Archive for the ‘Economics’ Category
Monday, June 4th, 2012
We find ourselves living in historic times along many fronts.
At a recent campaign event, presidential hopeful Mitt Romney took a hard look at the reality of government debt, noting that the thorny crisis caused by perpetual can kicking will likely be faced by our kids in the near future.
While Mr. Romney is right to address the seriousness of the government debt issue, he may be slightly off on the timing of this trade. While he anticipates the debt crisis to require attention “by our kids,” mathematical logic might indicate the problem could fester in the very near future â€“ potentially in three to five years in the United States, according to some projections. The mathematical logic indicates that the over expansive monetary policy that lead governments to embrace expenditures significantly higher than their revenues is coming to an end. Greece is example A of a society that received a natural margin call. With debt to GDP breaking into triple digits, investors might take note that all governments will likely receive their “margin call” at some point. The question is, when?
Republican Congressman Paul Ryan (Wisconsin) may have corrected Romney’s timing. Speaking on Meet the Press on Sunday, May 20, Representative Ryan called for a potential US debt crisis in two to four years. This coincides with other credible projections. “We could have a debt crisis in (the US in) 2-3 years absent action,” observed David Walker, former US Controller General and head of the Government Accountability Office (GAO). “There is a lot of irony and hypocrisy in Washington’s desire to make sure that JP Morgan has proper risk management practices,” Mr. Walker added, noting a general lack of appropriate risk management in government regarding deficit spending and leverage usage. Mr. Walker has been the early leader in speaking to the mathematical logic of a coming debt crisis, a message that few care to hear.
Making the required difficult and unpopular political decisions required to fix the debt problem will require significant political will. David Gregory of NBC’s Meet The Press noted this in his May 20, 2012 grilling of Republican Congressman Paul Ryan and Democratic Senator Dick Durbin. This is because over-leveraged governments have really two choices, neither of which are positive. In other words, there are no easy answers to the debt problem, only “worse and worser,” as author John Mauldin is so fond to point out the harsh reality.
What is the mathematical and practical logic behind a two to three year debt crisis projection?
Here is the reality, the wakeup call: In the United States, a demographic shift in three to five years is about to strain budgets as the government continues to spend nearly double its revenue. This is well documented in a Bloomberg BusinessWeek article written July 27, 2011. This demographic shift occurs when baby booming seniors retire in historic numbers, straining government benefits. This strain may occur the same time interest rates have risen, as a once infallible fiat currency discovers its fallibility. This strains a budget just when expenditures are running nearly double revenues. That’s the mathematical logic, one potential outcome. But the undeniable truth is that deficit spending such as being exhibited by government would be alarming on any balance sheet, but the fact that it isn’t even being addressed in a serious fashion is troubling, the root cause of the debt crisis.
Consider Greece from the basic perspective of their out of control leverage usage, with government spending well beyond revenues for years. When asked to face the economic problem and address the core structural issues through austerity â€“ the widely unpopular `political choice â€“ politicians prefer to kick the can down the road. The problem Greek political leaders face is they have just discovered the limits of how far the can kicking can last.
Is Greece a “One Off?”
When investors take a pure mathematical look at the structural problems, similar core issues appear in other over-leveraged western societies. Portugal, Spain, Italy, France, to name a few, all have the same structural spending problem, which could come to a head shortly. And from a mathematical perspective similar problems exist with the government who currently holds the reserve currency of choice status. At a basic level an understanding needs to take place that the root of the difficult problem is spending must be cut and revenues need to be increased. This will become a political football, a tug of war of epic proportion.
Will False “Growth” Through Easy Monetary Policy Solve the Problem?
In the past, the easy solution for government has been to stimulate growth through quantitative easing. Such tactics of “adding liquidity” typically work well early in a debt cycle but have less impact the more they are used. An example of this in the US can be found by examining the significant impact of an easy monetary policy during the 1980s and contrasting this to the relatively diminishing return on “growth” that today’s quantitative easing has on the economy. If one were a trader looking at the debt crisis they might conclude the significant risk of adding leverage to the government debt trade might not be worth the diminishing reward.
The key for investors is to recognize that the market environment to which western economies are headed may require difficult political solutions, which will not be easily solved without volatility. This could lead to a very different economic environment to which investors should be prepared to defend against. Economic environments that perhaps could be punctuated with bouts of volatility with strong market price trends emerging both positive and negative.
To read the entire article, click here
Mark Melin will be speaking on a panel at HedgeWorld June 6 @ 1:30 regarding MF Global. Click here for the agenda.
About the Author: Mark Melin is host of the internet video show Uncorrelated Investing and editor of Opalesque Futures Intelligence, a newsletter written for professional investors that covers investments in the futures and options industry. A futures industry practitioner and consultant, Mark has taught managed futures as an adjunct instructor at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark has worked as a consultant to the Chicago Board of Trade and OneChicago, the single stock futures exchange. He was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009. Mark worked with Peregrine Financial Group until 2011.
All contents copyright 2011 Â© Mark H. Melin all rights reserved.
Risk Disclosure: This article is intended for educational and informational purposes. Past performance is not always indicative of future results. There is risk of loss when investing in futures and options. Managed futures investing can involve volatility and may not be appropriate for all investors. The opinions expressed are solely those of the author, they are not appropriate for all investors and may not have considered all risk factors.
Thursday, May 24th, 2012
Reuters’ Elizabeth Koraca speaks with Jim Rogers, chief executive of Rogers Holdings, about regulating banks, why he’s not buying gold and why he’s short stocks.
“Listen, most of the management at JPMorgan, including the chairman, has no clue what’s going on in their back offices,” Rogers says. “All these guys are sitting there doing their thing. Do you think Jamie Dimon understands what’s happening in his offices? No, of course not.”
Monday, April 30th, 2012
Jim Rogers says the United States’ hefty debt load will make the coming recession worse than the 2008 downturn. The Fed is only making the situation worse, he says.
“The 2008 slowdown was worse than 2002 slowdown because the debt was high,” Rogers says. “Next time, the debt’s going to be up there (gestures) and it’s going to be much worse.”
And in response to a question about what the Fed should do next, Rogers says, “They should all abolish the Fed and resign. The Fed is making the world much worse and making the United States worse.”
Tuesday, April 24th, 2012
This week’s newsletter is up, and this time we’re reminded that important lessons can be gleaned not just from those that do well â€“ but also those who failed. After all, as the original America’s sweetheart Mary Pickford once said, “What we call failure is not the falling down, but the staying down.” Then there’s an old saying about return OF your capital than return ON your capital, so in the dangerous quest to mince quotable wisdom, the investing goal becomes ensuring that a failure â€“ like a “blow-up” â€“ doesn’t knock you down for good, and avoiding their occurrence in the future. Sounds easy enough, right?
The problem is that these words are more easily spliced than acted upon. You’re simply left with too many questions â€“ how does a “blow up” happen? How often? Dighton Capital famously “blew up” last year on an ill-fated Swiss Franc countertrend trade, and before that some option sellers went belly up in the first whiffs of increased volatility in 2007 and then full blown volatility spike in 2008. But as public and damning as these were, they were just a blip on the managed futures radar, and not indicative of the asset class as a whole (indeed some would argue that those didn’t really offer managed futures exposure, with option sellers having a short volatility profile, but that’s a debate for another day).
But this raised the question â€“ is there a pattern to blow-ups we can learn so that we can better avoid them, or even avoid some percentage of them in the future? We decided to go grave digging in our database of CTA results to find out. What did we find? You’ll have to click through to find out.
To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletterarchive and our Managed Futures Blog.
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The entries on this blog are intended to further subscribers understanding, education, and â€“ at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
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Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Copyright Â© 2011 Attain Capital Management, licensed Managed Futures, Trading System&Commodity Brokers. All Rights Reserved. Reprinted with permission.
Monday, April 23rd, 2012
Written by Bob English
Ahead of Tuesday’s Senate Banking Committee hearing on MF Global, we present the April 20 installment of Capital Account with Lauren Lyster, featuring futures industry veteran guest, Mark Melin. Ms. Lyster pulls no punches in the opener:
Has the case really gone cold? Or, are those who are in charge of the investigation, the “regulators” and the trustees, simply spraying teflon on every piece of sticky evidence that could lead to criminal prosecutions–and, ultimately–the recovery of stolen customer money?
We wish that MF Global were just a one-off affair–a bad apple, if you will. Unfortunately, it seems more likely to us that this is another milestone in the history of what we see as criminality, which has swept through the financial services industry, like some sort of Medieval Black Plague–the Black Death for capital formation. It seems the only time people are held accountable anymore, is when they commit crimes that affect the super-rich.
Bernie Madoff is a prime example…Madoff is securely behind bars, but Jon “Teflon Don” Corzine is busy ordering carmel-Frappuchinos at the local Starbucks as he goes to shop for office space in New York…bothered only by the low din of discontent emanating from the blogosphere (and shows like this, Capital Account). What a nuiscance we must be to the new God-fellas of Wall Street…
Nuiscance, indeed, to which we hope we are part. Here is a link to the entire episode, in which Ms. Lyster and Mr. Melin cover the following salient points, all pointing to a criminal intent to commit fraud, as well as the role of regulators and investigators:
Why was the MF Global back office cleared out with three top personnel allowed to leave, just as the firm was exeriencing its most serious liquidity (ahem solvency) crisis in its soon-to-be-terminated existence?
Why were C-level executives, far from being sequestered by investigators and being placed in an information silo, allowed to run the company for six weeks (prior to Mr. Freeh being installed as Trustee of the Holdings company)?
Why did Lois Freeh wait until early March to have MF Global Holdings USA declare bankruptcy, the very entity that retained the few remaining executives and employees and may have been cash-rich?
Why did Federal criminal investigators fail to so much as question Mr. Corzine nearly six months after the crime?
Why were large counterparties paid with wire transfers, when requests from lowly customers for wires were converted to checks (which ultimately bounced)? “Sloppy is when you don’t do things consistently. Sending all checks to customers and all wires to counterparties–that’s consistent.” See here for details published by John Roe of the Commodity Customer Coalition.
Why were the final days characterized as so “chaotic” when a properly programmed iPhone or Android smart phone (sorry, RIMM) should have been able to handle what amounts to maybe a few dozen megabytes of transfer instructions?
Just what were the details surrounding the successful lobbying effort by top level MF Global execs that effectively postponed reforms on rules that would limit use of customer funds (coincidentally, or not perhaps, just ahead of a $325 million bond offering by MF Global)? [For more details, see our prior piece from this week, which includes exclusive CFTC emails on the issue.]
Even Chuck Grassley, the sponsor of the now-widely criticized 2005 bankruptcy reform act, has stated, “The bankruptcy laws are written to ensure that company executives who were involved in the demise of a company because of fraud or mismanagement shouldn’t be eligible for bonuses,” Mr. Grassley said.
More broadly, MF Global customers have an absolute right to clawback of questionable margin payments and asset transfers from the broker unit that occurred in the weeks leading up to the firm’s demise because there was a clear pattern of intent to deceive investors and customers alike–from manipulating regulators and the regulatory process to changing business practices in the final wee–all of which ensured that customers would be last in line for the remaining morsels of the MF Global carcass. (And, as we have pointed out since early November, 2011, the very nature of the Corzine Trade from Day One was such that all the risk was put in the customer brokerage house, while profits were diverted to an offshore business unit).
“Fraud” is the operative word here. There is no dispute that the Commodity Exchange Act (sic, the law) has been broken, but until fraud is investigated, customers are at the mercy of a very fuzzy and opaque legal process.
It’s time for Congress to put pressure on those in charge of this investigation and oversight to break their own glass of silence and dare them to utter the magic “F” word.
To view the full video interview with Lauren Lyster and Mark Melin click here.
Bob English is the author of this article, the opinions expressed are entirely his own. View his work at:
Thursday, March 8th, 2012
Thursday, March 8th, 2012
It might be time to revisit the Kindleberger-Minsky framework of the anatomy of a bubble in assessing Asia. There are five stages of this anatomy: stage one involves a displacement such as a war, the introduction of new technology or financial deregulation.
Then comes a boom, such as we have seen with Asia’s tiger economies, particularly since the region’s late 1990s financial crisis. While stage two involves real organic growth, stage three involves leveraged growth based on underlying euphoria.
And next the stage is the one we seem to be at in Asia based on the debt issuance we have seen in the region over the past 15 months or so. That involves industry insiders selling, prior to speculators rushing to the exits.
What could have been more like an insider’s rush to the exits ahead of speculators than last year’s China property issuance frenzy? Yes, we are led to believe that the funds would be devoted to landbank acquisition and for capex needs. But the reality is that those funds were in most cases acquired in order to provide a liquidity cushion to see PRC realtors through the down-wave which is now punching through the China property market like there’s no tomorrow.
In other words the insiders knew only too well the state of their industry and decided to leverage up ahead of the downturn.
What if that downturn is vicious and prolonged? Well, they can always take the restructuring route and cane investors with equally vicious haircuts. And for all we know cash leakage on a vast scale is happening across the China property industry in the face of falling prices and rapidly diminishing contract sales.
And what about Asia’s latest issuance fadâ€”issuance from the resources sector? Berau Coal brought a $500 million Global a few days ago (achieving a sensational near 20 times cover in the process) and deals are waiting in the wings from the Philippines’ Carmen Copper and China’s Yanzhou Coal Mining. Both of the proposed deals have some eyebrow raising features.
Carmen is rumored to be eyeing 6.5%-7% guidance, or a good 50bp below where the private banks see optical attractiveness on a five-year and Yanzhou is circling a $1 billion trade, which if completed would be the biggest mining deal yet out of Asia ex-Australia.
To return to bubble anatomy, it was widely assumed that commodities trader Glencore called a top to the resource market with its $10 billion IPO last May. That also looked like the ultimate piece of insider selling.
And there is credence to that view if the fall in Glencore’s stock from its ÂŁ5.40 IPO price to its current level of ÂŁ3.99 is anything to go by, with the stock failing to climb above the initial offering price and having declined since the start of this year, despite decent diluted earnings growth at the company in 2011 of 220%.
Could Carmen and Yanzhou be playing the same game as Glencore? It looks like it.
Let’s remind ourselves of the final stage of Messrs Kindleberger and Minsky’s anatomy of a bubble. That involves revulsion, where prices overshoot fundamental demand and scams and fraud are uncovered.
This is not to suggest anything of the sort with the above companies. Rather, it’s to suggest that they are cashing in while investors and speculators still think the sectorsâ€”in which these issuers are the ultimate insidersâ€”are sexy.
â€” By Jonathan Rogers, chief IFR analyst, credit