Wednesday, June 25, 2008

DEAR MR. KUDLOW,

Dear Mr. Kudlow,

While your current focus seem to focus on the plebeian costs of high energy prices, you fail to warn your listeners that it will make living in Suburbia a living hell for many and some should entertain the idea of getting a bad bid now rather than wait for a worse one next year.

“IF AMERICA WAS AS EFFICIENT AT MOVING PEOPLE AS IT IS WAS AT MOVING GOODS, GM would be at $100 and Toyota at $13!”

LEAVING SUBURBIA
Once people have ditched their Suburbans SUVs(an appropriate name if there ever was one!),insulated their homes, put a couple of solar panels on the roof top and living on a severely restrained budget, they are going to ask themselves; "NOW WHAT?" by then they are going to realize that their local municipal government will have to contend with tough BUDGET choices if they are not ALREADY SKIRTING WITH BANKRUPTCY. Gone will be the days of “free” bus service to school, new artificial turf and increased public security. Petty crime will increase probably as employment becomes scarce and budgets cut police coverage. Next the infrastructure will start to crumble. Water Mains, bridges and levies will be left neglected. People will take refuge back to higher density areas.

MOVING BACK TO THE CITY
AS they soon realize that suburbia is not so hot anymore, more Americans will try to move to localities which are geographically closer to work or at least with better access to public transport and services. The logical step in this exodus is to go back to an urban center that offers the services that Suburbia had to curtail.
The problem with cities is unionized employees. They are a force to contend with. Their leaders will come up with a series of statistics on REAL living costs increases ( not of the doctored US government issue which are tragically corrupt). Soon enough, there will be a resurgence of union demands and many cities will have to deal with.
This will be an exact copy of the end of the Vietnam War back in the 70s! Stagflation, war vets roaming the streets and graffiti galore!


THE FED TODAY:
A MERE SHADOW OF ITSELF
Twenty years ago, as a junior VP in an investment bank, I had the privilege of having a private lunch with a former Fed governor who had worked along side MR. Vockler. I remember to this day his admonishments: “ONLY the FED has the power to deliver a target price for either OIL or GOLD”. Today, we live in a very different world where the FED is but an extension of the Federal government and rarely goes against policy. THE US owes more than it has on the books. Bernanke is no Vockler. The former wants to last a term and just go on the circuit like Mr. Greenspan and build a nice nest egg composed mostly of Huans or Euro term deposits. Saving Wall Street is such a useless Endeavour because the flight of capital at this point cannot be stopped with low rates. It can only happen with HIGHER RATES! As we wait until the next FED meeting. It reminds me of the old star hoping that the attendance will increase if times only got better… They rarely do!


So a simple recipe: "Keep what makes you strong, reform what makes you ill and avoid backing losers"


WHAT IS WORTH SAVING IN AMERICA
World’s best example of a free market economy
World’s best example of movement of goods
Leadership position in High Technology, entertainment and communications
Access to the world best and brightest through Higher Education opportunities


WHAT AMERICA CAN NO LONGER AFFORD
- Espousing Sprawling suburbia as an ideal
- Obesity and Diabetes
- Ineffectual centralized government, Legislative (lobbyists interference and partisanship, Executive ( 4 yr agendas) and Judicial (tainted by partisan appointments)
- Massive trade, balance of payments and budget deficits
- Fiat Dollar
- A tax code that favors circumvention over fair share
- 38 MM people without access to Health care
- Tort law which undermines competitiveness
- Defense budgets fueled by generating perpetual paranoia
- Global military presence as if the USA still needs to retain image as the world cop


Anecdotal evidence from Town of Mounr-Royal, QUEBEC
-In 2003, we got rid of FOUR of our FIVE CARS. Public transport is great. Everybody in the house has access to taxis chits. I haven't found ONE car that is cheaper to own than UNLIMITED TAXI USE... why? Parking is the COST of ONE-WAY to downtown.

- Our house price has quadrupled in twelve years and a 4 minute walk puts us on a 8 MINUTE TRAIN RIDE to the financial and commercial center of the city. Our property taxes went up SIX fold in the same period… Whether oil goes to $200 or $50, I doubt the value of our house will change as the value of the train pass is set yearly. I would expect the same for residents of Brooklyn Heights.
- We have universal health care. Compared to Florida, we have less reported cases of gross negligence PER CAPITA yet we have more lawyers challenging the professionals without no limit awards. We do wait more to see a doctor but you can always get somebody on the phone 24 hours a day to deal with emergencies.

Finally Mr. Kudlow,

VOTING FOR REPUBLICANS THAT SELL YOU THEIR EVERYTHING FREE FOR THE BACKBONE RICH OF AMERICA AGENDA AND PUT YOUR NATION IN DEBT FOREVER IS ABOUT AS UNCONSCIONABLE AS YOUR PROMISE in 2003 TO THE PEOPLE THAT THERE ARE NET BENEFITS OF WAGING WAR AND SENDING YOUNG PEOPLE TO DO YOUR FIGHTING TO GET $35 A BARREL OIL...

Nice going!

Friday, June 13, 2008

Humpty Dumpty up on a wall

If you think of the US based global investor as Humpty Dumpty (HD), high on a wall of "bric" investments, HD is sitting on a mounting wall of worry and the ledge is starting to crumble as quickly as a NYC crane.

Look at the Shanghai and India indices... they make the S&P look a rock solid index...

Now BIS in its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future.

Add to this RBS post of this morning calling for 1050 on the S&P , the FEDEX warning,and the pre-open ominous ...

Interesting times


DCW

Thursday, June 5, 2008

The baby boomers soon to be called Busted?

TWO themes today:
I) The WAR of WORDS: POLICY in action
II)POLICY FOR A TOMORROW



I) The WAR of WORDS: POLICY in action
(How to profit from it)

EUROPE and USA
- Interesting discussions over the pond...
Trichet freaking out on inflation, discussions about an ECB rate raise this summer as imports prices rose 6.1% in Europe.
- ANYBODY holding 2yr-10yr BONDS NOW is a complete fool!
- Boomers holding bonds give them the right name " boomers!"...
- If in March, keeping the US banking system alive by humongous rate cuts was the order of the day, by June Trichet and Bernanke were changing their tunes to Super Hero Captains of inflation fighters. That MAY have come about as they realized that for one BSC saved, there are dozens ready to drop dead and that neither the ECB or the FED can really win the fight against the global credit crunch in the Western Economies. China and other emerging economies have started to restrain credit to limit their fight against imported inflation. Metal prices charts are screaming this! While the Fed has won reprieves by attracting sovereign funds on a per case basis, dozen of banks/brokers if not hundred will need to merge or fail or part of the cleansing process. After the boom alas come the bust!


ASIA
CREDIT CONTRACTION IN CHINA
- If China decides it is not going to import inflation, well it won't either keep exporting deflation.
- Metal price have already shown this! The credit machine in Asia which brought us all the boom of the last 15 years is also generating all the bust!


FOOD FOR THOUGHT
As credit contracts, Metals are crashing fast and the last refuge of the speculators looking for suckers is in food based commodities. They may really implode any time if we have good harvests. It reminds me of those late night parties when most of the guests have left, there are always those staying around the buffet. In reality, the rich with leverage will decide soon enough what the price of A September Chicago delivered bushel of wheat is going to be worth but I doubt brokers,economists , anthropologists or African famines will have much influence on the outcome. I don't want to be on either side of that bet, same goes for soybean, rice etc. I think that it is immoral and I would rather invest in a campaign that destroys farm subsidies to millionaire farmers!

So where do YOU put your money?

Cash? A depreciating asset

Real Estate in NA? Still at risk

Bonds? As Don Coxe said in his MAY edition of Basic Points "My advice for investors back then was (in the 70s stagflation era)“The proper period for holding a long-term bond in this inflationary period is the amount of time you hold a hand grenade after pulling the pin.”)
Still applies today...

Now let's look ahead to the next year!!! Imagine we are in JUNE 2009!!!!!


II) POLICY FOR A TOMORROW

BERNANKE's JOB (HINT: Maintaining purchasing power is good for the US stock market)
Cheap Chinese imports fueled low inflation for more than 15 years in the USA. That allowed Greenspan to print dollars galore and fuel America's addiction to cheap credit. Ben, his successor, now is the cleaner upper after the party and will be incapable of changing consumptions patterns with his localized FED rate policy on a global scale. The US was the home of 45% of world equity markets. That number is going to be 20% in the next ten years. US monetary policy will not affect the decisions of an Indian buying a Tata or the Chinese buying an Internet Sub-zero looking Fridge. So Mr. Bernanke MUST fight US inflation and let the world fight its own demons. That in turn will make the US dollar a stable currency and the US bond market, an investment vehicle, rather than a depreciating asset. The federal Reserve cannot do it without the next administration and a responsible Congress (Oxymoron intended).

THE NEXT ADMINISTRATION AND CONGRESS: THE FED'S NEW BEST FRIENDS OR FRESH FOES?

Assuming Mr. Bernanke REALLY becomes an inflation fighter a la Volcker, meaning he lets the banks fix themselves rather than trying to push on a rope, sink or swim style, the US stock market is going to continue to rally IF and only IF the next administration is committed to improving the economics behind the dollar. As the Bush administration can attest to: You can't fight THREE wars ( two physical and on on the middle class) and hope to win your party's next election. BUSH has all but lost major voters in the middle class. With approval ratings below 28%, I sure would like to listen to his remaining supporters explain to me what he has done besides watching 9-11s disasters crop up in Europe rather than in the good old USA. No more rights and freedom, that has been Bush's price for security...

ON to YOU LEADER OF THE FREE WORLD!
OBAMA PLATFORM: You have NO platform in the USA unless you get everybody on board. Words, as Mrs. Clinton once said, can ring as hollow as Bosnian deeds, if they are not put into the fire of the action! Is this going to be another lame presidency? just Lots of applause at the State of the Union Address with lots of clapping but NO real change except announcing that we now have a working russian made $16MM dollar space station toilet?
Can OBAMA really get Congress to vote the will of the people? Can OBAMA really mend the trigger happy appropriation ways? Can the Pentagon go back in its Genie box and lick its wounds? Can OBAMA propose a trade-off to the health care for all lobby ( first we balance the budget and THEN we cover you)?

With the Word Change used by McCain and OBAMA on average 30 times a speech, I am not sure if Washington CAN change... PROVE ME WRONG!

THE WORLD BELONGS TO OPTIMISTS ( WHY? Because the pessimists give up at the onset!)
POSSIBLY the dollar could come back in the next twelve months. Why? because the Chinese hold US reserves of $1.3 trillion and the petro-dollars WANT to come home and grow. Sitting in a foreign bank, eaten up by inflation is not doing ANYBODY good! IF instead of weapons appropriation bills and military budgets, the world see a US balanced budget over the next 3 years,and US taxes are spent on infrastructure, retooling and new energy policy geared towards efficient manufacturing plants where LABOR is BUT a fraction of the cost of goods. BUILD it and THEY will COME! The recent rise of oil made thousand of plants worldwide as useless as bomb destroying plants in Japan and Germany in WWII. Call ENERGY DRIVEN OBSOLESCENCE! Maybe millions of jobs are going to be lost in the retooling effort, but I believe the US economy will continue to transform itself and it will bring about a new era of prosperity. Nobody has easier access to capital than the Americans so they should be the first to see the benefits of retooling to energy efficient manufacturing. Continued major advancements in transportation are going to be key and America will have to give up the love of its cars. THAT might be too much to ask for but we can all dream now, can we? ... Now how do I get from Montreal to NYC without a car or a plane... Bombardier got any ideas?

In the meantime:

- Continue to short The Loonie over the USD ( until 90 cents)
- Cover your shorts on XEG, keep your XGD...
- WHEN SKF drops $4 in a DAY buy another couple of lots... Global Credit contraction cannot help over leveraged US banks and brokers until next year.
- Short GS over LEH.`
- Buy GE... Energy efficiency is key !!!

Until then!

Cheers!