SURPRISE. SURPRISE

The bond market continues to conjure up a plethora of opinions. Some say it's a bubble, some say it isn't, sort of like the old childhood ditty many of us remember: She-loves-me, she-loves-not

.

I recall the tech bubble in 2002 not long before the gas came out of the balloon. At the Las Vegas Money Show thousands of visitors poured through the hundreds of exhibits daily, nearly all of them wearing tech blinders. Day trading was hotter than last year's sex symbol.

IT'S ALL IN THE WEIGHING

Since June of this year after several players on Mexico's national soccer team tested positive for a steroid, clenbuterol, Mexican officials have struggled with tracking down ranchers who supposedly spike livestock feed to make their cattle more attractive come market time.

Steers usually yield about 55% meat. On clenbuterol that yield jumps to around 62-65%. Cattle on the steroid for a month or two, according to some sources, can pack on 100 pounds or more of beef in each steer. If you can hear an old fashion cash register ringing somewhere in the background, you're getting the picture.

Problem here is one man's cash is another's poison, in more ways than one. Innocent people can get caught up like those soccer players who were later exonerated. Other unsuspecting, innocent souls just get sick from eating the contaminated beef, many winding up in the hospital.

The above is an excerpt from a story we penned in October, 2011. The point for here is, the cattle weighed more. In this case they were bloated by the steroids, something the ranchers sought, good thing perhaps for them and not so good for the unsuspecting. 

So it depends on who is controlling the scales. Here it was the ranchers. So keep that in mind as you read the following. It's from the June 4, 2008 issue of the Economic Policy Journal.  

INFLATION

With gas prices at the pump nearing $4 a gallon in So Cal (Some in LA are paying $5 a gallon.), drivers are getting fewer miles per tankful.

Bill Gross, the Pimco bond guru in his latest newsletter discussing monetary policy and the economic recovery, wrote:

Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four new dollars of new credit to generate $1 of real GDP. Over the last decade, it's taken $10, and since 2006, $20 to produce the same result.

Gasoline and GDP both start with the same letter in the alphabet, inflation.

PLATO'S TREE IS MISSING

It probably begs the question, but we'll ask it anyway.

 Why do politicians of whatever political philosophy never seem to understand what Malcolm Gladwell in his book of the same name,The Tipping Point, clearly noted: There
is a limit, as in people will alter their behavior?

The following is from a recent story in The New York Times about what's going on in Greece since the debt crisis began there where salaries and pensions have been cut, unemployment soared to nearly 27% and people are doing what people do when their pain threshold gets crossed or tipped, retrenching.

In raising the taxes, government officials hoped not just to increase revenue but also to equalize taxes on heating oil and diesel, to cut down on the illegal practice of selling cheaper heating oil as diesel fuel. But the effort, which many Greeks dismiss as a cruel stupidity, appears to have backfired in more than one way.

For one thing, the government seems to be losing money on the measure. Many Greeks......are simply not buying any heating oil this year. Sales in the last quarter of 2012 plunged 70 percent from a year earlier, according to official figures.

So while the government has collected more than $63 million in new tax revenue, it appears to have lost far more — about $190 million, according to an association of Greek oil suppliers — in revenue from sales taxes on the oil.

Grade school math says that's more than three times what the government took in and they most likely pissed a bunch of Greeks off in the process. This is a story about heating oil, in case you didn't catch it, poor, middle class and no-so middle class people trying to heat their homes and stay warm in the winter.

Meanwhile, many Greeks are suffering from the cold. In one recent survey......nearly 80 percent of respondents in northern Greece said they could not afford to heat their homes properly.

The return to wood burning is also taking a toll on the environment. Illegal logging in national parks is on the rise, and there are reports of late-night thefts of trees and limbs from city parks in Athens, including the disappearance of the olive tree planted where Plato is said to have gone to study in the shade.

At the same time, the smoke from the burning of wood — and often just about anything else that will catch fire — has caused spikes in air pollution that worry health officials. On some nights, the smog is clearly visible above Thessaloniki, Greece's second-largest city, and in Athens, where particulate matter has been measured at three times the normal.

All this in what officials describe as not an unusually cold winter and, according to one official, so far there are no signs that the tax has discouraged illicit sales of heating oil.

Government officials, however, according to the story, say it's "too early to judge the new tax. The winter is not yet over." And Harry Theroharis, the Secretary General of the Ministry of Finance, called the situation a complex environment too complicated to blame the result solely on the new tax.

Meanwhile, though it's just hearsay. One recent cold night in Athens two elderly gentlemen involved in a heated discussion were spotted rubbing their hands together over a crackling bonfire. A passerby reportedly overheard one telling the other: "Aw, hell, it was an old tree anyway."

VIEW FROM HERE

Jobs, Jobs, Jobs
There's been much discussion about the recently released unemployment numbers and the so-called new discovered jobs from earlier months.

The key item here is new discovered jobs or upward revision. Though this is not new, quite often the numbers often get revised, up or down. That's the part you should be paying attention to, revisions as in suspect.

Supposedly they found more new jobs but overall unemployment went up to 7.8. With the so-called unemployment number set for the Fed to turn off the monetary printers at 6.5 you should be asking what's so magical in that figure?

The next thing you ought to be asking yourself as an investor is what's on the list of things the government does efficiently: balance the budget, control spending, run Amtrak and the postal service?

HIP-HIP HOORAY
Pay-to-delay may be on its way out with the impending departure next week of the Federal Trade Commission head Jon Leibowitz.
According to some, Leibowitz has been a big thorn in the side of big pharmaceuticals and their pay-to-delay deals with generic drug manufacturers.

Simply put, the big boys would agree to a settlement to pay up if the generics would delay production of the knock-off drugs and end any litigation. Leibowitz argued the delay cost consumers money and were anti-competitive.

Costing folks money--especially if its big pharmacy--will get you some attention. Next month the Supreme Court will review those agreements. However the court decides, they'll most likely be some hip-hip hooraying going on by one group or the other.

The Market And Boxing
In boxing there's an imaginary line separating the fighters. Once one of them crosses that line, it's on. The same applies to markets that get ahead of themselves, something many believe this current market has. Different traders have different numbers they're looking for to signal the start. But be assured there's one there and most likely it's much closer than retail investors think

PIMPING

PIMP ZONE

Pimps come in all sizes, shapes and colors. It's got to be right up there with the oldest professions, like lobbying. 

There are pimps on the left, pimps on the right, pimps in the media, pimps everywhere. It almost sounds like something from a Tennyson poem and we the folks are the noble 600.

What the pimps on the left like economist Paul Krugman and his Twitter crowd don't seem to want to get is there's a lack of confidence owing to a disease all politicos seem to have, left, right or abstaining, the acute absence of fiscal responsibility. A cynic might argue any responsibility. 

In musical terms it's a bad case of the economic blues not completely of our own doing.  And what they all miss is, to paraphrase that famous St. Louis economist Chuck Berry, sooner most likely rather than later, Beethoven is about to roll over and give Tchaikovsky the news.

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.