Illinois Needs A Wall

16 May

A recent Chicago Federal Reserve study for dealing with the state’s fiscal crisis was perhaps a foreshadow of things to come. Mind you that I am referring to a legitimate, study done by The Federal Reserve, not some idea conscripted by a group of state legislators. The proposal suggests that a progressive statewide real estate tax, to be levied over a period of 30 years, would be the best solution for solving the intractable pension problems of the state. What was interesting was not only did it ignore the basic laws of economics but it was blatantly confiscatory in its tone and tenor. The basic premise is that the additional tax would be based on the value of the home and that such a tax would have a negligible effect on movement in an out of the state because:

Current homeowners would not be happy about this, but it would be a good result

for the Illinois economy. That’s because the new taxes wouldn’t affect people thinking

of moving to Illinois. While they would have to pay higher property taxes, that

would be offset by not having to pay as much for their new homes. In addition, current

homeowners would not be able to avoid the new tax by selling their homes and

moving because home prices should reflect the new tax burden quickly” 

In other words, home prices would drop so dramatically that people would be trapped into staying and people would be encouraged to move into the state because of reduced home prices. Debt at the Federal and State level are always someone else’s problem, until it becomes a collective reality. When proposals such as this begin to gain traction, the exodus from the state will be even more severe than it already is. Perhaps a wall?


23 Apr

The head tweeter-in chief has recently been targeting specific asset prices, tweeting on the relative value of the dollar, and most interestingly the “high” price of crude oil. His tweet last week ” Looks like OPEC is at it again. With record amounts of oil all over the place, including the fully loaded ships at sea, Oil prices are artificially high Very High! No good and will not be accepted!” Surely The Donald must be simply rehashing an old tweet from 3 or 4 years ago, because the only oil on the water now is heading towards satisfying a insatiable global demand. A quick look at todays crude oil forward curve, and its existing backwardation, would suggest that the days of surplus crude sitting in global cash and carry trades is non-existent. If the President feels that this situation is unacceptable then he should simply empty the SPR.

Apocalypse How

18 Apr

It feels like every day we are faced with the end, beginning, and or continuation of, some new kind of threat. Credit, or blame, can be apportioned to any number of things: surfeit of social and traditional media outlets, politics with its inherent catastrophic leanings, or a speed of technological change which necessitates constant transformational shifts. However, rather than becoming traumatized by the constant apocalyptic announcements, it would seem that we have become almost anesthetized to it, particularly in the geo-political realm. We know that the noise around skirmishes involving trade pacts, border security and proprietary technology have always been present. We wonder however whether the information gleaned from the current noise has been also ignored, and as such the imagined becomes more in danger of becoming the unimagined. In more mathematical terms, are we more and more living in a world where we are under-estimating (and therefore under-pricing) multiple std. deviation events, even though the “noise” might suggest otherwise.?

Improv Investing

9 Apr

Everyone knows the first rule of improv is the concept of “and then”. Simply put, the idea is never to stop the dialogue between characters by introducing qualifiers into the conversation. Free flow of ideas and association is the name of the game and if so we are all living in a Second City world. The great thing about improv, and free association, is that it unlocks creativity and allows performers to think outside of their normal patterns of thought. The problem with carrying this concept into the investment realm is that pure free association purposely loses the anchor of reality. Lets get up on stage: Performer 1: Tax cut.. Performer 2: good, more money in everyones pockets Performer 1: good for business and wages Performer 2: good for business good for stocks Performer 1: good for stocks, good for everyone. That was fun lets try again: Performer 1: Fed Increases rates Performer 2: rate increases are bad, will hurt everyone Performer 1: pain will lead to recession Performer 2: recession will be painful Performer 1: Fed will need to fix. This type of anti-analysis lends itself perfectly to the algo-driven world we have lived in over the past 6-8 years. We suspect however that a more nuanced strategy involving more second and third level thinking will ultimately prove more profitable. Actions have consequences, however in an algo driven world consequences are mere noise.


Finding A Bottom

16 Feb

Alcoholics and addicts have a saying that says ” a bottom is reached when your behavior is deteriorating faster than you can lower your standards”.  The important thing about bottoms in the recovery community is that they represent the critical point at which the addict experiences real consequences.  If we use the well worn analogy that the Economy/Capital Markets are the addict and the stimulant/substance is easy money, the latest tax package combined with a proposed infrastructure spend would indicate that the addict is a long way from rehab. Such behaviors on the part of lawmakers, aided by Central Bankers, would  indicate that consequences are for another day, sobriety can somehow wait for tomorrow. Tomorrow is closer than one thinks however as we have mentioned on several occasions, the math simply begins to become onerous, even assuming only a return to trend-line rates of interest(interest on the debt triples). There is simply no way to grow your way out of the kinds of federal deficits that the U.S. is experiencing and will experience. But for now, we say to Capitol Hill and Wall Street, BOTTOMS UP!

Stockholm Syndrome

8 Feb

The unhealthy symbiotic relationship that exists between Central Banks and the Capital Markets is starting to become more and more pronounced. We might even hint that there are distinct signs of Stockholm syndrome at play, the only problem being we are not sure who is the captor and who is the hostage. This blurring of the lines between whom is beholden to whom has accelerated of late, particularly as it relates to the yield curve and the latest tax reform bill. Typically, we would see some kind of Treasury or Fed response to such a blatant deficit-blind package, but in fact the Fed and the “bond market vigilantes” have chosen to leave their pitch forks at home. One would have expected more than a 20 bp rise in Treasury rates with such an imbalanced tax package, particularly in light of continued steady global growth.


6 Dec

Kudos to the commodity research group over at TD securities for their most recent analysis of the Aluminum market. What struck us most about their analysis, was the inclusion of a “behaviorally adjusted supply” curve. This supply curve, in effect, makes adjustments for those firms, primarily SOE’s, whose production levels are not solely driven by profit motives. I really like this type of analysis as it typifies so many commodity sectors where  a variety of non-profit maximizing entities operate whether it be SOE’s or quasi SOE’s,(codelco?),  or de-facto SOE’s (anyone operating in South Africa).  We might take this a step further however to include any firms beholden to the capital markets for their very survival, because as such their ability and hence willingness to produce is not driven by profit and loss, but rather by their ability to finance operations, think last years shale bust. The sharp down move in oil prices would have indicated to the market that the marginal barrel of production needed to be rationalized. However, what we saw evidenced in the shale market, was a very temporary shut in of production rather than a permanent shaking out of the marginal producers. We posit that the shale landscape in the U.S. would look vastly different today, if producers faced a dry well in the bond markets during 2016. As we have said, the mis-allocation of capital extant in capital markets today not only causes sub-optimal decision making at the investor level but in the real economy as well.