Tuesday, November 6, 2018

Barrels, Boats, Bitcoins, Brexit, and Other Bubbles

This blog is founded on the premise that ALL bubbles burst, sooner or later.  The rule of thumb is pretty simple: to paraphrase the old Crazy Eddie TV ad, if prices are INSAAAAAANE then the bubble is to pop sooner rather than later.

And there is always some form of loony "fundamental" hype which pops up as "analysis" to goose things along and provide that last HURRAH that produces forced short position liquidation.

Cases in point:
  •  Peak Oil!,  the theory that global oil production was about to peak and head inexorably down.  A large number of innocents were caught up in this, even publishing thousands of articles in The Oil Drum, a site which propagated the scientific version of the hype.  Oil zoomed to $145 per barrel and then melted down to $35.
 Image result for crude oil prices chart

  • No Boats!, the notion that the world didn't have enough boats to carry the increasing cargo needs of China and other developing nations.  Spot charter rates for large Capesize ships went as high as $150.000/day, and prices for new vessels skyrocketed to almost $200.000.000.  There was a flood of newbuildings just as the economy went south and charter rates sank to$7.000/day.  Image result for capesize ship prices chart
  • Bitcoins Are Best!, the belief that "regular" money was somehow unsafe and would eventually become worthless as a storehouse of value and wealth, whereas computer-generated cryptobits had rarity going for them.  Duh... anyone with a computer could come up with a catchy name, generate a new crypto and go to town mining away - and did.  
  • Rule Brittania!, the idea that, somehow, in this globalized world a (now rather smallish) former empire can become Great again all by itself.  This is different from the aforementioned cases, obviously ongoing - and Britons are ultimately sensible people. So, who knows.. they may yet come to their collective senses.
  • Make XXX Great Again!, the wave of global populism is still in its early stages, I'm afraid, and has a lot of room  to grow and become a poisonous bubble before it too - hopefully - bursts.

Thursday, November 1, 2018

Remember Chavez?

Way back in 2002 a most unusual man was elected President of Venezuela: Hugo Chavez. Remember him?  People may forget now, but he was the first 21st Century example of a Reactionary Populist to gain power in a major (almost) Western nation.  You may argue that Venezuela was not a truly Western nation and you aren't far wrong - but you aren't too right, either. It was then one of the wealthiest countries in South America and had (still has) vast reserves of crude oil.  Why did Chavez gain power? Massive income and wealth inequality. The masses were poor and the rich were massively wealthy.

Hugo Chávez salute.jpg

 Hugo Chavez, First Of Many...

Fast forward to today.  Populism is increasingly prevalent across the West: USA, Brazil, Germany, Great Britain, France, Italy, Poland, Hungary, Turkey, all now have populist leaders or strong populist parties rising fast (eg AfD in Germany). The same cause applies as in Venezuela: income and wealth inequality - real, perceived or threatened.  The latter applies to Germany and Great Britain in particular, where the economy is doing well but your Average Johann and Joe feels threatened by the "unwashed masses" of illegal economic migrants (Germany) and poorer EU citizens "stealing their jobs" (Great Britain).

Should we be concerned? Is another Mussolini or Hitler on the rise?

I believe the political ideology clash is no longer between Left and Right.  Rather, it is Rationalism versus Populism, or to put it in personal terms Merkel vs. Trump.  Unfortunately, Ms. Merkel - who is certainly to blame for lots of issues but is certainly no Populist -  effectively just resigned. And that's really bad news for us Rationalists...

Monday, October 29, 2018

Merkel To Retire

Following yesterday's abysmal results for Merkel's CDU in the regional Hesse elections (down 11% from previous polls) she is said to have declared her decision not to seek re-election as her party's leader in its upcoming congress.

Austerity and fiscal propriety are eroding fast, the Greens and AfD are big winners.

Europe is changing fast.

and PS Bolsonaro won in Brazil.  Reactionary Populism is gaining all over the world... (sigh).

Friday, October 19, 2018

Italy - The Rise Of (Fiscal) Populism

Bond and equity markets do not react well to overt signs of fiscal populism.  Case in point: Italy.

Italian 10 Year Government Bonds

The Italian government submitted its 2019 budget plan to the EU calling for a large deficit, unacceptable to the Commission.  A spat has ensued, causing bond yields to rise sharply.

Unlike the Greek "tragedy" of the last 10 (!) years, Italy is a very, very large economy and cannot the pushed aside and/or be blackmailed into submission.  A dogfight will eventually lead to tearing apart the entire EU structure, so an easing of the "German" fiscal probity model is likely in the cards, also given that Mrs. Merkel is now weaker than ever politically.

Friday, March 23, 2018

China Has To Grow Up

China has become the world’s second largest economy based largely on the ability to churn out cheap consumer goods in vast numbers. It could do so because of a) very low wages, b) cheap land and c) nearly zero regulatory costs (i.e. pollution and labor safety regs).  Couple that with an artificially low foreign exchange peg, and it’s no wonder that  low and medium value-added industries moved there en masse.

However, China is now very keen to move up towards more sophisticated, tech heavy industries like autos, aerospace and high end electronics, heretofore the domain of Western companies and institutions that have created a huge pool of proprietary R&D and the mechanisms to transform it into high-end products.

The problem of safeguarding such Intellectual Property has been around since at least the early 1990s and has never been addressed properly.  As the US economy moves more and more towards a Fourth Stage (ie knowledge-based) leaving behind its manufacturing roots, IP is today’s fortune and must be protected.

China needs to realize that the US will no longer turn a blind eye to IP exploitation.  Furthermore, it needs to “grow up” and institute developed country norms:

  • Its currency must float
  • Its markets must open up
  • Its government must impose western-level regulations on pollution and worker safety
  • It needs to institute a comprehensive pension/social security system.
Trump’s opening salvo on possible import sanctions is a warning: join the globalization party as an equal on ALL terms, or suffer the consequences.

Tuesday, March 6, 2018

Trade War Over Steel? Gimme A Break...

So Trump throws up this firecracker about import duties on steel (25%) and aluminum (10%).  It’s a non-issue folks, despite hot air from Brussels about retaliation via Levi’s, Harleys and Jack Daniels. (Notice that the Chinese haven’t said a word - and rightly so).

Fact is, the US hardly imports any steel from the EU or China, as you can see from the graphic below.

Now, if Mr. Trump starts talking about consumer electronics, that would be an issue.  But in an economy completely dominated by the likes of Apple, Google, Microsoft and Amazon imposing duties on their products would be plain suicide and it won’t happen.

Monday, March 5, 2018

Greek GDP And PMI

Greek 4Q GDP rose 1.9% YOY, the fastest in 10 years. Similarly, manufacturing PMI rose to the highest level on record in February.

Friday, March 2, 2018

Steel Duties, Seriously?

Imposing import duties on steel and aluminum is akin to protecting the horse buggy business when Ford set up his car production line... completely useless and meaningless.

The US economy is long past it’s heavy, metal-basing industrial era.  Trump is just playing up to his lowest common denominator electoral base, that’s all.

For proof, just look at the makeup of the DowJones Industrial Average in 1980 (even 2000) and today.  Unlike the past, the US economy today is all about Google, Amazon, Apple, Microsoft and a couple pharma companies.

Move on...

Tuesday, February 13, 2018

Interest Rates And Savings

One single chart: Ten year Treasury yields and the personal saving rate (ie the percentage of income saved).

The correlation is interesting.

Friday, February 9, 2018

Yes, Virginia, There IS Volatility

What happened with US stocks?  Why did they tank so suddenly after months of steady gains?

No, there was no irrational exuberance, no massive leveraging, no pernicious balance sheet shenanigans at banks, no NINJA loans, no CDS/CMO/CDO (plain, squared or cubed) baloney. Valuations weren’t even that high, given forward P/Es around 18-16x.

There was, however, a sort of  “complacency bubble”, aka very, very low volatility. This in turn spawned a variety of listed and OTC trades that shorted volatility for profit.  It worked like a charm - until it didn’t.

The following chart makes things quite clear.  It’s the price of an ETF (exchange traded fund) that shorts VIX futures.  Yes, Virginia, there IS volatility!

In my opinion that’s all there was to it - the snap unwinding of short vol trades.