Diary Archives

My Solution for Europe

Taking the express train from Paris to Frankfurt, I was playing around with the map function on my iPhone 4s. It was really cool watching the blue dot marking my location zip across the map at 200 miles per hour.

When I zoomed in on my location, I realized that I recognized many of the names. Soissons, Chateau, Thierry, and Belleau Wood were all names that I recalled from my grandfather?s US Army discharge papers from WWI. That?s where he suffered a mustard gas attack that inflicted total blindness for 5 years and put him in a bad mood for the next 50. The train was traveling along the frontline trenches of the Western Front.

I wondered what my grandfather would say to me today, 45 years after his passing. His parents sent him from his native Sicily to New York City to avoid the Italian draft, which then needed recruits to expand its empire in Libya and Ethiopia. But when 1917 came, he joined the American army?s famed Rainbow Division to gain US citizenship and quickly found himself in the trenches.

I am sure he would be amazed by the technology that emerged nearly 100 years into the future; bullet trains, cell phones, and laptop computers that give immediate access to all knowledge. He was a true renaissance man, spoke five languages, and was well versed in the classics, so he would have appreciated the utility of such devices.

However, he would have been horrified that I was traveling to Germany to speak with the hated ?Bosch?, who committed atrocities against Belgium children, whose submarines sank unarmed civilian ships, and who were no better than lowly ?Huns?. That, however, is precisely where I was going, to advise the German government, the CEO?s of top corporations, and officials from the Bundesbank on how to extricate themselves from their current financial and political predicaments.

Check Out My Frankfurt Digs

When I arrived at Frankfurt station, my origins as a German blue-collar factory worker made themselves abundantly clear. I headed straight for a fast food stand and ordered a bratwurst mit brutchen und kartofelsalat mit eine grosse bier. When I was 16, I spent a summer working at the Sarotti chocolate factory in West Berlin, and the preferences I picked up live with me today. Some of my co-workers had been Russian POW?s in Siberia released only a few years before, and the stories they told me were bone chilling.

When the list of those who wished to hear my views became impossibly long, I finally said to one friend, ?Why don?t we just get everyone together and have one big party.? And that?s exactly what he did. Crammed into the top floor of one of Frankfurt?s highest skyscrapers were 100 of the cream of the German establishment who came to hear my thoughts on the world at large.

I told them that Europe has two choices: it can move backward or forward. If it returns to the past, the European Community and its currency will break up, forcing each country to compete individually against the US and China. This would cut GDP growth by half and lead to a permanent decline in standards of living. Germany would lose all of its banks as they go under en masse from the burden of bad European debts. Eventually, you would end up with a Germany that is angry, broke, and nuclear, and nobody wants that.

Inventory is Not Flying Off the Shelf in Europe

The only choice, then, is to move forward. Europe is really half a country, or a pretend country. It has a common currency, but not the institutions to ensure its survival, like a US style Treasury Department and a dual mandate central bank with teeth. The present system as it stands is guaranteed to fail. But it took a Herculean effort to get this far 13 years ago, with every party expending their last centime of political capital. So here we stand. After a long hiatus, it is now time to move forward.

It?s up to Germany to bail out the weaker economies of Southern Europe. For a start, they have the money to do so. Much of this was earned exporting German products there. Last year exports exceeded $1 trillion, or about 20% of GDP. Complain all you want about Mediterranean borrowing, but a very large part of it was used to buy Mercedes, Volkswagens, BMW?s, and Audi?s. That?s a lot of money to put at risk by allowing their economies to implode.

Research Can Be So Tedious

But bailouts don?t come free, and the quid pro quo for riding to the rescue would be to give Germany control of European monetary policy. The president of the ECB doesn?t even need to be a German. A Belgian would do, as long as he pursues German style anti-inflationary policies.

There are plenty of historical precedents for such arrangements. The US put up the money for the creation of the United Nations in 1945, and kept for itself a permanent seat on the Security Council. The US funded World Bank is always run by an American. The originally US financed International Monetary Fund has traditionally been managed by a European. The current president is former French Finance minister Christine Lagarde. But its headquarters are in Washington DC.

Pulling this off isn?t going to be easy. When the United States wrenched these concessions out of 13 states in 1787, only 5% of the population was allowed to vote?white, property owning males. Good luck trying to achieve that in a loose confederation of 27 states, with 17 in the monetary union that backs the Euro. Some politicians may have to actually earn their pay for a change. I expect this to be a five-year work out, at the very least.

The net net for all of this is that the Euro will get a lot cheaper before we hear the end of this. Parity against the greenback by next year is within reach, and a revisit to the old low of 88 cents is not impossible. Such a bargain currency would give Europe a huge economic advantage on the world stage and might even provide the grease to make an ultimate solution possible. Then we will have a real United States of Europe to be admired, but also feared as a real competitor.

With that, I headed off to a late dinner near the grand Frankfurt Opera House with several of the more senior guests. My host explained that the impressive baroque building was symbolic in Germany in many ways. While it looks ancient and imposing, it in fact was new, rebuilt with modern reinforced steel and concrete on the rubble of WWII.

Powered by beer, Rhine wine, and ultimately schnapps, I made it until midnight and then caught a taxi back to my palace, wondering if I had missed anything that evening. I also wondered if my grandfather would have been proud of me.

Report From the Olympics

Diary

It was an unexpected call. A close friend who ran one of the world?s largest hedge funds said he had two tickets to the London Olympics opening ceremony on Friday night. Would I like to have them? I said he must be kidding.

I knew from my own research that these tickets were the most sought after in the world and were going for $20,000 each on the black market. Forgeries abounded. Besides, I was high in the Swiss Alps at Zermatt, and every flight going into London for weeks was booked. How was I supposed to get there?

No problem, he said. He would send his private Gulfstream G5 to pick me up. I answered that I was planning an assault on the Breithorn on Sunday, and that the guides had already been booked and the equipment rented. No worry, he would have the jet on standby in London until I was ready to return.

I said he was out of his mind. The day he was proposing would cost at least $100,000. He replied that he made over a billion dollars on my Swiss franc trade last year and it was the least he could do to say thanks. I said OK, but only if I could fly in the right hand copilot?s seat. ?Done,? he shot back.

I set to work immediately obtaining the necessary flight clearances. The nearby Swiss Air Force base at Sion was easy. But getting permission to land at Luton, just 45 minutes from the Olympics east London venue, was a little trickier. The British were unusually touchy about allowing private aircraft near the games, and my civilian inquiries hit a dead end.

Sion Airport

But after a few well-placed calls to the Pentagon it was settled. Looks like I owe the US Air Force Staff College a free lecture. I checked the NATO meteorological website, and miraculously, it looked like a cold front was veering to the right, and would just miss the Olympic site.

After my Zermatt strategy seminar, I literally ran to the heliport next to the Banhoff. In minutes, we were revving up the engines, and tore down the valley to Sion, an almost instantaneous free fall of 4,000 feet. The route the train covers in 80 minutes we did in ten. As soon as the chopper landed next to the G5 I hopped in with an overnight bag and we taxied for takeoff. At full power, we covered the route via Frankfurt and Paris in just 2 hours.

At Luton, a black Daimler limonene was waiting for me. I held my breath as the driver expertly negotiated the back roads to Stratford, hoping he wouldn?t get tied up in an immense traffic jam. Finally, a mile from the stadium we hit a wall of unmoving cars.

I jumped out and started briskly walking, carrying every form of ID I had, expecting to get challenged at every point. I was armed with a giant full page Olympic ticket with my photo that hung around my neck, a passport, my Department of Defense DD 214, a US commercial pilots license, a membership to the Surrey Rifle Association, and my old Scoutmaster?s card from a Boy Scout troop in west London. I made it just in time.

The atmosphere was absolutely electric, with everyone on a high. Try to imagine the excitement of the Super Bowl, the World Series, and the World Cup combined, and you might have an inkling of the emotions. Just getting here was a major achievement for all in attendance. The sound system was so loud that it reverberated straight through your body.

I sat in a high security VIP area about 100 feet from where Queen Elizabeth II sat surrounded by security men. No one can top the Queen on Olympic credentials. She opened the 1976 Montreal games herself.? Her father, King George VI, opened the 1948 London games. Her grandfather, King Edward VII, did the same for the 1908 games. I never believed for a second that she arrived by parachute with James Bond. Her husband, Prince Phillip, the Duke of Edinburgh, has origins that lie with the Greek royal family. Presidential hopeful, Mitt Romney, was not far away, sitting close to Bill Gates and Sir Richard Branson.

The ceremony opened with a medieval pastoral scene of farms, animals, and maypoles, even though most of the British lost their connection to the land ages ago. The London Symphony Orchestra tastefully opened with Elgar?s Nimrod. I quickly became the historical interpreter for the guests who surrounded me, as few could identify the significance of the Isambard K. Brunel figure played by Kenneth Branagh, the builder of Paddington Station and the first iron ship, the SS Great Britain.

Isambard K. Brunel

The rise of the industrial revolution was truly impressive, with its towering smokestacks, and the costs to the people and the land were clear. This was climaxed by the symbolic forging of the Olympic rings of steel. The smoke gave off the genuine stench of a steel mill.

After that there was so much going on in the arena, it was hard to keep track of it all. It was also a challenge to integrate the story line that played out on the big screen with the live action in front of you, and we all struggled to keep up. Unless you were an authority on English history, it was easy to lose track of what was going on.

I?m not sure many understood the significance of Emily Pankhurst and the suffragettes, the red poppies of WWI, and the blitz of WWII. Then 200 beds on wheels with nurses suddenly appeared as a tribute to the National Heath System created in 1948. After our recent Supreme Court decision on Obamacare, I wonder if we will do the same someday.

Rowan Atkinson was brilliant as the bogus member of the orchestra.? When 50 Mary Poppins holding umbrellas descended from the sky, I was afraid the whole thing would degenerate into a clutch of British clich?s. But then Paul McCartney played Hey Jude and we all nearly lost it.

The parade of the teams certainly challenged one?s knowledge of national flags. We took pictures of them and they took pictures of us. By the lime Lesotho appeared, I was starting to fade, so I told my neighbors to wake me up when the United States appeared. When they did, they looked glorious in their Chinese made Ralph Lauren designed blue blazers and berets.

Of course, the big suspense was over whom would light the Olympic flame. As a former marathon runner, I was hoping for Roger Bannister, who broke the four- minute mile in 1954. Then we were teased into thinking it would be soccer great David Beckham, who grew up nearby and arrived with the torch in a giant, glowing, powerboat. In the end, we saw seven British Olympic greats handing off torches to seven unknown kids to symbolize the passing of the generations. Finally, fireworks went off to the sound of Pink Floyd. How cool is that?

Only through the miracle of cell phones, Mapquest, and GPS was I able to find my forlorn limo driver. By the time I was dropped off at a friend?s house at Hampstead Heath, it was 4:00 AM. I heard it took three hours for Britain?s high-speed rail system to empty the 80,000 spectators from the stadium.

My return to Switzerland was considerably less dramatic. When the G5 landed back at Sion the next day, I took a taxi to the train station and caught a train up the mountain to Zermatt. En route, my friend called me and asked what my big trade for 2012 would be. I said I?d get back to him, but with a presidential election, a continuing European crisis, and a fiscal cliff ahead of us, I had great hopes. I got back to my chalet just in tine to turn on the TV and watch Michael Phelps blow the 400-meter individual medley.

The day checked another item off my bucket list, allowing me to give thanks for my life. And I?m now on my forth bucket list. Sorry, no financial stuff today. The surprise day at the Olympics blew a 24-hour hole in my work schedule, and I?m getting up at 5:00 a.m. tomorrow morning to climb the Breithorn.

Given the choice of bagging another 14,000-foot Alpine peak and publishing the 1,400th Diary of a Mad Hedge Fund Trader, I?ll settle for the altitude. You?ll just have to settle for the two Trade Alerts I sent out Thursday to sell short Treasury bonds and the yen, which I?m happy to report turned immediately profitable.

Report From Paris

Diary

The full force of soaring oil prices really hit home when I arrived in Paris yesterday. As we passed a gas station, I mentioned to the driver that I didn?t know that they sold gas by the gallon in France. He answered that they didn?t. Those were the prices in liters I was seeing. He then voiced concerns about the future of his taxi business as fuel prices ratcheted up from $10 to $15 a gallon! It makes our own bleating that our prices at $3.50 a gallon appear somewhat detached from reality.

The Paris strategy luncheon, held at the Cercle National des Armees, or the French Army Officers Club, was one of the best yet. You know, the place where Napoleon used to hang out? I gave my talk under the watchful eyes of the portraits of Charles de Gaulle, President Francois Hollande, and the French Foreign Legion. Renditions of the battle of Waterloo were nowhere to be seen.

When I gave my event here last year, Internet access was only available in the lobby. Perhaps that?s why the French lost Vietnam? At the table on my right a group of French Air Force officers were planning the next air strike on Libya. On my right several Chinese admirals were negotiating to buy an aircraft carrier from the French Navy. It was some of the most fascinating eavesdropping I have ever done.

The event turned in to something of a reunion for me, with my former institutional clients from the 1980?s dropping by, as well as some of my French staff from the London office of Morgan Stanley. A gentleman from Warsaw, Poland won the prize for the greatest distance traveled. Spend your Zimbabwe dollars wisely. Maybe you can offload your holding to Bashar Assad, who may soon need them.

The big question at all of my recent lunches is ?Will there be a QE3? I offered the simplest of all possible explanations. Asset classes that prospered mightily from the $600 billion infusion of the Federal Reserve during QE2, like stocks, commodities, precious metals, and oil, will suffer the most from its demise. Asset classes that suffered from the rapid expansion of the monetary base this encouraged, like the US dollar, should see a rebound. The political balance in Washington makes a QE3 impossible, unless the stock market crashes first, vaporizing Ben Bernanke?s wealth effect. So don?t hold your breath. It would be a last desperate act.

Not All is Well in the City of Light

Everyone present complained that the Euro was in freefall at $1.22, but conceded that momentum could take it as low as $1.00 before it sees a reversal. I brought an extra suitcase to Paris, hoping to fill it with goodies for those on the home front at the department store Gallarie Lafayette, Mon Dieu! But prices were still so high that I only purchased a few postcards, knowing I could buy the same products at home on the Internet for half the cost, with free shipping and no import duties.

I spent the weekend playing tourist and visiting my old favorites, such as the Louvre, the Musee d?Orsay, Sacre Coeure, Montmarte, the Eiffel Tower, and a fine dinner floating down the Seine on the Bateaux Parisienne. The food is so good that even the local corner brasserie produced a meal to remember. A stylish people make it impossible to be overdressed, no matter where you go. In Paris, even the homeless have taste. A search for my front teeth on the Left Bank, which I lost in a riot there in 1968 when a flying cobblestone hit me in the mouth, yielded no results.

My next report will be from Frankfurt, Germany.

Report From London, Part III

Diary

The city is now the most crowded that it has been at any time since WWII. Most hotels have tripled their rates, forcing traveling students on a budget to sleep in doorways and under bridges everywhere.? My usual abode here, The Naval Officers Club near Piccadilly, honored their regular price since I have been such a long term and loyal guest. However, I was the only one in the building not participating in an Olympic event, as the teams of several nations booked every room two years ago. The American team arrived today in their spiffy blue blazers. After randomly driving around London, the hapless bus driver broke down and admitted that he didn?t know where the Olympic Village was. And enterprising athlete whipped out his iPhone, Googled the address, Mapquested the directions, and they finally arrived four hours late. Still, they fared better than the Australian sailing team, whose sales were lost by Qantas Airlines. I decided to flee the madness in London for a day and visit some old friends in the countryside, the 8th Earl and Countess of Carnarvon. The late 7th Earl was an early investor in my first hedge fund and I have kept in touch with the family ever since. ? His grandfather, the 5th Earl gained fame and fortune from his co-discovery of King Tut?s tomb in Egypt?s Valley of the Kings in 1922. His early death, shortly thereafter, was the origin of ?The Mummy?s Curse? of depression era horror film fame. Many of his discoveries today make up the bulk of the Egyptian collection in New York?s Metropolitan Museum of Art, which the family sold to pay estate taxes. Recently, the family has been renting out their 350 year old home, a 15-minute taxi ride south of Newbury, the spectacular Highclere Castle, for use as a film set. The period drama series that resulted, ?Downton Abbey,? unexpectedly became a blockbuster in the US where viewers stupefied by endless low budget reality shows were starved for quality, thoughtful content and adult writing. It also sent 100,000 visitors a year their way, as well as $25 million in ticket fees. This windfall enables to maintain the house and the magnificent gardens in immaculate condition. The cash flow enabled them to ramp up the other family business, breeding racehorses for the queen. Portraits of past winners adorned almost every room. After tea with my hosts and a personal tour of the estate, I picked up some tea towels for friends at home who are into this kind of thing. I also saw a display of some spectacular early Egyptian relics, which the family found bricked up behind a wall 60 years after the Met sale. ? ? The train has just emerged from the tunnel and we are now racing our way across the Norman countryside. Everyone?s cell phone has simultaneously started bleeping, mine with a text message welcoming me to France and informing me that I will be allowed unlimited data transfer, but will be billed $1.29 per minute for voice. Is that in English or French? Is there a surcharge for speaking foreign languages in France? The medieval red rick farmhouses whip by in a blur. The steward has arrived with my dinner tray, so I?ll sign off for now. I?ll report again after Paris. John Thomas

My Visit to Obama?s House

Diary

During my recent quick run through Chicago, I stopped by Obama?s house on Greenwood Avenue and 50th street in up and coming Hyde Park to say hello. I was thwarted by two concrete crash barriers, 16 cop cars, and army of elderly Chicago police happily pulling overtime. Shifty looking characters wearing long overcoats and sprouting wires out of their ears were everywhere. Needless to say, I did not get invited in for tea and cookies.

Every neighborhood bird nest, flagpole, and chimney sported video cameras, and Google Earth has wiped the block off the map. No wanting to risk my valued Secret Service clearance, I scuttled out of there before anyone started asking questions. Instead, I settled for a visit to the delicious Valois Cafeteria around the corner, the president?s favorite diner, and his preferred bookstore at 57th Street Books. They carried all of his publications. Amazing!

I managed to run into someone, who knew someone, who once babysat Obama?s kids. Need, a presidential pardon, a cushy ambassadorial appointment, a new alternative energy program, or a juicy government contract? I?m now your ?go to? guy! Just make a discreet donation to my favorite 501 (3) (c) and it?s a deal.

Farewell to Barton Biggs

Diary

It is with a great sense of sorrow that I learned of the passing of industry legend, Barton Biggs. He was 79. I was speaking to him only a few weeks ago when I passed through New York for my strategy seminar, attempting to decipher the medium term trends for these fractious and conflicting markets. It is a reminder of how temporary and fleeting life can be.

Barton was a pioneer in the international investment arena and founding father of the modern hedge fund industry. He became famous for calling market bottoms in 1982, 1987, and 2008. He was a colorful and masterful writer who regularly titillated investors with his iconoclastic and out of consensus ideas. Sound familiar?

Barton grew up as a member of the East coast establishment, his father being the chief investment officer of the Bank of New York. He graduated from Yale in 1955 in creative writing and then did a brief stint in the Marine Corps. He next turned to Wall Street and joined E.F. Hutton as a junior broker (remember ?When E.F. Hutton speaks, people listen??).

In 1965 he spun off to create Fairfield Partners, one of the early long/short US equity hedge funds. After several prosperous years, the fund crashed and burned with the collapse of the ?Nifty 50?. He later told me that was when he first learned of the six standard deviation move. ?The biggest mistake you can make in a bear market is to cover your shorts too soon? he said.

In the mid seventies, he was recruited by a small, white shoed, private partnership called Morgan Stanley & Co. to build up an asset management division from scratch. Barton became my friend and mentor when I joined the firm in the early eighties, and I spent the better part of the decade debating every pebble of the investment landscape with him.

Together, we fought a major uphill battle trying to convince a cautious and blinkered management that the firm?s future lies in international and emerging market equities. Getting them to focus on Toyota and Matsushita instead of General Motors and IBM, we felt like Sisyphus endlessly rolling the boulder up a steep mountain.

Barton persevered, and in the following three decades the business grew to $1 trillion in assets along with a world-class global research department. After Morgan Stanley went public, he became a billionaire in his own right. I bailed to start my own hedge fund a few years later.

In 2003, Barton left (MS) to start a new hedge fund, Traxis Partners. We all thought he was crazy at the time, as it was the last thing you would expect a 71 year old to do. This is a business where 30 year olds regularly drop dead of heart attacks from the stress. That was pure Barton. I heard at one point he reached $5 billion in assets.

He became a regular fixture in the media, offering his wisdom and insights in his characteristic gravelly voice. Always the independent thinker, I know he voted for Obama in the last election, at odds with much of Wall Street.

To listen to my last extended interview with Barton where he gave his global view a few years ago on Hedge Fund Radio, please click here. He was tiring even then, and we had to record the show in 15-minute segments so he could rest in between sessions. But he made the extra effort to give my readers an edge on the market. That was pure Barton too.

Barton will be missed by many.

Sysiphus

Report From London, Part II

Diary

I write this to you from my double suite on the Orient Express crossing the Swiss Alps. My manservant, Charles, is off fetching a cup of tea and steam pressing my white dinner jacket for tonight?s formal dinner.

My first night at the Naval & Military Club in London, a group of British Army officers just back from Afghanistan, and their dates, hosted a blowout black tie homecoming party, complete with disc jockey and disco ball. While singing a drunken and rautious ?Rule Britannia? at 4:00 AM we maxed out the amplifiers and ended up blowing the power, not only for our building, but for the entire block.

Suddenly, our 18th century building was plunged back to the 18th century, meaning no lights, Internet, or flushing toilets. Candelabras solved the first problem, and the Financial Times the second, but when nature called, I had to retire to the pub across the street. Each time I did so, I enjoyed a pint of Fuller?s London Pride, not sure if I was making my problem better or worse. Two days later, two truck sized diesel generators on loan from the army magically showed up and solved the power problem, and we returned to the 20th century.

The Globe Theater is a magnificent reproduction of the original, which burned down in 1613 during a canon during scene in Henry VIII (click here for the link at http://www.shakespearesglobe.com/ ). Its thatched roof, open air seats, and 12 inch roughhewn oak beams led me to expect The Bard from Stratford-upon-Avon to walk out any moment. Actors tore through the standing crowds, reciting lines, and embracing a startled few theater goers. Half way through As You Like It, I realized that the devotees sitting next to me were mouthing the lines. They had memorized the entire script.

One afternoon I asked a somewhat doddering old taxi driver to take me to Kensington Palace, who seemed quite impressed. He drove me directly to Harry and Kate?s private entrance. After giving me the gimlet eye, Scotland Yard directed us to the correct entrance for the tourists. I try not to cause international incidents when on vacation, and this time I came close.

England definitely did not show its best face when I walked out of a comedy club into Leicester Square at 2:00 AM. The women were so drunk that they walked barefoot across the vomit covered pavement, unable to walk in high heels.

Another day found me at Christie?s auction house for a private viewing of John James Audubon?s spectacular Birds of America. The multi-volume set was in mint condition, the colors as bright as the day they were printed. Only 70 of the original print run of 140 in 1838 are known to exist. One sold for $11.5 million last year, making it the world?s second most valuable book after the Gutenberg Bible.

My last morning in London found me desperately hailing a taxi in a torrential downpour. The taxi Gods smiled upon me, and I was soon barreling down the streets of Piccadilly and Westminster on the way to Victoria Station. It seems that a 20 pound tip can move mountains here. I arrived with more than enough time for a pre-prandial glass of Champagne before boarding the Orient Express.

Report from London, Part III will be continued tomorrow.

John Thomas
The Mad Hedge Fund Trader

Report from London, Part I

Diary

I am writing this report on the Eurostar Express train 300 feet under the English Channel, which is speeding its way from London to Paris at 200 miles per hour.

Waking up in my suite on the Queen Mary 2 at the port of Southampton the other day, the first thing I noticed was that dreadful postwar English architecture. The Germans tried to bomb this place flat to block the shipment of American supplies during WWII, and in the rush to rebuild, style and taste were left by the wayside.

Walking out on my private deck I was greeted with an entirely different view. The pier next to us was parked bumper to bumper with US exports of Caterpillar (CAT) heavy bulldozers and John Deer (DE) tractors, the products of two of my favorite companies. God bless America! Who says we?re in decline?

God Bless America

I saw something else too, Austin Minis, thousands and thousands of them in every conceivable color and design. They crowded the docks, packed every parking structure and lot, and railcars brought in hundreds more by the hour. Roll-on-roll-off ships were loading 3,000 each for shipment to the US.

Who owns Austin Motors these days? Who else but the Germans? In a mere 60 years they have flipped from blocking imports to expediting exports from this southern English transportation hub. History may not repeat itself, but it certainly does rhyme.

To say that much of London is dreading the coming Olympic Games is a vast understatement. Much of the central part of the city has been closed to the public, with parks dedicated to events, and roads closed off to games participants only. Accommodation is so short that an entrepreneurial few have rented out their back yards for visitors to pitch tents.

There are rampant fears that Internet speeds will slow to the point of unusability, putting major multinationals out of business.? The cell phone network is supposed to crash from the backbreaking traffic load. The forecast is for rain on the opening ceremonies. Oh, and a giant asteroid will destroy the earth, at least according to an overwhelmingly downbeat media.

The security is overwhelming. Marine helicopters circle the city with crack snipers on board, the RAF is using fighters to fly combat air patrols, and the army has mounted ground to air missiles of rooftops. I hope they don?t shoot down their own planes. I asked some government officials if I could get an early peak at the Olympic Park and was given a rare flat out ?no?.

Some 4,000 tons of sand sit in front of Buckingham Palace awaiting construction of the courts for the women?s beach volleyball competition. England is suffering the wettest summer in history, and if it doesn?t warm up, the contestants, horror upon horrors, may have to wear clothes! As a result, the black market price for these tickets has fallen below $2,000 each.

The Declining America Myth

Diary

It seems that it has become fashionable to bash America these days. As I run around the country giving my strategy luncheons, I hear a lament that has become all too familiar.

America has peaked as a civilization, the story goes, and will follow the British, French, Roman, and even the Egyptian empires into the dustbin of history.? Our standard of living is falling, our technological prowess is fading, and our military strength is weakening. It will be just another generation before the Chinese take over the world and we will all be forced to learn Mandarin in high school, or somebody worse will take their place.

Such bouts of doubt, angst, and self-loathing occur every generation in America. I received a big dose after the US withdrew from Vietnam in 1972. My dad felt the same after Pearl Harbor was attacked in 1941. So did my grandfather when the Lusitania was sunk in 1917. The outbreak of the Civil War in 1861 was considered the country?s darkest day. And then there was the British burning of Washington in 1812. I remember it like it was yesterday.

I say horse feathers, bull-puckey, and balderdash to all this talk. When speaking to foreign governments, military leaders, and central bankers during my global travels I keep hearing a recurring theme. The United States is still the great shining example up on the hill. We are dominant in technology and increasing at an accelerating rate. All I hear about are our country?s strengths.

Our economy can evolve faster than anywhere else on the planet. This is because no one can beat us at creative destruction. Some 22 years into Japan?s stock market crash they are still maintaining companies on life support at enormous expense. We cleansed our system in about six months. And try downsizing outdated unions in Germany. We have cut the union share of labor from 35% to 15% in 30 years. Where else can someone with no money but good ideas become a billionaire in a couple of years?

Since I am a numbers guy, let me throw a few out there just to make my case. With a $15 trillion GDP, ours is triple contenders number two and three at $5 trillion, China and Japan. We are nearly four times Germany?s size at $4 trillion. Our per capita GDP is a staggering twelve times China?s. That means it takes 12 Chinese workers to produce an hour of output compared to our one. This is why America?s per capital income stands at $47,200, compared to only $4,260 in the Middle Kingdom, and many Chinese have to work a 70 hour week to take this home.? They are supposed to be overtaking us? Even the Chinese laugh when I tell them this.

Some 18 of the world?s 50 largest companies are still US based, like Exxon (XOM), Wal-Mart (WMT), Apple (AAPL), and Boeing (BA). But this understates the true picture. Ours occupy far and away the highest end of the value added chain. Many of the rest scrape by copying or pirating our products. You never get ahead that way. Look no further than Apple, which pays workers a minimal $15/day to build US designed products for sale at home with enormous profit margins.

It?s hard to find a strategic industry that we don?t dominate. US companies invented ?fracking? which has untapped vast new energy supplies, making the Middle East irrelevant. Saudi princes come here for their health care, not England or Japan. ?Globalization? has in fact become the polite word for ?Americanization?.

I was standing at Piccadilly Circus in London the other day when a bus stopped and unloaded 50 gorgeous high school girls. I couldn?t for the life of me figure out their nationality. They could have come from anywhere. The teacher had a big butt, so I though maybe American. Then a kid lit up a cigarette and no one cared. Aha! French. They turned out to be the winners of a national English language essay-writing contest and the prize was a trip to the Olympics.

Let me just toss a few more tidbits out there:

*The biggest selling luxury car in China is a GM (GM) Buick

* iPhones, Ford Mustangs, and Katy Perry songs are pouring into a newly freed Libya.

*Cubans and Iranians are erecting illegal satellite dishes so they can watch Law and Order

*Travel around Eastern Europe and all you see are blue jeans

*Over 70% of the drinkers of Coca-Cola are outside the US

*McDonald?s (MCD) has 10,000 hamburger stands abroad

*Microsoft?s (MSFT) Windows operating system runs 90% of the world?s computers

*London has 19,000 people a month joining Match.com

*100,000 readers a day pirate The Diary of a Mad Hedge Fund Trader, and even record a Mandarin version on YouTube

While the US has run big trade deficits for 50 years, we have a perennial surplus in services that goes unnoticed. We remain the force to reckon with in banking and finance, thanks to the reserve currency status of our dollar. Transfer dollars from the UK to Japan and it has to go through New York. This isn?t changing in my lifetime. The world?s wealthy and well connected have long sent their kids to American universities. Six out of ten of the world?s best schools are here, matched only by Oxford, Cambridge, Tokyo University, and Beijing University.

You may be concerned about our rising level of national debt. Aren?t we under saving and over spending? The credit markets beg to differ with you. With 30-year Treasury bond rates at 2.55%, the world is literally throwing money at us as fast as they can. With the long-term inflation rate probably at 3%, this means that our government can borrow money for free!

Foreign individuals and institutions regularly take down more than half of our monthly government debt issues. With Europe in trouble, this trend is accelerating. The government?s error is not that it?s borrowing too much money, but not enough. Prices tell us that there is a severe shortage of US bonds. We could probably double the national debt from here without much impact on interest rates. Apparently, the free marketers don?t look at markets very often.

You have heard me talk a lot about demographics over the years. The US still has a modestly positive slope to its demographic pyramid, which is the best in the developed world. This means that we can expect an ever larger number of young consumers to drive economic growth, largely driven by immigration. This will lead to a new Golden Age for America in the 2020?s, which I believe will be a repeat of the 1950?s. Japan, Russia, and Europe suffer from a diabolical demographic outlook. China doesn?t look so hot either, thanks to its ?One Child? policy. They?re just not making young people anymore.

Since I am also an old and grizzled Marine combat veteran and stay well connected with the military establishment, let me tell you a few harsh realities. Our military technology is the most advanced in human history, unbeatable, deeply feared, and is improving at breakneck speed. The American soldier is the best trained and most lethal ever deployed into the field. Did you know that no Air Force fighter pilot has been shot down in 20 years, despite being almost continuously at war during this entire time? The next generation of US fighters won?t even have pilots, with drones carrying much of the heavy lifting in today?s combat.

The US now provides for the active defense for about half of the landmass of the world; double that protected by the British Empire at its 1914 peak. Two decades after the end of the Cold War, the United States has no enemies of any real consequence. According to the CIA chief, General David Petraeus, Al Qaida has been worn down to a mere 200 active members. The futility of their efforts, confining explosives to shoes and underwear, show how badly things have gone for them.

We have been doing this with ever declining amounts of money. The military share of US GDP has plunged from 50% in 1943 to 6% at the end of the Cold War in 1992 to 4.7% today. It is about to fall off a cliff. Our defense budget is about to drop by half, back to pre 9/11 levels, either through budget cuts or sequestration. The Joint Chiefs are already prepared for this. Cyber warfare and drones are much cheaper than carrier groups and advanced fighters. If we spend less on weapons, the rest of the world will too. In a year, expect to start hearing about this a lot on your dinnertime news.

What about China, you may ask? They have had the blueprints of our most advanced defensive systems for many years now. But having a picture of a weapon is a long way from building one. They lack the technical expertise and the machinery even to copy what we already have. In any case, everyone knows China is indefensible. Torpedo one foreign grain ship, and the country will be starving in six months. China will never pose a threat as long as they can?t live without us and we have all of their money.

Yes, I know that it is an election year. It is up to the party that is out of power to portray conditions here as badly as possible so they can get elected to fix them. The party in power has to convince us how much things have improved so we can stay the course. The misinformation and apples versus oranges comparisons that get doled out as a result can make life complicated, frustrating, and difficult for traders and investors.

The next time I hear we have the world?s highest tax rate I am going to scream! I moved a company here from Europe 20 years ago because the actual taxes paid are low to non-existent. Just ask General Electric (GE), which pays a 3% tax rate. But hey, if this was easy, it would pay minimum wage, not ten figures, so I?ll take things as they are.

And the next time someone tells you that the US is history, consider that person a great short. It is they who are headed for the dustbin.

Things Aren?t That Bad

Can You Spot the American?

The Death of the Bond Vigilantes

Diary

Back in the seventies and eighties, when inflation was soaring well into double digits, the markets were regularly punished by a band of gun slinging traders known as the ?bond vigilantes.? Hard asset prices were running amuck, and there was a laser like focus on the growth of the money supply.

We have just witnessed the largest expansion of the monetary base in history. The Federal Reserve?s balance sheet has ballooned from $800 million to an incredible $2.8 trillion in a mere three years. So where are the bond vigilantes?

The answer is that they were all rounded up and lynched by Paul Volker decades ago. As much as commodity prices rise, the Consumer Price Index remains dead in the water at a 2% annual rate, a shadow of the 14% we saw 30 years ago. And no, it is not a government conspiracy, no fudged numbers, that are keeping the reported inflation rate so low.

The problem is, quite simply, your salary. For every $2 dollars? worth of commodity price inflation we are seeing, there are $3 worth of wages declines. Talk to any businessman, and he will tell you that wages account for at least 50% of his total costs, while commodity cost inputs are only 10%-15%.

Commodity prices can be roaring, but as long has globalization drives down wages at home, as it has for the last 30 years, their overall impact will be modest, at best. So add it all together, and you get an inflation rate that is stagnant at low single digits. You are obviously not working hard enough.

I am interested in all this because I have a dog in this fight. I happen to be short out of the money call spreads on the Treasury bond ETF (TLT). I also have more than a passing interest in the (TBT), a leveraged ETF that bets that the Treasury bond interest rates will rise and prices will fall. I used to think that a resurgence of inflation would take it from the current $14.50 to $200. I don?t believe that anymore. I instead think we will see a rise only to $43, which equates to a ten year Treasury bond yield of 4.10%, up from today?s 1.45%.

That is still a potential gain of nearly 300%, which is better than a poke in the eye with a sharp stick in this zero return world. And that middling profit will not be delivered by a reincarnation of the inflation beast, but by the sheer volume of issuance of bonds demanded by our enormous budget deficits.

The Bond Vigilantes: Gone But Not Forgotten