?The policies that we followed since the great crash of 2008 have been pretty darn good. It would be nicer if GDP were galloping at 4% or 5%. But we have had a complete resuscitation of the banking system. We?ve had the economy come back in a very significant way in all cases, except residential construction. Most of our businesses are having record earnings,? said Berkshire Hathaway?s Warren Buffett.
A few years ago on the Old Square in Brussels, a delicious luncheon of moules marini?res paired with an excellent white burgundy with some European Central Bank officials ran far longer than expected. They were attempting to convince me of the long term viability of the Euro, to no avail.
That seriously delayed my departure from Belgium to Salisbury in the English countryside to visit some clients resident at Highclere Castle, which is now the subject of a major TV series. I raced my twin engine Cessna at full power into the sunset, across the English Channel, past the white cliffs of Dover, because my destination airfield had no lights. By the time I arrived it was too dark to land, my alternate airport at Southampton had suddenly closed because of a crash, and I only had 15 minutes of fuel left.
I knew that the pub at the end of the grass runway kept a radio with the tower frequency always tuned in. So circling at 1,500 feet overhead in the pitch black darkness I called in and ordered a full bottle of Ron Rico rum. I told the bartender to pour out 16 shot classes and line then up on the bar. I then broadcast my predicament and said that anyone who would take a rolled up newspaper and dip it in the rum, set it on fire, then line up to light the runway would get a free pint if I landed successfully. I said that if I didn?t get help immediately, I might take out nearby Stonehenge, or perhaps Salisbury Cathedral, in the imminent crash.
Within seconds, I could see the flaming torches dispersing along the field, some in a somewhat drunken fashion. I landed right between the two ragged lines of my improvised landing lights, which lit up the field as clear as day. It was the first time that I landed on a runway that was living, breathing, and even staggering.
As I taxied to my parking space, the starboard engine ran out of fuel and shuddered to a halt. So I just abandoned the plane there to retrieve the next morning. Needless to say, I bought rounds for the house that night until no one was left standing.
Watching the Euro shatter its four month support line this morning at $1.2950, I felt exactly as I did all those years ago in the dark skies over the Wiltshire countryside. The concern was that my put options would run out of fuel before the currency made its big break, forcing me to crash and burn, as I almost did over England. The move sent my short position in the beleaguered currency soaring, and rendered the calls that I sold short only yesterday into dust. It was a good P&L day for the Mad Hedge Fund Trader?s model portfolio.
I am now seriously thinking of becoming a card carrying member of the Greek Communist Party, for it is their young leader, a Mr. Alexis Tsipras, who provided the final straw that broke the camel?s back. Its leaders threatened to challenge the legality of the recent bailout in court. Is Greek rescue package number three now in the cards? The development threatens to undo all of the hard won progress made this year towards resolution of the continent?s sovereign debt crisis. Did anyone expect that asking people to vote for their own austerity and starvation was going to work?
Long term currency watchers had been mystified as to why the Euro had held up so well in the face of such obviously collapsing fundamentals. The markets were rife with rumors of European Central Bank support at $1.30 to prevent a widespread panic that would ignite wholesale Euro dumping. My own theory was that the trade became so obvious and one sided that hedge fund short covering prevented it from falling further. Today, the fundamentals turned so dire that massive selling finally? cleared out? those positions, which is how these things always end.
All I can say is that when it rains, it pours. The profusion of the market developments that I have been predicting all year have suddenly come true in the last few days; the awful April nonfarm payroll, a global synchronized recession that is accelerating to the downside, and the end of the grotesque overpricing of the US stock markets. Also coming home to roost are the contagion effects on all ?RISK ON? assets, including equities (IWM), commodities (CU), oil (USO), the Euro (FXE) (EU), gold (GLD), silver (SLV), and a huge flight to safety bid for the dollar (UUP) and Treasury bonds (TBT).
Yale professor, Robert Shiller, is the kind of imp like, peripatetic college professor you might expect to find in a Disney movie. Highly animated and jumping from one radical idea to the next it is hard to keep up with his stream of consciousness torrent of economic innovations. After a two-hour barrage, I was so intellectually exhausted that all I could do when I returned home was to plop down on the sofa with a Jack on the rocks and watch Fox News.
You know Robert Shiller as the creator of the Case Shiller Real Estate Index, which tracks 20 major residential housing markets around the US. His data was originally the domain of a handful of real estate brokers with a theoretical bent or securitizing investment bankers. But when the real estate collapse began to accelerate in 2007, it suddenly became the data point du jour for every property investor, business news network, and hedge fund manager.
Shiller is a devout non believer of the efficient market theory espoused by Eugene Fama of the University of Chicago. He thinks that financial markets are so emotional that they are beyond rational analysis. The systemic vulnerability of financial markets was a major cause of the 2008 crash and is still not well understood. He argues that people should have a 100 year time horizon when making investments, because that?s how long today?s children will live. Does anyone have the trading call for the Spring of 2112? (no typo!).
He says that teaching finance today is about as popular as being the university Reserve Officer Training Corps (ROTC) instructor during the Vietnam War. People are angry at bankers, as the Occupy Wall Street crowd has so amply shown, which Shiller sees as our own ?Arab Spring?. Since 1990, the top 1% of the wealthy have seen their net worth soar by 60%, while it has fallen for the other 99%.
When Occupiers discovered that their movement could cause governments to fall, it rapidly spilled beyond its Madrid, Spain origins. But the financial industry is not all bad. Witness the miracle in emerging markets which has been made possible through new capital provided by western investment bankers.
Robert titillated me with some highly creative innovations which we may see adopted in coming years. I?ll give you the highlights.
*Options on individual real estate markets, now five years old, will go mainstream and finally become liquid as individuals seek to protect their home equity during economic downturns. This will become a major area of new profits for Wall Street.
*?Continuous mortgages? should be created whereby the debt is never paid off, but is assumed from one owner to the next in exchange for a higher interest rate. If you package many of these together and securitize them, it would be a major step towards clearing out the massive inventory of unsold homes.
*The government already issues plenty of bonds and next should sell equity in itself in one trillionth increments. That puts the value of the government?s share price today at about $15.50. If the economy grows, the share price should go up.
*Tax rates for the wealthy should rise with inequality. The more wealth that is concentrated with the 1%, the higher the maximum tax rate should go. Remember, the maximum rate was 90% at the time of the Roosevelt administration during the Great Depression, nearly triple today?s 35% rate.
*The actual impact of high frequency traders, who he refers to as ?millisecond traders?, is vastly exaggerated.
*Although the new ?crowd funding? bill just signed by president Obama has been described as the ?Boiler Room Full Employment Act?, it will provide a valuable source of venture capital for micro startups. Those earning only $40,000 a year are limited to an $800 bet, with the maximum legal investment set at $10,000.
*Some 14% of the total economic activity of the US involves security. Just having people watching people is an enormous waste of resources.
*For profit nonprofits, called benefit corporations, should proliferate to advance specific social goals. These should work well as they pay little in wages and enjoy community support. They are already legal in eight states.
If you would like to attend one of Shiller?s classes for free and expose yourself to more out of the box economic thinking, you can do so through regular offerings of his online courses. To sign up for Open Yale University, which Time magazine lists as one of the top websites, please click here at http://oyc.yale.edu/economics .
And what about real estate? Robert told me that his data show that there is not the slightest sign of any long term recovery in prices. Real estate brokers insisting that the final bottom has been reached are best to be ignored. Rent, don?t buy.
?It?s not the end of the world, but it will be one messy process,? said Oracle of Omaha, Warren Buffett, about the European debt crisis.
That is what the head of Greece?s opposition party said this morning in the wake of elections where voters resoundingly rejected austerity in any way, shape, or form. Ditto for France, where the Socialists rode a wave of resentment against the incumbent conservative government. Looks like I will have to pack a red scarf and schedule some time for manning the barricades during my upcoming Paris strategy luncheon. My front teeth are still kicking around somewhere on the Left Bank from the last time this happened, in 1968.
The results couldn?t have been more decisive, with president Francois Hollande capturing 51.7% compared to a stumbling 48.3% for Nicolas Sarkozy. Sarkozy conceded defeat five minutes after the polls closed, and presumably went back to the ?lys?e Palace with his fashion model wife, Carla, to start packing. After studying Carla?s picture below for a considerable amount of time, I would have to say that Sarkozy was the real winner of this election, as he now has plenty of free time to spend at home.
It turns out that I was also a winner of the French elections, as I went into them short the Russell 2000 (IWM), the Euro (FXE), Boeing (BA), Pulte Homes (PHM), and US Treasury bonds (TBT). Overnight, the S&P 500 (SPX) traded all the way down to 1,354 before rebounding during US time, putting 1,325 on the table.
Only my short in the Yen (FXY) came back to bite me, and that was just a nibble. I also used the big volatility spike last week to establish substantial short volatility positions which are doing quite well today. I think we may be able to really coin it in coming weeks with these positions, before the summer doldrums set in.
Longer term, I believe that the outcome of the weekend European elections will be a longer period of uncertainty with greater volatility for financial markets. If Europe kept you awake at nine before, now you have even more reasons to become a late nigh TV rerun addict.
French First Lady Carla Says Good Riddance
With Treasury Secretary, Tim Geithner, in Beijing last week kowtowing to the largest foreign owner of our national debt, the prospect of the dollar?s demise as a reserve currency has once again reared its ugly head.
Will people pleeease stop incessantly nattering about the possibility of China dropping the dollar as a reserve currency? What else are they going to use? Monopoly money? Taiwanese dollars? Collectable postage stamps?
At $3.6 trillion and rising fast, the Middle Kingdom?s reserves are so enormous that no other currency in the world could accommodate the switch, and no other security offers the necessary depth and liquidity but US Treasuries. China only needs to breathe on any other market for it to skyrocket, we have seen in the relatively Lilliputian commodity markets in recent years.
And really, how likely is it that China embarks on radical new monetary policies that suddenly halves the earnings of its exporters, as well as its 30 year hoard of accumulated savings? The demise of the dollar has been predicted more often than the ditching of Microsoft?s Windows as the global PC operating system, and is just as likely. Hate the greenback as much as you like, but there just isn?t any other alternative.
I have been hearing these arguments ever since the US went off the gold standard in 1971. First there was a perennial Arab threat to price crude in a basket of currencies. Gee, they never seem to complain when the buck is going up. Then there was the speculated emergence of the ?Yen Block?, in the eighties, back when Japan was dominating international trade and the yen was bumping up against ?75 to the dollar. Remember the book ?Japan as Number One? What a laugh.
Next we got all that European whining after the launch of the euro, when the weak dollar was every trader?s free lunch. Let?s face it, Europeans hate using someone else?s currency as their primary reserve instrument. Before the dollar, sterling was the de facto international currency, and was equally despised. So rather than waste time discussing this issue anymore, let?s talk about something more important, like who is going to win the World Series this year. I?m wearing my Yankees hat.
Our New Reserve Currency?
?Regulation is complicated and annoying, but it is civilization,? said Yale professor, Robert Shiller.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
After my entertaining repast with the head of our nation?s intelligence service, I had to ask myself this question.
During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050.
Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Australia, Africa, and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring.
Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork demand rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone.
To produce one pound of beef, you need 16 pounds of grain and over 2,000 gallons of water! I won?t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply. Burning food so you can drive your GM Suburban to Wal-Mart on the weekends while millions are starving never made much sense to me.
It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver.
The amount of arable land per person has fallen precipitously since 1960, from 1.1 acres to 0.6 acres, and that could halve again by 2050. Water is about to become even more scarce than land. Productivity gains from new seed types are hitting a wall.
China, especially, is in a pickle because it has 20% of the world?s population, but only 7% of the arable land. It has committed $5 billion to develop agricultural land in Africa. There are now thought to be over one million Chinese agricultural workers on the Dark Continent. Similarly, South Korea has leased half the arable land in Madagascar to insure their own food supplies.
An impending global famine has not escaped the notice of major hedge funds. George Soros has snatched up 650,000 acres of land in Argentina and Brazil on the cheap, an area half the size of Rhode Island, Others are getting into the game, quietly building portfolios of farms in the Midwest and the South.
This year promises to deliver one of the greatest US crop yields in history, brought on by the warmest winter in 100 years. The US Dept. of Agricultural January crop report then predicted huge surpluses, slamming prices once again, and delivering limit down moves in the futures markets. But the weather may not cooperate, as it did last year.
The net net of all of this is that food prices are going up, a lot. Use this year?s expected weakness in prices to build core long positions in corn, wheat, and soybeans, as well as in the second derivative plays like Potash (POT), Agrium (AGU) and Monsanto (MON). You might also look at the PowerShares Multi Sector Agricultural ETF (DBA) and the Market Vectors Agribusiness ETF (MOO).
A ?BUY? SIGNAL?
The original purpose of this letter was to build a database of ideas to draw on in the management of my hedge fund. When a certain trade comes into play, I merely type in the symbol, name, currency, or commodity into the search box, and the entire fundamental argument in favor of that position pops up. With a link chain to older stories.
You can do the same. Just type anything into the search box with the little magnifying glass in the upper right hand corner of my homepage and a cornucopia of data, charts, and opinion will appear. Even the price of camels in India (to find out why they?re going up, click here) As of today, the database goes back to February 2008, and comprises some 2 million words, or triple the length of Tolstoy?s epic novel, War and Peace.
Watching the traffic over time, I can tell you how the database is being used, and the implications are fascinating:
1) Small hedge funds want to see what the large hedge funds are doing.
2) Large hedge funds look to see what they have missed, which is usually nothing.
3) Midwestern advisors to find out what is happening in New York and Chicago.
4) American investors to find out if there are any opportunities overseas (there are lots).
5) Foreign investors wish to find out what the hell is happening in the US (about 1,000 inquiries a day come in through Google?s translation software in a multitude of languages).
6) Specialist traders in stocks, bonds, currencies, commodities, and precious metals are looking for cross market insights which will give them a trading advantage with their own book.
7) High net worth individuals managing their own portfolios so they don?t get screwed on management fees.
8) Low net worth individuals, students, and the military looking to expand their knowledge of financial markets (lots of free online time in the Navy).
9) People at the Treasury and the Fed trying to find out what the private sector is doing.
10) Staff at the SEC and the CFTC to see if there is anything new they should be regulating.
11) More staff at the Congress and the Senate looking for new hot button issues to distort and obfuscate.
12) Yet, even more staff in Obama?s office gauging his popularity and the reception of his policies.
13) As far as I know, no justices at the Supreme Court read my letter. They?re all closet indexers.
14) Potential investors/subscribers attempting to ascertain if I have the slightest idea of what I am talking about.
15) Me trying to remember trades which I recommended, but have forgotten.
16) Me looking for trades that worked so I can say ?I told you so.?
It?s there, it?s free, so please use it.