THE HOT SWEDISH MODEL

No, we're not talking T&A here, something much more solid than that. So spare us the PC epithets.

 Is there something US politicians and the American public can glean here? A key word in this interview is pragmatism, as in a tradeoff between deficit spending and deficit entitlements.

"Northern Lights: The Nordic countries are reinventing their model of capitalism" is the feature article in the recent issue of the Economist.
  

YOU'RE ON YOUR OWN

With the DJIA breaking above 14,000 today for the first time since 2007, here's an update on our Zimbabwe article, "It Can Happen."

May be even a little food for cogitation, maybe not.

What many retail investors and retail voters alike apparently only vaguely comprehend is purchasing power. And the loss of it. Sometimes it's insidious, like the old boiling the frog trick. See Federal Reserve Bank here.

Two of America's finest institutions celebrate their 100th anniversary in 2013, The Federal Reserve Bank and the IRS.  A detailed research project of any meaningful magnitude will have a hard time finding two institutions that have destroyed more purchasing power than these two since their birth. But for now that's part of the rest of the story. Back to Zimbabwe.

A former British colony known as the Republic of Rhodesia for many years, Zimbabwe gained its independence in 1980 with Robert Mugabe Prime Minister and the Zimbabwe dollar replaced the old Rhodesian currency. At the time the Zimbabwe dollar held more value than the U.S. dollar (See U.S. inflation rate 1980-81).

In the early part the last decade we had the of pleasure visiting Zimbabwe and traveling around the country. Back then they wanted fresh U.S. $20 bills at the airport when you entered the country and another one when you flew out. A couple of elderly people sitting on weathered wooden folding chairs at tattered metal folding tables with cigar boxes stuffed full of the bills greeted visitors with a friendly smile. It all seemed rustic enough .

Another face, this one unsmiling, that greeted visitors everywhere was pictures of then president Robert Mugabe. One day at a checkpoint crossing into Botswana right in front of the guard shack there was a motorcycle accident.  A couple of us stopped to see how bad one of the riders was hurt. We helped him up and into the guard shack. When we turned to leave there it was, an over-sized picture of Mugabe on the wall staring down at us, taking it all in. A friend looked at the picture, then at me and rolled his eyes. As Hemingway might say: "It wasn't a good feeling."

A short time after Mugabe became president he instituted a destructive redistribution plan, seizing farmland owned by white farmers and began redistributing it. An avowed socialist, Mugabe sought to right the wrongs of what he saw as British colonialism. Over time his plans proved disastrous as food scarcities soared, manufacturing tanked and unemployment hit 80%. Violence erupted and foreign aid dried up adding to Zimbabwe's woes. It quickly became a monstrous mess. To pay its debts and to try to restore some stability the government ran the monetary printing presses until the smoke coming out of them was visible miles away. But things only got worse.

Zimbabwe inflation rates rocketed in 1998 from 32% a year to an estimated high of 11,200,000 in 2008, according to Zimbabwe's own government statistics when officials issued a new 100 billion dollar note. At that point the government stopped trying to keep tabs. In 2008 Zimbabwe's rate of inflation was so bad prices were doubling every 1.3 days, the second highest in history only to what Hungary experienced in 1946 where prices doubled every 15.6 hours.

Around the same time, talk about pouring H2O on the head of a drowning man, Transparency International, an organization that tracts public sector corruption in 176 countries around the world and publishes an annual Corrupt Perception Index,(www.transparency.org/2012), from the least to the most corrupt, listed Zimbabwe among the worst. Capital fled the country faster than one can say Usain Bolt.

Kyle Bass is the founder of Dallas-based hedge fund Hayman Capital Management. He is also a guy who knows a thing or three about inflation. Bass reportedly made roughly $500 million shorting the sub-prime mortgage miasma. Anyone now think subprime paper wasn't inflated?  Give or take a couple tens of millions here and there he's had other successes.

Bass appeared on CNBC today (2-1-13) discussing monetary policy, inflation and rising stock prices. "You lose sight of what's important if you're focused on nominal prices in equities," he said.

"One of the best performing equity markets of the last decade has been Zimbabwe. But now your entire equity portfolio only buys you three eggs."

That's the big whammy in your lunch pail most people don't get. That's the be careful what-you-get-use-to factor because it can and most likely will change.

"You have to really focus on the insidious nature of what inflation is," he concluded, "and how real returns might be negative on both equities and bonds. You're losing purchasing power."

And that's the point, Mr. Krugman. You lose purchasing power. And nobody--not Bernanke or Krugman or anyone else, not a police, fire or Indian chief, will sound the tocsin before hand.

You're on your own.

IT HAPPENS

Zimbabwe has mere $217 in the bank

Jan 30 2013 07:48 Sapa

 

Tendai Biti. (File, AFP)

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Harare - After paying public workers' salaries last week, the balance in cash-strapped Zimbabwe's government public account stood at just $217, Finance Minister Tendai Biti said Tuesday.

"Last week when we paid civil servants there was $217 (left) in government coffers," Biti told journalists in the capital Harare, claiming some of them had healthier bank balances than the state.

"The government finances are in paralysis state at the present moment. We are failing to meet our targets."

Zimbabwe's economy went into free-fall at the turn of the millennium, after President Robert Mugabe began seizing white-owned farms.

The move demolished investor confidence in the country, paralysed production, prompted international sanctions and scared off tourists.

After more than a decade - in which the country suffered hyper-inflation of 231 million percent and infrastructure that crumbled as quickly as prices went up - the situation is now more stable.

But public finances remain a mess and local business battles against unstable electricity supplies, lack of liquidity and high labour costs.

Zimbabwe's government has warned it does not have enough money to fund a constitutional referendum and elections expected this year.

Biti said that left no choice but to ask the donors for cash.

"We will be approaching the international community," he said.

The country's elections agency said it requires $104m to organise the vote.

Government's national budget for this year stands at $3.8bn and the economy is projected to grow 5.0%.

The mineral rich country is now using the US dollar and the South African rand.  

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HARD HATS & THE VIX

Note: This article was originally posted 1-25-13, but deleted by human error.

Ever go to a construction site? Most of the workers, including visitors, usually wear hard hats. There must be a reason.

Indicators are as much a part of the markets as three pointers are a part of basketball or holding hands is in a new romantic relationship or volatility in life.

Investors love steady upside volatility of bull markets but deplore downside V in prolonged bear ones just as holding hands can be nice but as a long-ago popular song noted breaking up is sometimes hard to do. And costly.

VIX is a volatility index traders use to gauge the market's direction or if the market is over-bought or over-sold. It's based on a put-call options ratio. Options give one the right to do something. Options are what's known as decaying assets much like us, Homo sapiens; they too have a time limit.

Every year you buy a home owners insurance policy that has a starting and expiration date. Six months into the policy it's lost some of it cash-in value owing to time decay. That policy gives you downside protection if something nasty to your home happens, not a lot different from pre-nups if something gets nasty there.

 When you pay for that policy you just bought a put option, usually good for one year. If there's a big fire causing lots of damage, you're glad you bought the policy; if not you're out the premium but you had the feel-good feeling for one year knowing you we're covered. When fire happens you exercise your right to put or sell that policy back to insurance company and they pay for damages. You win this time. All others when no damages they win.

Put is play market headed down, call just the opposite. When things appear gloomy investors usually bid up the put prices and calls conversely get cheaper. It's the same the other way when the economic sun comes out and folks believe they can truly see for ever. Right now the VIX at 12.5, a 5 year low. Another way to say it is, it's an indicator of calmness or storminess....at 12.5 it's, to borrow a line from Coleridge's The Rhyme of the Ancient Mariner, "like a painted ship on a painted ocean." Things don't get much calmer than that.

If you're a sailor you need a bit of a wind to have a decent day at sea. Too calm or too windy, not so good. So VIX is a proxy on sentiment of a group of market players, sophisticated or otherwise.That's what it tells us. What it doesn't tell us is if they are correct. That's our decision, further proof there are no free lunches.

The late Julius Simon, an economist well-known in academia but much under appreciated in public eye, once noted we have Statue of Liberty on east coast and we should put a Statue of Responsibly on west coast. Simon was noted for his belief there are no such things as natural resources; the only one is the human mind without which any so-called natural resource--land, oil, bauxite,etc.--would remain inert, another way in our judgment of saying we have to decide and our decisions ain't free.

At one juncture in 2008 when it looked like the bottom was about to drop out of the ole economic container VIX traded in the 80s, an all- time high in its 21-year history. Its range over it existence is roughly 10 to 89 where it peaked in October 2008. Between 1990 and 2008 the VIX traded at an average just over 19. It's only traded below 14 about 1/5 of the time or 20 %. As noted today it's around 12.5, a 5-year low with largest move lower over the last 3-6 month period in 3 years. So are investors bullish or bearish? Well, one indicator that tracks such things shows about 53% bullish versus 23 % bearish the highest in 4 months.

Now that statistic about trading below 14 is important because in 6,000 days of trading VIX has only traded below 10 nine times. Remember that's 6,000 days of 4 or 5-day markets owing to holidays, etc. Last time it bounced below 14 was just before the current rally when market coughed up 7%. Seven percent from here is about 1,000 points and not a big deal, but 20% another thing.

The current market has discounted just about every piece of bad news that's come it's way, budget-economic cliff, higher taxes, Obamacare, global unrest, slow growth, inflation fears, the banshies at the Fed wildly printing money, you name it. So what's the blind side issue going to be? It's usually clear only in hindsight. So do we throw away our hard hats or keep them ready? You decide.

BLOWING SMOKE

Only fools and knaves get surprised when the road of life gets a little bumpy.
                                                  RL Ellison

Blowing smoke has been around for a while.

Here's proof positive. And as we keep repeating, there's nothing new under the sun. It's just packaged a little different as the excerpt below from Burt Prelutsy's recent article, Guns & Goons, at BurtPrelutsky.com recounts about the powers that be in D.C.

Who said all the good rappers are in Hollywood?

Finally, someone else sent me a photo of a strange-looking instrument and asked me if I could identify it. I couldn’t. It turned out to be a combination of a bellows and a tube that was widely used in the 18th century. The purpose of the contraption was to help in the resuscitation of drowning victims by forcing tobacco fumes into their rectums. 

The warmth of the smoke was thought to promote respiration, but doubts about the smoke enemas ultimately led to the popular phrase “blow smoke up someone’s ass.”

Although it fell out of favor two centuries ago, it has not only been rediscovered by the Democrats in Washington, D.C., but Pelosi and Reid are insisting that it be mass-produced as an essential part of ObamaCare.

Editor's Note: Though we weren't yet able to verify it, rumors abound that instrument actually originated on Wall Street at an investment bankers convention.

LET THE CUTTING BEGIN

There is an old saying in medicine whenever one is dealing with an open wound or a contaminated laceration: "The solution to pollution is dilution."

In some cases the more dilution the better. And when it comes to pollution, you can forget about carbon dioxide and ozone layers. What we're talking about here is government pollution.

From the silly legislation that prevents start-up businesses from starting up to burdensome, complicated tax codes more mysterious than the Da Vinci Code to wasteful government spending that would make every drunken sailor who ever lived blush, it's as obvious as Barney Frank's sexual preference: Too many chits out, too many IOUs, the sum and substance of politics everywhere.

Now before all you epithet-hurlers get worked too tight, Mr. Frank has publicly avowed his preference; that makes it a statement of fact, one of public record. If beauty is in the eye of the beholder, so too must be malice. No malice intended here, just fact.

Irrigating a wound helps remove the unwanted bacteria and debris. The wrong bacteria in the wrong place is just another name for debris. And that's what government waste has become, just so much debilitated, dead debris that will soon include, if something sensible isn't done, the U.S. dollar, DOA. And the answer sure isn't passing out more heroine to the addicted like New York Times columnist and left-wing economist Paul Krugman keeps pimping.

Infections frequently have to be opened and drained to let all the waste and harmful debris out. Krugman's prescription calls for kicking the can further down the road, arguing the US debt problem is relatively small compared to other developed countries.
Krugman and his ilk apparently believe the possibility of septicemia isn't wound specific.

As is sometimes the case with wounds, irrigation often isn't enough. Unwanted waste must be excised. That usually means taking a scalpel and some scissors to cut away the unwanted so the remaining healthy tissue can flourish. That's just about where we are today as a nation.

So forget all that political nonsense about bipartisanship; it never was and never will be. Just send your elected official a scalpel and a pair of scissors.

BE CAREFUL

Be careful what you get use to. Probably no place is that more important than it is with today's stock market.

The trend may be your friend and all that, but complacency often comes with a high price tag. The S&P 500 is up 5.4% so far this year closing at 1502.96 last week, not far from its all-time high of 1565.19 in 2007. Annualized that would produce a market gain over 60%. Ain't going to happen.

Sell in May and go away is a shopworn Wall Street slogan. Could we see a summer sell-off to rival the Summer 2011 one when all the political nonsense about budget deficits and ceiling cliffs is over come June?

Another well-worn Wall Street ditty says markets always climb worry-walls. Maybe so but this market is acting like it doesn't have a single global care, climate change and genetically modified grains notwithstanding. Yet there remains enough possibly serious problems in the wind that could sideswipe the entire dog and pony act.

Start with sequestration. Set to take place in March if Congress can't agree to disagree to agree that many believe will whack about 1% off the hide of GDP and push unemployment higher. One government agency expected to get whacked pretty hard is DoD, the Department of Defense, where an estimated 118,000 jobs will disappear faster than my old girlfriend's affections.

Sequestration is, in case you haven't heard, a politically-contrived term to describe mandated budget cuts to reduce the deficit set to kick in if Congress can't agree to disagree to agree before summer rolls around.

Stimulus packages, like many things in life, arrive in various forms: tax cuts, easier credit, ramped up spending, lower interest rates, to say the least. According to one report, in the last year and a half globally there have been over 300 stimulus packages from various governments. Forget the Yellow Brick Road, follow the stimulus package because there is most likely a stock market profit in there somewhere.

One such package is the Federal Reserve's love affair with the bond market (Yea, we know folks have been talking about this for some time.) that many seem to believe can continue forever. But if the minutes of the last FOMC meeting earlier this month are any indication, forever might not linger more than, give or take, a few bond auctions away. In short, there appears to be some conflict in Federal Reserve Land. Not everyone wants to continue riding the same attraction.

Say it anyway you want, frontwards or backwards or whatever, it means higher interest rates. And don't be too surprised if those higher rates are already in the economic porridge.

TAKE A TIP

The speculator's deadly enemies are ignorance, greed, fear and hope. All the statue books in the world and all the rule books on all the Exchanges of the earth cannot eliminate them from the human animal.
                                               Jesse Livermore

Somebody forgot to tell all the politicians and the social do-good crowd.

Jesse Livermore was one of the all-time great stock market traders amassing several fortunes over his career. He shorted the market before the big 1929 Crash, pocketing nearly $100 million dollars, a sum that equates to roughly $12 billion today.

In 2009 almost a century later another famous Wall Street icon, probably 100 times more famous than Livermore in his day, was asked reflecting on the market's recent doldrums: "Why can't we learn the lesson of the last recession. Look where greed has gotten us."

The Omaha Oracle, Warren Buffett, replied, "Greed is fun for a while. People can't resist it."

Buffett went on to point out what in our opinion was the most important point implied in Livermore's statement, one most people either fail to or refuse to learn about the human species, "...however far human beings have come, we haven't grown up emotionally at all. We remain the same."


Livermore's comment about statue and rule books in our judgment is even more telling. Humans will keep on doing what humans do, regulations and rules notwithstanding; and all the Kings horses and all the King's men aren't going it change it. What they can do, however, unintended or otherwise, is makes things much worse.

We had a spate of high profile athletes recently commit suicide. It's highly unlikely the way they died will tarnish their athletic feats. Nor should it. Jesse Livermore likewise died by his own hand, a fact some might use to try to tarnish his feats. But as Buffett noted much of human kind has yet to emotionally grow up. If you entertain any hope of making serious money in the market take a big tip from two of history's best players.

A LOOK 2013

                                                           
This is, to paraphrase Dickens, the worst of the clueless versus the best of the clued-in time, a time when much money will change hands now that we have four more of the Bamster crowd.

Worse nightmare: taxes rise? Nope! Worst nightmare: taxes go up and deficit stays same or expands. Printing presses world-wide running hard. Japan's debt to GDP 250%, US 170%; highest in history for country: UK 290% in 1815 and again in 1945, British lost its currency status as international trade currency after WW II. US housing market showing some vague life-like signs, much of it coming from higher rents when demand there increased owing to the trashed home-buying market. Demand or lack thereof creates markets, up or down. Housing inventory still high, banks afraid to lend, oil at $85/barrel--cheap. US has one ace in hole--domestic gas and shale oil, but politicians could screw that up. Materials, metals, agriculture all places for money. Water too.

Romney biggest winner in election; he won't have to explain messy next 4 years. Biggest losers the great unwashed masses of the clueless. Rising prices not only way to create inflation, debasing the fiat currency works just as good. It's going on big-time. Bamster loves the word equal, but a Russian immigrant recently told me, equal there means everyone is poor, working hard and have jobs, but top 10% have all the money. Familiar ring. Here it's top 1%. No middle class there, vanishing one here. Divided nations create opportunities. In fact, one could argue when was it ever undivided.

Take look at how dollar debased over last 100 years, the anniversary of Federal Reserve Bank and the IRS, both created in 1913.

We have not had 20% market decline since the bottom in 2008. 20% declines usually occur about every 3.5 years. We've had couple 10 percenters and one 17% in 2011, so after lame duck season ends, political dealing begins. But the market may well tip it's mood before that. Lot of talk/concern right now about fiscal cliff. Market may soon, if not already, factor in that possibility. Most likely scenario non-event short-term.

Here two oil picks to add to, BP and COP. BP just settled spill issue and has 5.3% yield at current price, 40.16, mid-way between 36 and 48 on 52w high-low. Earning 4.95 this year and possibly 5.20 next, trading at 8x earnings. Added kicker also just settled dispute with Russia. Similar story for COP, trading just over 54 with 52w high-low 50-78 range at 9x times earnings yielding 5% earning close to 6 a share.  Average yield on S&P 500 stocks 2% and trading at p/e 14. These are good rainy-day buys in here with recent pullback in energy prices.

With taxes set to go up muni bonds should become more in demand, but higher interest rates when they arrive, and they will, could prove troublesome. Like the line in a long-ago popular song: It's just a matter of time. Could be facing a cap on part of tax-exemption of muni bonds based on one's tax bracket. A Bamster proposal.

Some of the bartering is in and dividends for those earning less than 400k for single folks and 450k for married couples survived at 15% tax rate. Above that the pic gets a bit like the portrait of old Dorian Gray, pretty ugly. Interest income took a hard hit, so investors will react accordingly. The same for capital gains in the higher brackets.

To put it succinctly, the recent deal to avoid a cliff that was better advertised than the upcoming Super Bowl where Beyonce will do the halftime gig will be is just a period between crises. This lull presents major opportunity in the energy sector. Meanwhile, back at the ranch the Obamacare surcharge tax at 3.9% gets added to interest income and that coupled with this administration's latest definition of "rich" spells trouble in so-called paradise. Rich is as rich does.

New US credit downgrading in the wind. And if you like the quirky, unfathomable, see
Oregon where legislators want to tax all those greenies who rushed out and bought a Prius. It's a mileage tax. And don't laugh Washington has one on the books and Nevada is considering. Reason: falling tax revenues at the gas pump. The Washington tax requires electric vehicle owners to pony up an annual flat tax and a mileage added tax is under consideration. So where is Ed Begley, Jr. When you need him?

Investments: buys

Oil ............. yes
Gold/silver...........yes
Energy...........yes
Good quality dividend payers......both here and Europe...yes. General Mills, Diebold, J&J

US Treasuries.......no
Bonds.....no. Munis....yes with care and benefit of clergy.

We want some exposure to large cap European stocks, most likely via either vanguard /fidelity fund. Also commodities via fund. Copper has already started back up. Agriculture, too. One financial we like is HBAN, Huntington Bank, traded in low 20s in 2007 and has chance to return there. Slowly buying more. Trading around book value with small dividend. Made its mistakes, but is now well-run regional with some upside.

Other outside the box good dividend plays are SCCO, Southern Copper, an Arizona based metals that mines more than just copper--lead, molybdenum and zinc with 6.5% yield trading at around 11p/e. Another is CLF with big yield, low payout ratio, trading way off 52 week highs. This is a good return-of-inflation play.

What's In Another QE?

The QEs have had it.

Trusting souls want to believe Bernanke stands at the ready, rescue button in hand. That's an old, old movie.  The monetary wiggle string is mostly all out. Another round of QEs could further spike raw material prices, picking more money from consumer pockets, something rebounding energy costs is already doing.


Economic growth prospects in most developed areas are anemic; shortfalls in corporate earnings and declining retail sales are but a few of the current economic downers facing investors. A case in point, high-end retailer Coach shareholders witnessed a 17%  decline in its stock price recently. Or Tiffany's shares, down nearly 5% since late last month.


On the other side of the retail trade is Walmart. Its shares are up dramatically in just the last two months, trading at 73 and change, just off its 52-week high. Some refer to this as slum retailing as folks pinched for capital downsize their spending seeking more bang for their buck.


And forget about jobs. Most folks have. The prospect of higher taxes beginning next year and fewer incentives to invest sound more and more like a super-sized horse-meat sandwich--unappealing, to put it kindly. Where is Mayor Bloomberg when you need him?  Super-sized soft drinks maybe persona non in high places, but BS as always rides free.


That the trusty Fed stands ready is more whistling past the bone yard.  Bond dealers and some big-time investors are suggesting the US Treasury float short-term paper with negatives yields. That should palliate the worries of fixed-income investors. QEs are DOA, just ask the smart money. 


Markets may climb the proverbial worry-wall from time to time.  But short of defaults and higher inflation, few have discovered the magic formula for cheating the piper.