VERBAL LEGERDEMAIN AND THE EU

 

Weekends are supposed to be for relaxation to some degree. 

So from time to time we like to revisit something either we or one of our contributors has written. Here's a piece from 2011 when the EU crisis was exploding on the global scene and the bureaucrats and politicians were tripping over themselves to deflect blame.
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A lot of people believe that God whipped up the heavens and earth in six days and on the seventh, exhausted, flopped into a lounge chair, kicked his sandals off and put his feet up.

But what if He didn't? What if He used that seventh day to create the concept of credit, investment banking and along with those  geniuses of Wall Street and all their political allies?
 
In college certain courses require prerequisites. There's a reason. One could make a sound case that debasing a language is a prerequisite for debasing a currency. Those hard-headed, self-centered Germans most economic and political pundits are complaining about today understand that all too well. And that's the problem; they get it.
 
Debasing a language is not much different from debasing a currency. There are prices to be paid. And they both begin, as one of Hemingway's characters in The Sun Also Rises points out when asked how he went bankrupt: "Gradually, then suddenly."
 
In 1964 George Orwell published an essay, "Politics and the English Language." The first paragraph pretty much tells the tale.

Most people who bother with the matter at all would admit that the English language is in a bad way, but it's generally assumed that we cannot do anything about it. Our civilization is decadent and our language--so the argument goes--must inevitably share in the general collapse. It follows that any struggle against the abuse of language is sentimental archaism, like preferring candles to electric lights and hansom cabs to aeroplanes. Underneath lies the belief that language is a natural growth and not an instrument that we shape for our own purposes.

Orwell didn't stop there. He pointed out that the decline of a language inevitably has political and economic causes and those causes are not simply owing to the bad influence of a few individual writers. An effect, Orwell wrote, can become a cause "reinforcing the original cause and producing the same effect in an intensified form, and so on indefinitely."

He was particularly harsh when it came to politicians.
"Keeping out of politics in today's world is impossible. All views are political issues," he wrote, "and politics itself is a mass of lies, evasion, folly, hatred and schizophrenia. When the general atmosphere is bad, language must suffer."
 
The Germans and some others simply want to hold the mark on the language agreed to in the Maastrich Treaty. That language called for fiscal and monetary responsibility. Their critics obviously see it differently, taking the just-this-one-time-it-won't-happen-again path to justify their stance. 

Even Bill Gross, the Pimco bond guru whose performance this year has been anything but sterling, in his latest screed chimed in, taking his cue from a quote on a 12-year-old coffee mug he received as a gift: "You can always tell a German, but you just can't tell him much." Quite cute to be sure, but really just another round of verbal legerdemain.  

"The whole tendency," Orwell noted, "of modern prose is away from concreteness." He included activities like public speaking and speech writing. Germans admire the concrete, debasers the abstract. 

The Germans are trying to hold the line against abstraction, one of the main tools the bebasers of language and, apparently as it follows, a currency, love to use. 

Take a look at the so-called $1.2 trillion spending cuts our illustrious President recently claimed he would steadfastly veto any attempts to trim after the super-duper committee went snap, crackle and popped. On his part it appears to be an admirable stand against the economic philistines.

The key phrase is spending cuts. Anyone who thinks those are real cuts in real spending as in real deficit reductions should look again. It's obfuscation, a euphemism for lying, of the worst kind. Orwell no doubt would deplore the use of such a highly Latinate word like obfuscation. It's precisely what he wrote about, the dishonest use of dishonest words to deceive, the hallmark of politicians, bureaucrats, statesmen and other assorted species of the gas-inflated.
 
We've yet to hear anyone suggest that maybe the initial project was too ambitious to begin with. Even Jacques Delors, the man credited with creating the euro, is deflecting blame. In a recent interview from the UK scribe, The Telegraph, Delors states "surveillance" was a problem (An interesting choice of words for a European.), as bureaucrats, the Council of Ministers, failed to police member states to ensure they followed economic convergence criteria. Don't know about you, but that sounds like they reneged on an agreement they signed.
 
Even the word science, Orwell pointed out, isn't immune. It's a word like many others--e.g., patriotic, democracy, justice, realistic, to name a few: "Words of this kind are often used in a consciously dishonest way. That is, the person who uses them has his own private definition, but allows his hearer to think he means something quite different."
 
Like a blanket of soft, fresh snow the doomsayers wallowing in their gloom fest are all over the problem. So what if a few countries opt out of the monetary union? It's happened before, more than 80 other times since the 1940s, and most ended so horribly that hardly anyone can remember. 

It isn't like the EU bureaucrats and politicians didn't know what they were getting, especially with Greece and Italy. So who are the naive here, bureaucrats and politicians who cooked up this scheme, expecting a quick religious conversion, or those of the so-called peripheral, weaker countries?

Perhaps this whole mess is a clear warning to the rest of us about international bureaucrats and politicians who keep pushing for globalization, one-world government and the end of local sovereignty, a clear signal just how dangerous these supposed know-it-alls are.

For many of Germany's critics the outcome of no bailout represents a kind of living Dante's Inferno. Worse still, a clutch of investment bankers and their ilk will likely take a big hit. The repercussions could provide another round of shock and awe. 

But maybe, just maybe that's what the entire system needs. Maybe then, just maybe words and meaning will carry some real meaning.

PULLBACK BUYS

We don't often write about individual stocks to buy especially in this schizophrenic market were many stocks are overvalued, others fair-valued and few, if any, undervalued.

So with this parenthetical warning we will give a couple of examples of stocks we own that we are looking to add to on any pullback. In fact, the bigger the pullback, the more we want to add. We also note, like that Dos Equi guy, we don't often sell. That should give a little insight to our madness.

Companies are like boundaries. They come and go. The components of the DJIA of your great grandfather's day are hardly the same as today. 

Then there are those famous Nifty-Fifty of the 1960s and early 1970s. Though there was never a formal list--in fact two lists were often cited, Morgan Guaranty and Kidder Peabody, a large stock broker firm of the time--more than a few like Polaroid, Burroughs, Eastman Kodak and Kresge went either bankrupt or are forgotten memories buried inside some poor functioning survivor.

History teaches markets go through conglomerating and un-conglomerating. Probably one of the least valid reasons for conglomerating is to add value. We recently witnessed one with Pfizer-Astra-Zenica. Anyone believe, had the deal gone through, the new firm would have been named Pfizer-Astra?

Mergers and acquisitions are again the rage of the day if one can believe what one reads. Cheap money has it's price. Are Spanish bonds really cheaper-safer than U.S. ones? But like everything else this too shall pass until another time arrives, all part of the cycle.

With all due respect to the quantitative grunts if you're locked into numbers you probably won't appreciate our choices. We pay attention to those things too. We just don't consider them as some do the alpha and omega alter. The price of a stock is mostly about what someone will pay. And we think our choices people will pay a lot more for in their future.

Our first one, though hardly a suggestion that it is the best one, comes from the oil patch, Marathon Oil. Recently in the news for selling its Norwegian assets for $2.1 billion net proceeds, according to reports, the move highlights the conclusion of MRO asset sales bringing a total of $6.2 billion since it spun off its refining company, MPC, to concentrate on the E&P side in 2011.

Though we have many reasons for liking the stock, one of them just happened today when Wells Fargo downgraded MRO's status to market perform from outperform at the same time another firm, Jefferies, initiated coverage with a buy rating. We just love the scent of Wall Street confusion.

To put a number on it we think it's worth $45 a share conservatively, will hike its dividend and will develop its higher-margin assets in the U.S. where it intends to concentrate efforts, not a bad strategy if you fear geopolitical friction or supply interruptions. Our pullback number is in the $33-$35 range.

In our view, the market is due for a sharp, short pullback, maybe 4-9%, could be a bit more, before it retraces that loss and moves higher on its way to a much bigger decline down the road. And that's the decline you want to be prepared for.

We'll list another of our pullback picks, one we've mentioned before, in a couple of days.

UPDATE ON OIL

We understand there's much to do about oil owing to the recent Iraq situation, the Ukraine and other troubled oil-producing areas around the globe, not to mention the downward pressure put on the producers of the black stuff by the climate-change crowd.

With oil's recent surge above $106 a barrel, its highest level in nine months, concern is starting to mount. Anyone short oil in recent weeks is beginning to feel some pain just as the longs might do later if a calmer period develops in some of these areas.



Higher prices could put oil  producers in a more enviable position to search for more oil. It's also something the Russians firmly welcome given the sanctions. Not so with the EU. To be sure, others will say the recent explosion of the shale oil business will help soften the blow somewhat.

That's a real possibility but it's just as possible that the U.S. will  figure out some way to squander what resources it currently has in the shale beds. For such a much-hated commodity that federal and state bureaucrats and politicians love to feast on for a source of their fanciful spending ventures it's one of the great human hypocrisies. 

The point here is oil will remain a volatile commodity for years to come. And we're still buyers for the long term on any pullbacks.

EXPECT THE UNEXPECTED

If you bothered to read our recent post about Mexico, you'll recall we stated not a single economist predicted the recent rate cut. 

Now there is no issue here with timeliness or one upping anyone just further collaboration. We've been talking about EMs and how at the beginning of the year they were cited by the cognoscenti as the place not to be.

That this has been a difficult and surprising year, one few saw coming, should not surprise. And that's the point. After the incredible debacle at the Bay of Pigs, President Kennedy was quoted as saying in a regretful, self-castigating tone that he knew all along not to trust the experts.

After the great stock market run of last year too many expected smooth sailing ahead. That could still occur. But truth be spread, there are just as many things that could go wrong as could go correct. And most of us humanoids, though we rarely care to admit it, look only for those things that buttress our own beliefs.

Here's decent quick summary on recent EM actions.
http://www.marctomarket.com/2014/06/emerging-markets-what-has-changed_12.html 

HOT RISING CURRENCY

The late Hall of Fame baseball pitcher Leroy "Satchel" Paige advised: "Don't look back 'cause something might be gaining on you."

Though some might say this is panicky talk, if you're the U.S. government you might want to give old Satchel's advice a closer look.

Azerbaijan's a country most Americans would likely have a difficult time finding on the map. A former member of the Soviet Union, the oil rich country is an important wedge between Russia and Iran. Baku is the capitol city.

The country recently announced its sovereign wealth fund plans to invest $1.8 billion in the Chinese renmimbi this year. According to the FT, it is the "largest investment in the Chinese currency to be made public --and a further indication of its rapid move towards reserve currency status."

The CEO of the $37 billion State Oil Fund reported to the FT the fund was seeking permission to access the renminbi assets and start investing in the currency before the end of the year. As the renminbi grows in international important it was the seventh most used currency for international payment in April, an amount that doubled in a littler over one year.

The Azerbaijan fund is not alone in buying renmimbi. Some reports suggest central banks and other wealth funds are starting to buy the Chinese currency but only a few have publicly confirmed these purchases. The Reserve Bank of Australia, Chile and Nigeria's central bank hold renmimbi in their reserves along with Japan and Malaysia.

As noted those are the ones publicly known. The recent big energy deal between Russia and China and the fact there's talk about the BRICs finding an alternative currency to settle accounts if access to the dollar changes should also trouble U.S. officials.

In foreign policy the US is a victim of the damned-if-you-do-and-damned-if-you-don't concept. But that hardly excuses the fact that it is also a country that continues to suffer from pitiful leadership hardly unique to the current feeble, pathetic administration. It breeches generations.

It's not our intent to name names because if we did one of the names that would have to be tossed into the ring is the name of the people themselves. They have and continue to tolerate it. They do so, apparently bereft, that it's their future economic welfare and freedom at stake here.

AROUND THE WEB

Not Your Father's Ponzi Scheme
http://www.acting-man.com

Deaf Ears
http://www.minyanville.com/business-news/politics-and-regulation/articles/Moscow-and-Kiev-A-Dialogue-Of/6/10/2014/id/55250

Dropping The Bubble
http://www.testosteronepit.com/home/2014/6/10/feds-bullard-the-bubble-was-developing-under-our-noses.html

Fed Needs To Start Hiking Rates
http://www.marketwatch.com/story/fed-needs-to-start-raising-rates-top-forecaster-says-2014-06-10

Another Central Bank Adds Liquidity
http://www.reuters.com/article/2014/06/10/peru-centralbank-idUSL2N0OR2KL20140610

Buy High, Sell Low
http://www.nytimes.com/2014/06/07/your-money/fear-of-equities-drives-more-investors-to-cash.html?_r=0

BP Gets First Drone
http://www.latimes.com/business/aerospace/la-fi-faa-bp-drone-20140609-story.html

CRAZINESS ABOUNDS

 
There's an old saying, look and you'll find what you're looking for. Perhaps nowhere is that more true than in medicine. But then again maybe climate change is another sure-fire area.

Perhaps an exception to the rule today is in the financial markets. If you look for craziness you won't have to look very far or hard. There's more than enough to go around.

"Some Spanish government bond yields dipped below U.S. Treasury bonds, adding another twist to the year of surprises for the world's bond markets," the WSJ recently reported. Now we think technically the U.S. isn't in such great shape. Probably a more apropos description would be something like: An undeclared bankrupt country looking for a proper time and place to come out of the closet.

The U.S. for now still enjoys the international currency of trade, an advantage no other country has. But don't blink too long or you might miss it if there are not some serious and severe structural changes that have a lot more to do with bankrupt leadership than income inequalities or the trumped up caterwauling about the wealthy.

Now Spain, that's another can of beans. Unemployment there, generously noted, is between 20-25 percent, one section of the country wants to secede (Come to think of it, the same thing 
is going in the US!), and much more. But we'll spare you the rest and just direct you to this site.

The point is Spanish 10-year bonds are now yielding less than U.S.10-year bonds and no one apparently thinks that crazy.
http://globaleconomicanalysis.blogspot.com/

POLICY ERRORS

Looking over the current landscape one sees headlines like this from the Financial Times: "US stocks soar as US's 'fear gauge' hits semi-year lows."

Stock prices are up, inflation, so they tell us, down and volatility AWOL. When things get too far over the line, as they sometimes do, there's usually a correction or regression to the mean of sorts. The absence of fear, at least in markets, is almost always joined at the hip with the absence of common sense.    

We recall in our many travels strolling into a noted chest surgeon's office some years ago to interview him and noticing a sign on the wall behind his desk: "There is nothing more uncertain or dangerous than a state of absolute certainty."

That pretty much sums up investor attitude about this market. The Fed apparently has convinced investors they won't be jacking up interest rates until sometime in 2015. And even then they'll raise them orderly.

Now what we don't hear--and this is our take on it--is any contingency for policy error. Most seem to take for granted the bureaucrats at the Fed will get it just right. The truth is they may already be behind the curve. Such things are usually only discerned in retrospect.

The Fed in the past has missed numerous recessions either going in or coming out. Truth be told, they usually miss them on both ends. In fact, the old joke about economists is they've correctly called nine of the last two recessions.

Note also that central bank bureaucrats every time they cut rates they claim they averted disaster. What they're really doing is causing it.

Now we don't want to trouble you with too much history especially since other than revisionists not too many today are interested.  Harry Truman, the U.S.'s 33rd president, once noted, "The only thing new today is the history you failed to learn yesterday."

So just to bolster your confidence in government and bureaucrats, we'll close with three things here in America they run well: Amtrak, the Post Office and the VA Medical Centers.

What the chart below shows is the Fed missed on three of these four recessions, odds not much better than one would get in Vegas.

WARNING SIGNS?

Earnings no longer in tandem with stock prices in the EU.

This article by Wolf Richter appeared 6-8-14 on David Stockman's Contra Corner.

Here's a couple of paragraphs from the post.

For years, EPS of the Stoxx companies and the index itself have been rising and falling roughly in parallel. The chart, based on data from FactSet, picks up in 2005. The index was tracking earnings perfectly on the way up. On the way down during the financial crisis, EPS lagged, given that companies report quarterly and the index crashed by the second. Then EPS recovered – OK, in Europe, financial engineering is just as normal as in the US – while the index lagged behind as the debt crisis was raging. But when the index took off, an ugly thing happened:

Since July 2011, earnings have been falling!

And that, despite quarter after quarter of Wall-Street forecasts of dizzying earnings growth for future quarters that then get whittled down to nothing!

As of May 30, according to data provided by FactSet, the Stoxx 600 had EPS of 23.67. That’s down 0.7% from a year ago, and down 11.2% from July 2011. These miraculous European companies that make up this gravity-defying index and that have been trumpeted by Wall Street with such conviction are making less now than they did three years ago during the depth of the Eurozone debt crisis!

GOBBLEDY MEETS GOOK

                           








 
You got to give it to central bankers and their loads of economists. They like to take a language and screw it up as badly as they can, almost as badly as governments around the globe like to screw taxpayers.

We'd include a host of others who enjoy torturing the language, but space doesn't permit. Yet most of you sociologists, psychologists and business school grads know whom we're talking about. So for now we'll start with this cute phrase that came out of a recent Financial Times article about the ECB and their new found love for financial charity.

One for the money, two for the show, three to get ready and here we go: "monetary transmission mechanism." In case you haven't guessed it, it's broken. Wow! Sounds like a Bad Day At Blackrock and we're not talking about the investment funds.

So what is the monetary transmission mechanism that's so busted? It's banks refusal to lend money or make loans irrespective of how low central bankers lower the interest rates it charges bankers. Now that brings up an interesting point. You first roll out the regulators to financially pistol whip the banks for doing all the things they should not have done in the first place and now you want them to make loans and take risk just because money is cheap.

In the past when banks were given the prospect of cheap money, they did what any sane banker would do, they bought government bonds to make guaranteed money on the spread. After all, lending to families and small businesses can be a risky business especially when you relax the the lending standards like the U.S. government did with its an affordable home for everyone program that led to the subprime explosion.

But that's a topic for another time, one that will never show up in the lives of the bureaucrats and politicos responsible. Meanwhile, we'll just entertain ourselves with some redundancies like feeling tones and aggregate demand. 

And please don't get us started on economic redundancy, a term you and I know we most likely wouldn't capisce even if it were written on the stall door in a public restroom as diversification.