The dependency ratio

The dependency ratio usually refers to the proportion of people not in the work force to those in the work force (currently 1.94 in the US).

We are entering a new era where another dependency ratio is coming into focus.

The proportion of govt employees to private sector employees (about 1 in 9 employed persons are employed by govt), and also the ratio of govt sector pay to private sector pay (hint: it has been going up and is about 2x).

She'll be right, mate!

Positive momentum is feeding the trend, or "she'll be right, mate!"

Factors driving this thing:
- earnings (no worries there)
- positive change in unemployment (the end of the last holdout)
- Fed affirms ZIRP (giddyup)
- the conversion of the naysayers (I can see clearly now...)
- growing realization that recovery is real (only time will tell, but I don't have any time left)

It seems to me the consensus (at least among the major sell side strategists) from the beginning of the year is setting up to be proven right, ie. clear sailing in 1H10, potential ripples in 2H10. Whowouldhaveguessed.

What to expect of the "more normal"

Looking at the charts, they look a lot like a map of the Indian subcontinent, with Karachi representing October 2007 and Karungulum March 09. That, to my mind, puts us near Satabhaya presently (just south of the Bangladesh border).

The rally is likely to flatten out, as we grow in confidence and comfort with the recovery (with a hiccup or two around monetary exit), and the market will continue to have a positive skew. Welcome to a "more normal" market.

Alas, if we fail to address the serious global imbalances, then we are likely to take a right turn at Chittagong. And that looks ugly.

Chinese disconnect

It has always struck me as strange that most of the Chinese companies traded on US exchanges (including the largest companies) sport significantly higher growth rates and, more importantly, margins than their industry peers located in the US and elsewhere.

Call it Chinese exceptionalism.

Now there are some reasonable explanations for some of it (market closed to foreign competition, govt preference, super growth part of the cycle, only the best make it to an offshore listing, etc.). Growth rates I can understand (although even some of them are suspect). Margins, however, are a slightly different story. The laws of economics talk about diminishing marginal returns to production, capital, and labor weighing on the economic surplus that can be earned in a competitive market.

In the case of the newer, smaller cap companies operating in traditional industries, it stretches credulity that they can grow as fast and earn as super-sized profits as they say.

All this in the context of Chinese companies having a reputation for being low margin, seat-of-the pants businesses.

Buyer beware. If it is too good to be true, it just might be too good to be true.

Are we entering a "more normal?"

Man, have I been out of sync with this market.

"Don't fight the tape," and I've been fighting it since July 09.

Followed the good folks at PIMCO and GMO into the "new normal." Consequently stayed away from the cyclicals (big mistake) and also was way too cautious on the Financials.

With the market trudging determinedly higher, investors are slowly, but surely, convincing themselves that we are moving back to normal and are growing in confidence daily. I'm not a card carrying member of that school (yet), but I am worried that my timing could be a tad off (like years!).

The structural problems are real and unsustainable. In the absence of serious change, we know where we are heading. It is only a matter of timing (and that is the hardest part). Another part of my thesis, is that the changed dynamics of the market (new instruments, new vehicles, new players), in conjunction with the the imbalances outstanding, will lead to more compressed market cycles. So, while the historic market cycle has ranged around 5-7 years, we are now likely to experience market cycles of 3-5 years.

Where are we vulnerable

The seas appear to be calming, but the quiet reflects the passing of the storm, and rocks lie just beneath the surface.

So, where are we vulnerable. And, what are we vulnerable to.

Given the amount of debt outstanding, we are vulnerable to a rise in interest rates.

Given the fragility of the recovery, we are vulnerable to a rise in oil prices.

Given the trade imbalances in the global economy, we are vulnerable to a trade war.

Given the level of confidence in China, we are vulnerable to an asset collapse there.

Given the fickle nature of financial markets and the risks outstanding, we are vulnerable to a generalized decline in confidence.

Given a host of structural issues (prospective new wave of defaults, unemployment, monetary/fiscal exit) we are vulnerable to a double dip.


As we found out so painfully in 2008. Confidence is fleeting. We know and can see the vulnerabilities in the system. What we don't know is when the positive will turn to negative.

Vacuous mouthpieces

I feel sorry for the likes of anyone who heads-up a confidence game (financial CEOs, central bank chairman, country heads), because they have to compromise their integrity in order to maintain confidence.

When the system/company/country's wellbeing is predicated upon maintaining confidence, then they reason that it is worth compromising their personal integrity (or belief) for the greater good, and the potential of getting through the crisis du jour.

However, after calamity strikes, they are seen to be vacuous mouthpieces.

Even though I think there is some truth to this, I think it is also somewhat unfair. We knew they were compromised, but we chose to turn the other way, because it also served our purposes as well.

The "self" dilemma

We face a dilemma of sorts. Call it a selfish dilemma.

While it may benefit me personally for the government and the Fed to continue stimulating the economy, it is not necessarily in the best long term interests of the country to do so.

Therein lies the dilemma. At a personal level, it makes absolute sense for me to support the government's stimulus efforts. I am a large beneficiary, albeit indirectly, of the bailout. The rise in the markets has increased my company's AUMs, thereby solidifying its financial position, thereby bolstering my employment situation, thereby helping provide food, shelter, and clothing for my family (and indirectly those from whom I purchase those goods).

By stimulating at the scale that they have, authorities are effectively rolling the dice and hoping that it will somehow solve our problems. It might, but most likely it won't.

You've got that incessant feeling...

The market has that incessant feel to it.

Incessant, because every day, no matter what, it is going up.

Its incessancy is dragging in the sideliners.

Positive data is convincing folks of its legitimacy.

It is hard to know when this worm will turn.

But it certainly feels as though it is setting itself up for a nice trade on the downside.

Need to be patient and disciplined.

Healthcare issues

Here are what I see as the biggest healthcare issues:
(1) High healthcare costs - due to everyone supping at the trough.
(2) Lack of universal coverage - creates insecurity.
(3) Lack of transportability - reduces flexibility.
(4) Doctors paid too much - this is hard because they study for so long and those costs are huge, but the reality is that US doctors are way overpaid relative to doctors in other countries; implication is fewer people entering the profession (now that could be a problem).
(5) Drug companies and medical device companies make too much profit - by allowing medical companies to charge a market rate the US is subsidizing the rest of the world's healthcare costs, but to control domestic expenses the US needs to manage medical company profitability kind of like it does with utilities.
(6) Legal framework increases costs - so many issues and problems here; one nasty by-product is the overprescribing of procedures and medical services (also related to the conflict of interest between the doctors fiduciary duty to their patient and their desire to make money).
(7) Multiple payers creates an administrative mess - not to mention duplicative administrative costs.
(8) US consumers won't accept "no" for an answer - resources are limited and there are constraints in any system.
(9) Too many vested interests supping at the trough - makes the development of good policy unlikely.


There are no easy solutions for the country's problems. Solving one problem leads to a compounding of other problems. The problem with instituting a universal healthcare system is you are creating a massive new entitlement program. If you were to go this route, you would need to manage everyones margins in the system and the only way to do that effectively is through a single payer entity.

Getting a read on the Fed

The markets focus is upon working out when the Fed will begin its exit from quantitative easing.

Some would say that it has already begun with the dismantling of various "market support" programs. The critical element will be when they begin raising the Fed funds rate.

With the knowledge that any "real" exit could send the economy in the tank again, I wonder whether the reality is that the Fed has little intention of raising rates anytime soon (read that in the next couple of years).

Any increase in rates will weigh heavily upon the economy, the govt's expenditures, and the markets. In many ways, the Fed has no choice, but to try and keep rates at ZIRP until it is patently obvious that the economy is totally recovered. In the same way that the govt is "all-in" on the fiscal side (and is committed to doing whatever is necessary to keep things from going back down), the Fed is in a similar boat. In spite of it's credibility and reputation being on the line, the Fed has little choice, but to keep rates low. Any removal of the foot from the pedal stands a high likelihood of choking off recovery (all that ZIRP for nothing). It has to go "all-in" on the monetary side. Failure to put the economy back on an even keel means we are left in a worse position than when we started.

With the Fed's priority upon the recovery of the economy, it has to risk inflation and the debasement of the currency in order to get us through this period.

Above the fray

My day is a panoply of information. From sign-on to sign-off, it is all about gathering and processing the latest information.

It is one thing to gather and process information, but at some point, you need a view, a conviction. And rather than seek additional information to either affirm or deny that view, you need to take a step back and process the current zeitgeist, as translated by the markets, in the context of that view.

It is the ability to stand above the fray and discern the general forces at play that I most admire.

Is Greece the tip of the iceberg?

Have we seen this before!

Is Greece the tip of the iceberg?

Is Greece like New Century Financial Corp signalling the beginning of the fall in the sovereign dominos?

Only time will tell. It may, or it may not. If failure in Greece is the tipping point, then it will be all too obvious in hindsight. If it isn't, then it will be quickly forgotten as a footnote.

Forest for the trees

I feel as though I am so caught up in the day to day fear wranglings that are our present situation, that I risk missing the forest for the trees.

One of my problems is that my short term outlook is heavily influenced by my longer term outlook (hard sledging ahead), and it is hard to get away from that.

But at another level, I have the feeling that if only I could step back from the fear abyss, I could see that the market is fine and the current fearalysis provides opportunity on the upside.

Let the Good Times Roll

Sort of as a contra-note to the previous post*, I want to remind myself of recovery mathematics.

The economy is bottoming and beginning the process of healing.

There are two points to make. First, the damage inflicted by the severity of the recession means it will take a long time to regain previous economic highs. Second, the YOY and MOM change numbers will look real good going forward.

The great thing (if you can call it that) is that asset prices were re-set when the economy imploded. As such, expected returns going forward will probably mirror the rate and extent of recovery.

In an environment where systemic risk factors and secular headwinds are in play, however, it is hard to see equity markets getting too exuberant, even as positive economic numbers come in. There again, that might be ascribing a level of rationality to the market that it does not warrant.

Depending upon how you look at it, it will be both a lost decade and a growth decade.

*The post was really about risk factors. Always got to keep an eye on the downside.

Living with the sword

Better get used to the daily angst of living with the sword of Damocles swinging overhead.

The world's economic problems are structural in extent, systemic in breadth, and long term in nature.

There are no short term fixes for the imbalances and problems that have been brought to the surface by the financial crisis.

With the possibility of a bomb going off at anytime, the market will struggle for sustained confidence and likely vacillate in ranges.

Big bang vs slow drip

Big bang changes like 1.50% drops in Fed Funds rates, or $750 billion stimulus packages, or $700b TARP-type packages are only possible in crisis situations.

But once the panic is over, there is still a need for enacting good policy. And often, that policy change is more important for the long term health of the economy than the immediate response to the crisis.

But getting major policy change enacted becomes more and more difficult the further away from the crisis you get. It becomes like a slow drip to the electorate as they lose focus and move onto other things.

Death by a thousand cuts.