Post the Great Depression the global socio-economic trend among political elites was toward greater government involvement in the economy. That trend finally came to an end, shipwrecked on the rocks of the 70s recession. But by the time it had run its course, it had blended opposing socio-economic ideologies into indistinguishable political forms. Turning, so-called "conservatives," such as Richard Nixon, Edward Heath, Helmut Schmidt, Valery Giscard d'Estaing, Malcolm Fraser, and Robert Muldoon into quintessential socialists. Such is the pressure of a trend and a supportive ideology (Keynesianism).
The natural backlash to the expanding Statism of the 50s, 60s, and 70s, was the countermove toward deregulation and financial liberalization in the 80s and 90s, led by Margaret Thatcher and Ronald Reagan (supported incidentally by ideological liberals Francois Mitterand, Bob Hawke and David Lange in France, Australia, and New Zealand respectively). This trend now appears to have run its own course, shipwrecked on the shoals of the Global Financial Crisis, with Tony Blair and Bill Clinton the best examples of political actors who melded their opposing ideological disposition to the dominant ideology of the time (monetarism). Whether Democrat or Republican, Labour or Liberal, the times and the culture might change, but the dominant political parties seem to move symbiotically together.
Interestingly, the role that President Carter played (serving in the transitional flux between periods) might serve as a template for the role that President Obama is playing, as socio-political forces work out a new direction.
"plus ça change, plus c'est la même chose"
Friday, November 18, 2011
Thursday, November 10, 2011
Sovereign Debt Crises Have A Long Fuse
About the only thing Greece* has shown us is that sovereign debt "crises" have a long fuse. The Greek crisis erupted in early 2010 and has yet to reach its ultimate zenith.
In recent days, Italian bond yields have risen above 7%, throwing into question the sustainability of Italy's fiscal position, and the potential collapse of efforts to bailout the eurozone.
Equity markets have appeared to ignore the current "crisis." I suspect it is because they see it as a long term problem, with only a small likelihood of a catastrophic collapse any time soon. With Greece as the blueprint for this thinking. This may, or may not, prove correct, but it has frustrated the bears no end. They have been betting upon a rapid conflagration, and are perplexed by the market going up in the face of supposedly rising risks. The greater possibility is for more "can kicking" and the prospect of a long dripfed erosion in confidence. Periodic fires (aka crisis of confidence) are likely break out, but the system can go on for a long period of time before the piper ultimately comes calling.
The real problem in this whole equation is structural fiscal/current account imbalances co-mingled with massive long term contingent liabilities due to generous promises made at various points in the past. In the absence of any serious address of those problems, we know how this story will end. Even when the market is signalling the ultimate end, a bankrupt country can make interest payments on its debt for a long period of time before it eventually calls it quits.
*And let's not forget Japan.
In recent days, Italian bond yields have risen above 7%, throwing into question the sustainability of Italy's fiscal position, and the potential collapse of efforts to bailout the eurozone.
Equity markets have appeared to ignore the current "crisis." I suspect it is because they see it as a long term problem, with only a small likelihood of a catastrophic collapse any time soon. With Greece as the blueprint for this thinking. This may, or may not, prove correct, but it has frustrated the bears no end. They have been betting upon a rapid conflagration, and are perplexed by the market going up in the face of supposedly rising risks. The greater possibility is for more "can kicking" and the prospect of a long dripfed erosion in confidence. Periodic fires (aka crisis of confidence) are likely break out, but the system can go on for a long period of time before the piper ultimately comes calling.
The real problem in this whole equation is structural fiscal/current account imbalances co-mingled with massive long term contingent liabilities due to generous promises made at various points in the past. In the absence of any serious address of those problems, we know how this story will end. Even when the market is signalling the ultimate end, a bankrupt country can make interest payments on its debt for a long period of time before it eventually calls it quits.
*And let's not forget Japan.
Friday, October 28, 2011
2Q11 Comments 7/15/11
Excerpt from 2Q 2011 commentary. Always interesting (and sometimes insightful) to go back and see what one has said in the past. Dated 7/15/11.
“Hey, Let’s Be Careful Out There”
Despite a rather anemic recovery, and a distinct soft patch, the consensus is holding out that the economy will get back on track later this year. Markets have held up surprisingly well, especially given all the negative headlines (debt ceiling debate, eurozone crisis, austerity), but they are somewhat bifurcated with a few high growth names receiving super-multiples, while megacaps trade at a discount to the average. In spite of the potential for systemic risk as a result of global deleveraging from the debt supercycle, equity markets have been underpinned by solid earnings, attractive valuations, and low interest rates. Negative real interest rates make equities the best looking house in a bad neighborhood. In the wake of the Fed’s exit from QE2, it has indicated a watch ‘n see approach, while retaining the Bernanke put. The task for investors is to determine the likely path forward as cyclical tailwinds smack into secular headwinds. Will it be policy mistakes and blunders, or will it be political solutions and renewed confidence? Are we in a secular bear market, or the early days of a new bull market? In the relative vacuum of the Fed’s exit from the market, it will be interesting to see whether the market tests the downside to gauge the Fed’s resolve.
Amid significant structural problems, political decisions and policy choices need to be feasible and effective in order to put to rest concerns. That requires strong, decisive leadership. Something that has been missing, not only in the US, but also in Europe and Japan. The authorities are doing everything they can to kick the can down the road. There is an end of the road somewhere. We just don’t know where it is, or when we’ll get there. The market has not really been spooked by the lack of decisiveness, but at some point it may have no choice but to respond to whatever crisis du jour washes up on the doorstep. Everyone knows that the solution to our problems is growth (productivity based growth). But knowing the solution and reaching a solution are two different things. In the absence of real change, the likely result is more “can kicking”, and ultimately either inflation, deflation, or some kind of burden-sharing restructuring. The longer we go without resolving a number of fundamental problems, the greater the likelihood that the market will get caught out and we’ll be facing a lost decade for the economy. With the authorities almost out of bullets in both the fiscal and monetary realms, good options are fast diminishing.
Given the potential severity of the risk backdrop, there are relatively few signs of stress in global equity markets. Credit spreads across the spectrum have expanded, but are within bounds, the VIX volatility measure has increased recently, but is reasonably tame by financial crisis measures, and perhaps most amazingly, government bond yields show few signs of alarm (the obvious exception being peripheral Europe). Given the potential for contagion, this is hard to fathom. Not only that, but there has been an apparent disconnect between corporate earnings and the economy, which leaves one scratching their head. The essence of the current dilemma is knowing that there is an elevated level of risk at a macro level, but also knowing from history that there is a good chance we’ll muddle through. A consequence of this juxtaposition is a positive skew for equity markets, but with the possibility of binary outcomes. In the absence of a strong conviction related to better times ahead, and in deference to the large macro risks overhanging the markets, it seems most prudent to proceed with some degree of caution.
The problem when facing a binary outcome of unknown magnitude, direction, or proximity is that you can become paralyzed with fear. Even if you don’t like the economy, you don’t like current policy(ies), and you don’t like the outlook, when you take a step back and factor in low interest rates for an ‘extended period,’ then it is hard to resist the temptation to deploy capital. There is a huge opportunity cost to sitting on the sidelines and waiting for the big one to hit. In the longer term it may be the right move, but in the shorter term it is incredibly painful and frustrating. The potential pitfall here is that the authorities are forcing you back into the market, largely based on a monetary illusion. When the punchbowl is taken away, and/or one of the major landmines explodes, then the mask may get ripped off and reality laid bare. Easy money distorts reality through perverted incentives, leading to the misallocation of resources, and ultimately the destruction of capital. Like too much honey, it tastes good at first, but leaves you with a stomach ache. Contrarily, there is a tendency to be too sensitive to risk(s), especially in the wake of a financial crisis when our attitudes are anchored by our experience in the recent past. Overcoming psychological as well as real barriers is one of the tasks at hand.
There are many good reasons to be concerned with the current global economic environment, but there are also many positive factors outstanding as well. To list a few: a normalizing of megacap and financial sector valuations; highly accommodative monetary policy; ongoing economic recovery; strong emerging market demand; solid earnings; decent long term expected returns; a recovering banking system; the eventual bottom and rebound in property and construction, and lending. In addition, the outstanding reservoir of negativity lends itself to a market climbing the wall of worry. Renewed confidence of any form will propel the market higher. Investors should look through the overwhelming doom and gloom, and allow for the possibility of positive resolutions to some of the nation’s long term problems. And the fact that there are a lot of things that are weak, means that when they improve, good things will ensue. And let us not forget two other important factors. Firstly, we have already experienced a lost decade for equities, and within the scope of history another is unlikely. Secondly, human progress and advancement often take place in the midst of financial turbulence and economic difficulty. On a relative basis, with interest rates near zero, equities don’t look so bad.
“Hey, Let’s Be Careful Out There”
Despite a rather anemic recovery, and a distinct soft patch, the consensus is holding out that the economy will get back on track later this year. Markets have held up surprisingly well, especially given all the negative headlines (debt ceiling debate, eurozone crisis, austerity), but they are somewhat bifurcated with a few high growth names receiving super-multiples, while megacaps trade at a discount to the average. In spite of the potential for systemic risk as a result of global deleveraging from the debt supercycle, equity markets have been underpinned by solid earnings, attractive valuations, and low interest rates. Negative real interest rates make equities the best looking house in a bad neighborhood. In the wake of the Fed’s exit from QE2, it has indicated a watch ‘n see approach, while retaining the Bernanke put. The task for investors is to determine the likely path forward as cyclical tailwinds smack into secular headwinds. Will it be policy mistakes and blunders, or will it be political solutions and renewed confidence? Are we in a secular bear market, or the early days of a new bull market? In the relative vacuum of the Fed’s exit from the market, it will be interesting to see whether the market tests the downside to gauge the Fed’s resolve.
Amid significant structural problems, political decisions and policy choices need to be feasible and effective in order to put to rest concerns. That requires strong, decisive leadership. Something that has been missing, not only in the US, but also in Europe and Japan. The authorities are doing everything they can to kick the can down the road. There is an end of the road somewhere. We just don’t know where it is, or when we’ll get there. The market has not really been spooked by the lack of decisiveness, but at some point it may have no choice but to respond to whatever crisis du jour washes up on the doorstep. Everyone knows that the solution to our problems is growth (productivity based growth). But knowing the solution and reaching a solution are two different things. In the absence of real change, the likely result is more “can kicking”, and ultimately either inflation, deflation, or some kind of burden-sharing restructuring. The longer we go without resolving a number of fundamental problems, the greater the likelihood that the market will get caught out and we’ll be facing a lost decade for the economy. With the authorities almost out of bullets in both the fiscal and monetary realms, good options are fast diminishing.
Given the potential severity of the risk backdrop, there are relatively few signs of stress in global equity markets. Credit spreads across the spectrum have expanded, but are within bounds, the VIX volatility measure has increased recently, but is reasonably tame by financial crisis measures, and perhaps most amazingly, government bond yields show few signs of alarm (the obvious exception being peripheral Europe). Given the potential for contagion, this is hard to fathom. Not only that, but there has been an apparent disconnect between corporate earnings and the economy, which leaves one scratching their head. The essence of the current dilemma is knowing that there is an elevated level of risk at a macro level, but also knowing from history that there is a good chance we’ll muddle through. A consequence of this juxtaposition is a positive skew for equity markets, but with the possibility of binary outcomes. In the absence of a strong conviction related to better times ahead, and in deference to the large macro risks overhanging the markets, it seems most prudent to proceed with some degree of caution.
The problem when facing a binary outcome of unknown magnitude, direction, or proximity is that you can become paralyzed with fear. Even if you don’t like the economy, you don’t like current policy(ies), and you don’t like the outlook, when you take a step back and factor in low interest rates for an ‘extended period,’ then it is hard to resist the temptation to deploy capital. There is a huge opportunity cost to sitting on the sidelines and waiting for the big one to hit. In the longer term it may be the right move, but in the shorter term it is incredibly painful and frustrating. The potential pitfall here is that the authorities are forcing you back into the market, largely based on a monetary illusion. When the punchbowl is taken away, and/or one of the major landmines explodes, then the mask may get ripped off and reality laid bare. Easy money distorts reality through perverted incentives, leading to the misallocation of resources, and ultimately the destruction of capital. Like too much honey, it tastes good at first, but leaves you with a stomach ache. Contrarily, there is a tendency to be too sensitive to risk(s), especially in the wake of a financial crisis when our attitudes are anchored by our experience in the recent past. Overcoming psychological as well as real barriers is one of the tasks at hand.
There are many good reasons to be concerned with the current global economic environment, but there are also many positive factors outstanding as well. To list a few: a normalizing of megacap and financial sector valuations; highly accommodative monetary policy; ongoing economic recovery; strong emerging market demand; solid earnings; decent long term expected returns; a recovering banking system; the eventual bottom and rebound in property and construction, and lending. In addition, the outstanding reservoir of negativity lends itself to a market climbing the wall of worry. Renewed confidence of any form will propel the market higher. Investors should look through the overwhelming doom and gloom, and allow for the possibility of positive resolutions to some of the nation’s long term problems. And the fact that there are a lot of things that are weak, means that when they improve, good things will ensue. And let us not forget two other important factors. Firstly, we have already experienced a lost decade for equities, and within the scope of history another is unlikely. Secondly, human progress and advancement often take place in the midst of financial turbulence and economic difficulty. On a relative basis, with interest rates near zero, equities don’t look so bad.
Wednesday, October 26, 2011
All Blacks win Rugby World Cup...NZ may never be the same
There are many reasons not to host the Rugby World Cup in New Zealand, but there are no comparable places in the world where rugby is so embraced and is such an integral part of the culture. It may be some time before the RWC ever returns to New Zealand, but the country will be forever marked by a sparkling six week period known as the Rugby World Cup 2011, culminating in the All Blacks victory. History is always hard to gauge at the time, but it is quite possible that the Rugby World Cup 2011 will leave an indelible mark upon the New Zealand psyche and the identity of the country.
And so, after years of RWC disappointment and heartache, it was not only appropriate, but fitting, that the All Blacks exorcised those demons in front of their home support.
And despite being the best team in the world over the past four years (and twenty four years since they had last won the cup), the x-factor of home field advantage may have been the telling factor in a match where the French won in virtually every facet, except for the one that counted, the scoreboard.
Pick me out of the crowd:
http://gigapixelfancam.com/fancams/rugby/2011worldcup/20111023/?slug=4263942-share-view&ref=nf
And so, after years of RWC disappointment and heartache, it was not only appropriate, but fitting, that the All Blacks exorcised those demons in front of their home support.
And despite being the best team in the world over the past four years (and twenty four years since they had last won the cup), the x-factor of home field advantage may have been the telling factor in a match where the French won in virtually every facet, except for the one that counted, the scoreboard.
Pick me out of the crowd:
http://gigapixelfancam.com/fancams/rugby/2011worldcup/20111023/?slug=4263942-share-view&ref=nf
Wednesday, October 12, 2011
Apple the new Microsoft
Apple has benefited greatly from peoples dislike of Microsoft's dominance and penchant for marginal upgrades. The seemingly constant need to update to new versions of the operating system or Office has hacked alot of people off.
Apple, in its present pursuit of monopolist profits, has now picked up the same playbook and will no doubt become persona non grata in a few years once people get sick and tired of paying more for the newest, latest, greatest, or even worse, getting stuck with some of their orphaned software and/or systems.
You've been warned!
Apple, in its present pursuit of monopolist profits, has now picked up the same playbook and will no doubt become persona non grata in a few years once people get sick and tired of paying more for the newest, latest, greatest, or even worse, getting stuck with some of their orphaned software and/or systems.
You've been warned!
Thursday, October 6, 2011
Steve Jobs passing is a milestone and a chance for reflection
I was saddened to hear of Steve Jobs passing. I heard it at tennis last night, and it was the first thing I passed along to H when I got home. He has touched my life with his products and has left a mark upon modern society and culture. A modern day Thomas Edison. It is amazing to see the outpouring of emotion today. A milestone.
We had a discussion with the kids at breakfast this morning regarding his impact upon our lives and his legacy. In going through his history (Pong, founding Apple, getting fired, NEXT, Pixar, and then rejoining Apple and transforming the modern consumer technology landscape), he is a testimony to perserverance, dedication, vision, and giftedness.
It was somewhat appropo because Emma asked about Henry VIII, and that got us into a discussion about the reformation and how people leave their impact upon society and culture, oftimes with us not even knowing the source.
We had a discussion with the kids at breakfast this morning regarding his impact upon our lives and his legacy. In going through his history (Pong, founding Apple, getting fired, NEXT, Pixar, and then rejoining Apple and transforming the modern consumer technology landscape), he is a testimony to perserverance, dedication, vision, and giftedness.
It was somewhat appropo because Emma asked about Henry VIII, and that got us into a discussion about the reformation and how people leave their impact upon society and culture, oftimes with us not even knowing the source.
Friday, September 16, 2011
The Markets Are Like Doctor Who
The markets are like Doctor Who (or Flash Gordon, or Lost in Space, or any of the other serials from the 50s, 60s, and 70s), in which the audience is left waiting till the next week to find out whether the Doctor dies or not.
Apart from the pantomine of the political actors, the matters are serious, and they are eroding confidence the longer they are left unresolved. Band-aids provide short term salve, but no long term solution. As a result, it seems we go into each weekend wondering what the outcome will be on Monday.
Till Monday. See you then!
Apart from the pantomine of the political actors, the matters are serious, and they are eroding confidence the longer they are left unresolved. Band-aids provide short term salve, but no long term solution. As a result, it seems we go into each weekend wondering what the outcome will be on Monday.
Till Monday. See you then!
Subscribe to:
Posts (Atom)