths.  Highly depressing for an investor-class Republican.  Especially if you had been burrowing into deeper denial as reality got harder to ignore (see “Sarah Palin, Rush Limbaugh, Terrorist “Militia” armed takeover, Tea Party, or any randomly selected 8 hours of Fox News programming“).

It is all pretty depressing.  It just doesn’t solve for an (economic) depression.

  • “Your” party is tearing itself apart.  That’s been going on for years, but its now impossible to ignore.
  • Its not “your” party anymore.  Its a bunch of angry, under-educated, reactionary, pitchfork wielding peasants.   The Sarah Palin crowd.  The people you used to rely on for votes, but who would have ever thought they turn on us…?
  • Actually “your” party is turning on you.  The pitchfork peasants seem most energized by a deep resentment of the elite classes (followed by a dislike of most non-white people, but I digress).  An elite class into which you have somehow been inexplicably lumped.  “Moi?  Don’t you people understand that a family making $200k-$300k in a Whole-Foods zip-code is just barely middle class?  Are we not brothers in arms!?! [ripple of a firing-squad.  A pause… “Bring in the next next lot of class-enemies!”]  
  • Looking across the aisle, things don’t look much better.  The Clintons did a great job of talking liberal-left, but hiring elite-right-center (cue Rob Rubin et al).  OK, the Dems were asking people to, like, actually pay for mroe of what they consumed.  But they weren’t really going to rock the boat.  But isn’t that same peasant crowd is lurking behind Bernie Sanders and Elizabeth Warren too?  The Clintons have done many deals with many devils to win.  Hillary will do another on the backs of Wall Street.  Anything to finally grab that brass ring for herself.

I’m not thrilled about the above trends either.  But I don’t see them adding up to an economic crisis.  This is equating “my team is losing” with “all teams must be losing.”  The tide is going out on the last three decades’ class winners, but that is just re-balancing the distribution of spoils.  I do worry about 10-20 years out.  The great leftward swing will go too far (just like the great rightward swing that started roughly with Reagan).  But today, a little income redistribution would probably lift all boats (minimum wages, fiscal stimulus, etc…).

 * Oil:   Told a year ago that oil would be $30 a barrel, a rational investor would have bet on a consumer boom.  Every week, most every American family is getting an extra $20-$40 to spend somewhere else besides the gas pump.  That boom hasn’t shown up yet.  Those pesky proles are saving it – or something silly like that.  But every week, that same $20-$40 keeps showing up.  Those billions of dollars WILL flow through.  See “stocks vs flows.”  Maybe the problem is your average investor doesn’t see $40 as much money in a world of $4 toast?  Perhaps it isn’t surprising they’re under-estimating the impact.

** A smart Investor Relations guy I talked to complained that EVERY 1-on-1 meeting started with the same question – “How is the (presumably bad) macro affecting you?”  A  thoughtful, qualified, industry-specific answer got dismissed as “well, you just aren’t seeing it yet.”





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Peasants, Pitchforks & Torches. Or “Why Bank Stocks are Tanking…”

Bank stocks are way down globally.  An apparent mystery!  Why?  A raft of research and commentary.  Impending recession?  Are oil bust bankruptcies big enough to cause systemic crisis?  The rot of Europe’s “extend and pretend” response to the Euro crisis?  China about to implode?  Sunspots?

More interesting is the question that hasn’t been asked.  Is the market is pricing in higher political risk?  Did the banks really escape payback for the crisis?  Or is the 95%’s revenge a dish to be served cold?  Are those pitchforks and torches wending up towards the castle?  At the least, we do seem to be heading into a less-comfortable political/regulatory/cultural climate.  Consider the following:

  • This in today AFTER I drafted the rest this post.  🙂  Treasonous, traitorous treachery!  It really is a big deal though…    Fed’s Kashkari, in first speech, suggests radical Wall St. overhaul:  (Reuters) “In his first speech as head of the Minneapolis Fed, Neel Kashkari, a Goldman Sachs executive before he worked at the U.S. Treasury, urged Congress to consider “bold, transformational” rules including the breaking up of the nation’s largest banks to avoid bailouts.  “Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all,” Kashkari said, arguing that the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to the U.S. economy.
  • WTF?!?  Sen. Richard Shelby R-AL  The Republican Chairman of the Senate Banking Committee is trying to survive a Republican primary challenger by slamming the banks.   By name!?!  You read that right.  Now re-read it.  Really let it sink in….  For more see this Bloomberg News article (love his quote – points for honesty).    “Even the Senate Banking Chair Is Slamming Banks in Campaign Ads”  “Shelby, who’s being challenged by a Tea Party candidate, Jonathan McConnell, in the state’s March 1 primary, has already spent almost $3 million on TV ads—more than anyone else in Congress—many of them attacking Wall Street banks….  He said on Jan. 29 that he’d halt his committee’s work until later in March: “I have a primary, you know.”
    Political professionals have been struck by Shelby’s attack on banks not only because he chairs the Banking Committee and has received enormous largesse from financial companies—$2.7 million this Senate cycle, the nonprofit Center for Responsive Politics says—but also because his TV ads have been extraordinarily aggressive, naming individual banks such as Bank of America, Morgan Stanley, and Wells Fargo. 
  • The Big Short”  Yes, a movie.  Average people tune out a lot of news – especially if depressing/controversial/complicated news.  Yet they have been lining up to see a polemical, pretty-good-but-still-complicated movie about a banking crisis?  There isn’t an exploding fireball, superhero, or winsome-Victorian-of-marriageable-age in the whole darn thing…
    • Its been doing steady-eddie business, which means strong word-of-mouth.  Opened in December.  Months later, it is still going strong.  At 14 mostly mass-market theaters near me (admittedly the Bay Area but box office numbers have been strong/steady nationwide).  I (finally) saw it last night.  The theater was packed.
    • It flat out asserts “the system” is corrupt.   I’d guess that only 1 in 10 movie goers comes out understanding the detail.  But I’d guess 9.5 in 10 agree with that underlying message.  That other 5%?  They probably agree, but don’t mind so much… 🙂
    • Nominated for 5 Oscars – Best Picture, Cirector, Supporting Actor, Screenplay, and, well, Film Editing.  I mean, it was a good movie but…  It would have gotten ZERO from the 2007-era Academy…
    • It name-checks ALL the major banks.  This surprised me.  I would have expected some Hollywood legal team to force a fig-leaf change to “Mulligan Stanley, Gortman Sachs, Morrel Lynch, etc….
  • Bernie Sanders:  He seems to be doing quite well out there…  With a one-note campaign attacking the banks as vanguards of a “corrupt system.”  Heck, Bernie has single-handedly revived “Goldman Sachs” as a marker of moral taint (see Hillary’s $650k of bribes speaking fees).  I think Bernie would love to be President, but will settle for winning back the Senate – see “pound of flesh” under Hillary below.
  • Donald Trump:  He also seems to be doing quite well.  Trump’s message isn’t coherent enough to be explicitly anti-bank.  But his supporters certainly look like an incipient peasant revolt pitchfork-and-torch brigade…
  • Hillary Clinton:  Out-flanked by Sanders, she’s out blasting the same banks that she used to massage for dollars.  And Hillary is most likely the next President (more on that later).  Just wait until Sanders extracts his pound of flesh to go out on the campaign trail for her.  More on this later too, but I’d guess a big bloody hunk comes out of the “big bank regulations” policy sphere.
  • Democrat’s Re-Take the Senate Baying for Bank Blood?  The Democrats have an increasingly good shot at flipping the Senate this election cycle.  Particularly if those swing-state candidates tap the raw, rich vein of populist, anti-bank anger unearthed by Sanders and Trump.  Those two sentences imply a sort of circular logic that is entirely by design.  If the Democrats do flip the Senate, the incoming senators are going to be bank-bashers.  Owing a lot to Bernie Sanders.  And Elizabeth Warren.  She has been quiet so far (waiting for Bernie/Hillary to resolve I’d guess).  But wait until she gets out on the hustings.  Fighting for a woman President, a Democratic Senate, and a pox on the banks….  That will be fun brutal.
  • New Life for Individual Prosecutions?  Phil Angelides, the guy who wrote the (unlikely best seller) Financial Crisis Inquiry Commission report is goading the DoJ to act it it by, well, actually prosecuting somebody.  That pesky ten year statute of limitations…  One can argue Angelides is just a Democratic hack trying to grab headlines.  But that is exactly the point.  The political winds are shifting…  See this FT piece for the details –     “Charge senior bank bosses, says former commissioner”  Phil Angelides uncovered evidence of widespread fraud and corruption in the US mortgage market as chairman of the commission which produced the government report on the global financial crisis. Five years on, he is asking the Department of Justice why it has yet to call any senior bank executives to account…  In a letter to Loretta Lynch, US Attorney General, Mr Angelides has challenged the DoJ to take action before the ten-year statute of limitation expires.

There’s more of the above wherever you look.  Most interesting is that so few people seem to be looking there.  Even Gretchen Morgensen of the NY Times.  She spent major column inches on Sunday looking at the banks without seriously considering that glint of torches on pitchforks.  Maybe it was too far outside the castle walls.  Maybe she is buried too far inside them.  She is not alone.

But the markets have noticed.  Being reasonably efficient, they are pricing in more political risk for banks.  Being human, most market commentators are still looking for explanations in the economic sphere, not the political one.  Blithely assuming the status quo still holds.  And it might yet.  But I’d bet with the market on this one…

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“Boardroom Recession” Risk Going Up? Inflation Shibboleth Slayed… Deep State in a Deep Rut?

A conversation today sparked some thoughts around sentiment inflation, negative rates, etc… So I am blatantly recycling them here.  Happy Valentines Day!

I just spent the last 3 days at an institutional investors conference and boy are they a bearish lot.  I am a little more worried about a “boardroom recession” as a result.  More on this below and to follow.  But the most perplexing thing was a general fear of inflation.  This came up in multiple conversations from multiple angles with people who are very thoughtful and smart.

The answer to this, I think, lies in the authentic-but-unrepresentative experience of people on the fast-track of a two-track economy.  But first lets slay that inflation shibboleth.  BTW – any day you get to write “shibboleth” is a good day… 🙂

The existence of negative to near-zero rates globally proves the absence of inflation.  Really.  No room for debate.  Try this thought exercise.

  • If the 10 year treasury is at 1.75% and economic growth is 1% to 2%, then we have a effective inflation rate of -0.25% to +0.75%. Just how the math works.
  • If you are going to assert that inflation is higher, then you are basically asserting that economic growth is zero to negative. And things just aren’t that bad….
  • Or you can assert the Fed is “manipulating the market.”  But if the Fed were manipulating successfully, people would borrowing all this free money and spending like mad.  They aren’t.  QED.  And note the Fed just RAISED short term rates and long-term rates just went DOWN.  Not great manipulation if that’s their goal.

But lack of general inflation doesn’t mean my peers and I aren’t experiencing inflation. Because inflation is not a general thing. The inflation rate for affluent people has been above the general level of inflation.   Heck – pints of craft beer are like $7-$8 a pop these days. I’m deeply worried about inflation!!!!

We all understand that different prices for different goods go up and down. But inflation also varies by social class (whoops! can’t use that word. I meant “income strata”). Inflation depends a lot on the mix of goods and service you consume. That mix varies by class income strata.  And the higher up the income scale you go, the worse “inflation” gets.

Paul Singer was feeling this pain when he implied that government inflation numbers were political fakes. But you have to laugh out loud at his (ahem) “real world” experiential argument. This is a guy who needs to get out a little more…  (full text and link below).

  • “check out London, Manhattan, Aspen and East Hampton real estate prices, as well as high-end art prices, to see what the leading edge of hyperinflation could look like.”  He forgot to mention how much NetJets is charging these days.  I hear its outrageous!  🙂

Things affluent people like to buy more of HAVE gotten stupid expensive.  Mostly because the increasingly affluent are increasingly isolated in bidding increasing amounts against decreasingly few of each other, but I digress…

  • Housing in San Francisco, New York, Boston, the Hamptons, etc…
  • Fancy coffee, burgers, cocktails etc… (partly driven by the above soaring real estate prices and also as positional goods).  Whole foods/organic feel-good-y stuff.  No properly coddled affluenza sufferer can thrive and go to Harvard without it…
  • Education – private schools today have facilities no-one would dream of even 15-20 years ago. College tuition costs are insane. Plus the kids “have” to go to grad school.
  • Art. Travel. Etc….

So it is true that inflation for “people like us” has been going up.  The problem is generalizing from our experience to the broader population. Negative/low rates tell us that just ain’t true. Most people still drink Budweiser.  Scary I know, but the numbers say its true.  Even if Bud no longer for sale at most places I normally go….

This insularity is where/why I am deeply worried about a “boardroom recession.”
We’re going to always have an elite.  But there’s a difference between a “healthy” elite class and a disconnected one.  Insularity is the best explanation for deeply held, clearly, simply wrong “tribal” beliefs around things like inflation. Inside the bubble, prices are going up so inflation is perceived. And there isn’t enough experiential data bubbling in from outside the bubble to keep things in perspective.

This raises the risk of a boardroom recession.  Just when things started to seem pretty decent out there in Wal Mart land (cheap gas, higher quit rates, low layoffs).  The Paul Singer’s of the world apparently came back from Davos with their underwear in knots.  I mean that literally in this case, although Davos is a useful whipping boy.  Read this quote from Cisco’s CEO speaking yesterday.

So the last 3 weeks of our quarter were the first 3 weeks of the calendar year, and that was when — the last week of our quarter was when we were in Davos and you had a 1,000 point swing in the same day on the Dow, right? That was what we were experiencing. That’s what our customers were seeing. And so we had the first 10 weeks that actually moved along exactly as we expected. And then the last 3 we saw this pause from our customers and we saw our teams were missing their forecasts and missing their forecast, and they’re usually pretty good at that.

The question is which is the chicken and the egg here?  Davos or the 1,000 point swing?

FWIW I think this elite disconnect is really what is hurting Hillary.  That is why Bernie’s “$650,000 Goldman speaking fees” punch keeps landing so hard.  From the outside looking in, she just looks like another member of the elite “deep state.”  She may not see herself as another Paul Singer, but she’s in the same bucket when viewed from far enough away…  The average Joe is angry at the entire elite class.  And the Clintons have burrowed deep into the deep of that deep state…

I’ll wrap with a Krugman “economist hat on” piece on inflation’s absence from May 2013.  It is terrifying sad perplexing that he could re-publish it today with basically no editing….

Economists who had studied such [liquidity]traps — a group that included Ben Bernanke and, well, me — knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employment.http://www.nytimes.com/2013/05/03/opinion/krugman-not-enough-inflation.html?rref=collection%2Fcolumn%2Fpaul-krugman&action=click&contentCollection=opinion&region=stream&module=stream_unit&version=search&contentPlacement=1&pgtype=collection

Here’s Krugman’s more political analysis of why.  Whether you agree with this, he is still right about the above (see “Nobel Prize”)….  http://www.nytimes.com/2014/07/18/opinion/paul-krugman-addicted-to-inflation.html?rref=collection%2Fcolumn%2Fpaul-krugman

PS:  Full Paul Singer quote is below. My guess is that he’s spent so long in the hedge fund shark tank that he just assumes everyone is lying/cooking the numbers to “talk their book” – including the government. I do think things are pretty rotten out there, but the US Government is still not run like a hedge fund….  He really should get out a little more.


But regardless of the purported results for the rest of 2014 and into 2015, all of the reported growth numbers are too high, because the official inflation number is too low. Over a long period of time, these figures have become politicized, always in the direction of under-reporting inflation. Constant repetition has resulted in most policymakers and economists now just accepting the adjustments and tricks that have become part of the reporting culture. From the notion that there is “core” and “non-core” inflation; to ignoring house prices and using “rental equivalence”; to “hedonic adjustments” according to which, if your computer is “better” than last year’s, then you should subtract an amount from the actual price every year to reflect that improvement, even though it is subjective and not really quantifiable; to a handful of other nonsensical adjustments, inflation is understated. Inflation is also distorted by the increasing gap between the spending basket of the well-off and that of the middle class (check out London, Manhattan, Aspen and East Hampton real estate prices, as well as high-end art prices, to see what the leading edge of hyperinflation could look like).”

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Crude or Cruz? Why the Market Was Down 2%… Trump & Bernie Too

Lets review the facts.

  1. The Iowa caucuses confirm that there are a lot of angry American voters out there – Right and Left.
  2. The market tanks 2% the next day.
  3. None of my market-focused news/commentary sources draw any connection between “1” and “2” above.

OK so part of the market swoon is probably Oil and Exxon’s bad earnings and etc.  But maybe just a teensy weensy bit might be the growing wave of anti-establishment sentiment out there in flyover land?  The political reporters have been on this for months.  The market reporters are still deep in the Davossian bubble.

The idea of serious political risk is still not really on the table.  Sure we’ll probably get another Democratic president, but she is just another fellow Davos attendee.  Part of the post-Clinton/Rubin/Summers Democratic embrace of the plutocratic agenda.    Meet the new boss, same as the old boss.   So we’ll get a few gestures toward the little people and we can all go back to mutual backscratching…  Or at least that’s where the consensus seems to remain.

Iowa points in a very different direction.  It already seems clear the post (Bill) Clinton “Davos Era” of centrist, plutocrat-friendly government is fading.  We are entering a very different political risk environment.  Yet most market players only talk/think about “political risk” in terms of emerging markets.

We could be in for a rough ride.  Especially sectors sucking off the fattest teats – banking, energy, healthcare/pharma, and defense.  I think most technology companies still do OK.  At least I hope so…

PS:  The tone/tenor of the next era remains is not yet clear.  I still think we are on a 20-30 year shift leftward (after the 20-30 year shift rightward kicked off by Reagan and ended by Bush the 2nd).  I remain more surprised by Sander’s success than Trump’s.  His message would have been inconceivably fringe even in the 2008 election.  But I could well be wrong.  We could end up with an ugly nativist era that I am just desperate to avoid contemplating.  We all have our blind spots.

PSS:  How weird is it that the “establishment” Republican Rubio’s 3rd place finish is getting held up as some sort of victory?  Seems mostly evidence of the thicknesses of the Davossian bubble-wall.

PSSS:  I checked and Bernie Sanders has never been to Davos.  He was likely not invited out of principle (and his prior un-importance).  Ted Cruz also hasn’t been.  He was likely not invited because he’s a slimy self-serving jerk.   But I digress….


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A Brilliant Post On Oil. If Only Written 6 Months Ago. FYI Its Gonna Keep Sucking….

My much awaited “brilliant” post on the oil price plunge.  Actually a brain flash I wish I’d had 6 months ago.

  1. Oil is in a recursive downward spiral until a (very) rational (Saudi) actor decides to stop the cycle.
  2. The “stop” signal(s) will be a wave of bankruptcies among US shale producers and deep economic pain in Iran.
  3. We have seen neither so far.
  4. So oil will continue to suck for a while yet.

The main insight was that we have a human actor in the driver’s seat.  This is not a garden-variety supply/demand imbalance price cycle.  It was deliberately ignited and fed by the Saudis.  So you just have to figure out what the Saudi definition of “success” is.  That is when this cycle ends.

“Success” is probably.  1).  A lot of marginal producers  out of the market (US shale & nascent shale efforts in other countries).  2).  A lot of pain in regional rival Iran.

I don’t have much to add on Iran.  But it looks like the Saudis under-estimated shale’s potential for efficiency gains.  This is a very human cognitive failing.

  • People only find real efficiencies under duress.  Inertia is otherwise too powerful and imagination too weak.
  • People also tend to assume things are already efficient (inertia and imagination failures again) so they overestimate the impact of stressing a system.

But the Saudi’s are now committed to their strategy – no matter how miscalculated.  So expect oil to keep sucking wind until things get much worse in the energy sector (and Iran).

This should be good for the global economy once everyone figures this all out.  Huge drop in input costs = more consumption of useful things vs palaces in London.  That should be good for the stock market (ex-energy).  Which suggests the current moment is just a kerfluffle.  So we should all be buying.  Which I am doing.  Although it doesn’t feel very good…  Which should be a good sign I’m on the right track.  Although it doesn’t feel very good…  🙂

PS:  The other interesting thought exercise is:  “what happens if we run out of places to put the surplus oil?”  Everyone is still pumping.  Not trying to outrun the onrushing bear.  Just the guy running away next to them.  Reports are that crude storage tanks are already at capacity, with excess going to rented, slow-steaming supertankers being used for floating storage.  Do we see a spike in supertanker rental rates as that capacity also gets tight?  And where else would you put it?  Per the above, the system will likely find more room once stressed.  But maybe the clever trade is to buy increasingly unlikely venues for oil storage?  Or just oil tanker capacity?  That is a trade I won’t be exploring, but someone probably makes a lot of money on it.

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I Am Shocked to Discover Gambling Here! Are H-1B Visa’s About to Metastasize?

So I was going to post something brilliant about oil, but today’s NYTimes has a page A12 story that bears watching.   Lawsuits Claim Disney Colluded to Replace U.S. Workers With Immigrants.

Cheap tech labor has long enjoyed a governmental blind eye (or wink).  Bringing in @85,000 indentured servants “H-1B immigrant Visa holders” annually to toil in the bowels of IT outsourcing operations.  The fiction has been that they do not replace more expensive American workers.  The reality – as we all know – is that a lot of them did.

The risk is that the law stops turning a blind eye?  To which the Davos crowd chortles with laughter.  After all, they feel they own the government.  That’s what they pay all those bribes “speaking fees” for…

The problem is that sometimes the government feel compelled to enforce the rules, speaking fees or no speaking fees.  The government does have to keep up appearances after all.  Sometimes its awkward e-mails from awkward lawsuits.  Sometimes its Nazis.  Cue the Casablanca clip…  “I am shocked to discover gambling here!

A key quote sets the stage.

The lawsuits by Mr. Perrero and Ms. Moore are based on the rules for H-1B visas, which Congress designed to bring foreign workers with special skills into the country. Employers are required to declare to the Department of Labor that hiring foreigners on the visas “will not adversely affect the working conditions of U.S. workers similarly employed.”  “Was I negatively affected?” Ms. Moore asked. “Yeah, I was. I lost my job.”  Sara Blackwell, a lawyer in Sarasota, Fla., representing the former Disney employees, said the suits charged that the companies had lied under oath when they said no Americans would lose their jobs.”

A lot of people knew that H-1B visas were largely used to bring in cheap IT labor.  I don’t think a lot of people knew that it was THAT explicitly illegal to thusly replace American workers.  I certainly had no idea.  And I am willing to bet that a lot of people hiring those outsourcing firms didn’t know it either.  And I am also willing to bet they wrote a whole lot of e-mails…

So we have a few tiny, pre-cancerous cells sitting there.  We need three things to happen to yield an unholy, cancerous mess.

  • We need some smoking gun e-mails to bubble up from this or another case.
  • We need a big, fat multi-million dollar payday for the lawyers involved.
  • We need regulators emboldened by a political climate increasingly concerned about income inequality, worker rights, and “furriners” (especially in turbans!  I mean, don’t they just look like terrorists!).

Its the regulatory shift that will be most interesting/informative/profound (if it happens).  Those sort of things have tremendous inertia.  They might go on to start enforcing other pesky laws like anti-trust (already happening actually).

A regulatory shift is also what Davos crowd is most likely to miss.  In Casablanca, the Nazi Strasser just assumes that Police Captain Louis Renault will keep “doing his job” propping up the Nazi regime.  Renault, of course, is smart enough to sense a shift in the wind and blow accordingly.  The result, of course, is the classic end scene.  Hint – you don’t want to be Major Strasser.

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