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No Diving

3 May

The obsession with spotting “bubbles” in capital markets and elsewhere seems to border on the inane. Pricing which lies outside of what would be considered normal valuations, in our opinion, do not constitute a true “bubble”. More importantly, the discussion of whether something is “bubbly” or not completely misses the point. We take much greater umbrage at the constant commentary uttered by almost all index hugging managers who state ” we know (fill in the blank asset) is probably overvalued, but where else are you going to put your money”. This relative value investing is the absolute antithesis of what true value investors practice and preach. Whether it is Rwandan debt at 7% or Greek debt at 4% or the entire junk market trading at 265 basis points over treasuries, not only have Global Central Bankers pushed everyone into the risk pool, there is now only a foot of water left in the shallow end. Risk and reward are not predicated on where Central Bankers artificially set rates, but are based categorically on what return you demand for the risk you are taking. If those returns are not adequate, you don’t play. But, Central Bankers are intent on ensuring that people continue to play, regardless of how much capital is currently being mis-allocated. Meanwhile, we are constantly being told that the ensuing backup in rates will decimate non- yielding assets such as metals and other hard assets, ironically they fail to make the same distinction with these other effectively non-yielding assets.

Buckle Up

17 Apr

Anyone that has flown as of late knows the ticket inflation that has infiltrated almost every part of the traveling experience. Charges for baggage, change fees, beverage fees, overhead space fees, etc.. We have always wondered out loud how a flight to Florida from Chicago could be profitable at peak travel times for $100 round trip. Well, it turns out it wasn’t, and a Bloomberg article astutely points out the somewhat counterintuitive notion that high oil prices are actually the culprit for a turnaround in the profitability of the U.S. airline industry. In spite of fuel costs doubling over a 10 year period, airlines are on track for a record fifth consecutive year of profits. The reason for the profitability increase was that airlines not only became more lean and mean, flights were  finally rationalized and thus consumers were forced to allow the airlines to charge more. However, most importantly the relatively high fuel cost made starting a new airline cost prohibitive thus finally driving bottom line growth in an otherwise unprofitable schizophrenic industry. We have to wonder if this industry example can be extrapolated into other industries where high commodity costs and low barriers to entry have led to great benefits to the consumer, but low to stagnant profit growth afforded to the producer. More stable profit growth means more stable underlying commodity demand and a compression of the amplitude of the boom/bust cycle that plagues all commodities. This type of shift would ostensibly bring smiles to Central Bankers faces everywhere.

ObamaCare vs. YellenCare

9 Apr

The most recent Fed minutes came out and we were surprised to see the consternation amongst some Fed Members regarding the downward trend in medical costs. The concern was voiced in the context of a discussion on the decelerating overall price level. Some of the voting members were optimistic that wage growth momentum would be positive for inflationary pressures moving forward, but it should bother everyone that falling medical costs are a concern of those around the Fed meeting table. Correct me if I am wrong, but as I stated in our last post, the goals of monetary policy seem to have shifted towards the touchy-feely variety and as such it would seem that falling medical costs might benefit those that Chairman Yellen seems to be most worried about. Chalk this discussion up to one more example of: Be careful of what you wish for. If Central Bankers are becoming concerned, and thus forming policy decisions, based on naturally shifting price data (some go up some go down), it would seem only natural that they miss the forest for the trees. Particularly since history has proven that their forecast usually misses both the forest and the trees. Pay attention to the forest. Buy Stuff Sell Paper

Money For Nothing, Sticks for Free

5 Feb

We wonder whether the economic discord that currently exists across the globe can legitimately be laid at the feet of all of the developed Central Banks. The ease of global capital flows, combined with a desperate grab for yield, has left us with the twitchy capital flight that so often happens when country specific internal imbalances are suddenly exposed. The social discontent stretching from Thailand to Turkey is undoubtedly political in nature, however some of this frustration is borne of a free-falling currency combined with the inevitable uncomfortable rise in the price of basic necessities. While it is true that Central Banks must make policy based on their own circumstances, some of the unintended consequences we have spoken about so often are real and  are currently being displayed right in front of us on the front page. When Central Bankers force people into the risk pool, very little thought is put into just how many might not make it out. One can be sure however that if the local currency is not working, the alternative is not bitcoin. Buy Stuff.

Who Invited Him?

14 Jan

The reasonableness and straightforwardness of comments by Fed Governor Richard Fisher makes one wonder: Who Invited this guy to the Party? Mr. Fisher, in a speech much similar to one given several weeks ago, continued to question the sanity of providing additional liquidity to a market that clearly does not need it. One has to wonder whether Mr. Fisher is even on the same team as other Fed officials when he states ” Of greatest concern to me is that the risk of scrutiny and criticism might hinder policymakers from acting quickly enough to remove or dampen the dry inflationary tinder that is inherent in the massive, but currently fallow, monetary base”. Compare this with other Fed Governors who have made numerous calls to tie further Treasury purchases to some minimum level of inflation. We have to believe that mentality of the group advocating higher inflation has been driven to such conclusions by their perception that each new iteration of QE deals with the micro rather than the macro. These Fed officials know we are not dealing with bazookas anymore like we were in 2008/2009, but instead most at the Fed believe we are simply working around the edges of a precise, targeted balance sheet management program, which can be reversed at any time. This would all be wonderful if this thinking even came close to resembling the reality of Fed policy transmission. As we have stated before, Fed policy even under the most normal of circumstances, works with a most undefined lag. Governor Fisher understands this, the others understand this as well but have chosen to ignore it(For Now). There is no new Central Bank Paradigm: Buy Stuff.

The Road Never Travelled

18 Dec

Once again, another year has passed and we are now inundated with the end of year projections as to what will happen in 2014. We generally find these projections without merit, but we have a particular distaste for such guesstimates given the self-reinforcing behavior that currently overwhelms todays capital markets. Early on in these various monetary science experiments market participants looked at the potential mismatch between objectives and the measures taken. Today, however, it would appear that this analysis has fallen by the wayside along with any concern over the possible unintended consequences.  There is no longer talk of whether we should be going down this path, but rather what will be the harm if we shift to another path. Forget the fact that the current path may take us in directions or places we never imagined. Many scoff at comparisons between today’s Central Bank actions and those of the Central Bank of Japan during the 90s and beyond. However, recent comments by the BOJ Governor should validate those comparisons. In a recent FT interview, the BOJ Governor remarked that they were the first to enact quantitative easing back in 2001, and even though it has essentially accomplished nothing, they continue to push forward with a program to double (at least) its holdings of JGBs. The recent actions by the BOJ are driven by a desire to break the deflationary spiral that has existed in Japan for over a decade, the question however becomes at what price. If Inflation comes purely as a result of a rapidly depreciating currency, and does not necessarily translate into wage growth then the “benefits” of inflation for the population in general is moot. More importantly, the BOJ Governor also does not rule out using other more radical tools should the current ones prove, yet again, unsuccessful. What also stands out from this interview is the  disconnect between what is happening on the monetary side and what is occurring on the fiscal side. The Governor acknowledges the potential for a sharp rise in rates as a result of their current strategy, however he soft peddles the effect such a rise would have on Government finances. The BOJ has travelled down this QE path for years, but rather than shifting to another possibly more advantageous side road, they have instead chosen to simply proceed at a higher rate of speed. If the definition of insanity is doing the same thing over and over and expecting different results, choose rational thought: Buy Stuff.

Anchors Aweigh

4 Dec

I have been thinking a lot about anchors lately. Not to get too nautical here, but my thoughts have centered on the anchors, or perceived anchors we currently see all around us. The front end of the Treasury Curve anchored by the various forms of QE, the attempt to anchore investor expectations by all global central banks, the lack of any attempt by those in Washington to provide any kind of anchor to the credit worthiness of the U.S. Government, the complete lack of anchor associated with any fiat currency. Maybe what got me thinking in this vein was an interview with former Fed Chairman Alan Greenspan. The wide ranging interview, which mostly consisted of trying to box the former chair into some critique of current Fed policy, stood out for two divergent points that were made by the Maestro. When asked about the difficulty with stepping away from  Central Bank balance sheet management, Greenspan stated that “it really is not that difficult, it is merely a bookkeeping entry”. The fact that the Fed could conjure up $4Trillion in reserves, and just as easily un-conjure a like amount speaks to the anchorless world in which we live.  However, the former Chairman was not done there. When asked about the presence of a Bitcoin bubble, he responded ” I don’t understand where the backing is… there is no intrinsic value”.  Buy real anchors(Stuff) Sell perceived anchors(paper).