THE REAL DANGER

Two cardinal sins among the many that governments commit are propping up markets and keeping interest rates too low too long.

Japan is the latest example where the propping is under way with the second coming of Prime Minister Shinzo Abe and his goal of hogtying the Bank of Japan. Japan, an export-dependent nation, is currently the not-so proud owner of one of the strongest fiat currencies around.

To say that has weakened it exports is putting it mildly. The Land of the Rising Sun has been stuck in a de-leveraging death spiral for 20 years. A small island with an aging population and few natural resources, domestic demand remains in a major funk. Leveraging usually weakens a currency, not the other way around.

CLAIRVOYANT AARDVARKS

Ran into an old friend the other day. We hadn't seen each other for a while. I'm always interested in what he has to say.

Harry's a trader. A contrarian to the core. Years ago when we we first met, I asked what he traded. 

"Everything from bonds to wives," he said, with a slight chuckle.

He's now on his fifth I think. But it's not his expertise as a wife picker I'm interested in though I think some might hold that against him. It's the old book-by-its-cover syndrome. Harry's has a good track record doing what few can really do, calling it correct and making money. And he's made some serious money.

We decided to have lunch over some Italian fare at a little strip-mall joint not far from LAX. Harry's a peripatetic soul. He likes to visit companies and countries. He calls it up close and in the flesh.

"What's your take on the bond market?" I asked, as he slid into the booth across from me and we ordered some tortellini with a bottle of Tuscan red to wash it down.

"Reminds me of my third wife."

"How's that?"

"We're in a state of if-we-don't-look-it-might-go away. She finally did too, took half my grubstake with her."

"That must've stung?"

"Every good trader has to know how to take a loss," he said, laughing at the memory.

"U.S. equities got that PT feeling to them," he said, taking a sip of wine.

"PT?"

"You been watching money flows? Money's been flowing lately into mutuals funds and ETF's faster than Bernanke can print the stuff. Most of it from retail crowd. While back they wanted no part of the action. Peak time."

"So what are you buying now?"

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.