Cinema Rasik

America & India - Political Look Back at 2011 and Ahead to 2012-2020

2011-12-31T14:45:00Z

This past year has been politically eventful for both America and India. Next year promises to be even more so. While the events might look different, the same macro forces are driving the events in our opinion.

America

As we enter 2012, all eyes are focused on the Iowa Caucus on January 3. This is the first round of the uniquely American game of choosing a nominee to challenge the incumbent for the Presidency of the United States.

Look back to this time last year. The Republican party had won a huge victory in the November 2010 elections and seized political control of the House of Representatives. Their momentum was acknowledged by President Obama who moved to strike a compromise with the Republicans to extend the Bush tax cuts. This mood did not last long.

It was followed by a bruising battle in the summer of 2011 for the extension of the US Debt Ceiling. That process proved so dysfunctional that no one wanted a repeat in the final political battle of 2011, a battle to extend the payroll tax cut for about 160 million Americans.

Unlike a year ago, this time the House Republicans caved in. They had been boxed in by a more confident President who fought and won a tactical battle. The Republican nomination process has been a debacle of sorts, with fatally flawed candidates rising to the top of Republican polls and falling seemingly into political oblivion. With each turn, President Obama looked stronger and more capable.

But all this, we think, is more about optics than reality. The election of 2012 is likely to revolve around the condition of the US economy barring a military conflict between Iran and America. But even the economy and discussion about how to improve it might be more optical and superficial than real. Why?

Because, there is a tectonic shift underway in American society. America used to be a society dominated by taxpayers. Since 1773, taxation and political representation have gone hand in hand in America. American society has been built on the premise of the American Government being responsible and responsive to American citizens about how America's tax collections are spent. This is the core reason behind the almost uniquely American distrust of big Government.

This America is becoming passe. Today, about 48% of Americans do not pay any income taxes. So about 48% of Americans now take from the American government without contributing to it. Barack Obama is the first American President whose election symbolizes the united efforts of this half of American society. He knows it and that is why his economical policies, right from his inauguration, have been essentially distributive and oriented towards providing government resources to the less advantaged.

The American taxpayers instinctively understood that President Obama was engaged in transferring wealth from taxpayers to non-taxpayers. This realization led to the political explosion we call the Tea Party. The 1773 Tea Party revolt was against Taxation without Political Representation. The 2010 Tea Party revolt was essentially against Political Representation without Taxation.

The taxpayers won the first battle in November 2010. The next important battle is the Presidential election in November 2012. That may be the last Presidential battle won by taxpayers in this long war. Because, the demographic tide is inexorably moving towards a majority of non-taxpayers in 2020 or perhaps by 2016.

In this setup, we see the Democratic party slowly morphing into a party of the non-taxpayers plus a slice of the very wealthy and the Republican party becoming the voice of the taxpayers who are unwilling to have their earnings taken away from them. The demographic tide, as we said, favors the Democratic party.
So we expect the Republicans, if they win the White House and keep effective control of the Congress, to take steps to build a policy framework for Less Representation for Non-Taxation. These steps might include changing electoral districts, making voting registrations difficult for non-taxpayers and even imposing minimum income tax levels (perhaps like the one already proposed by Congresswoman Michelle Bachman) on all Americans. We might see easier and increased immigration policies for wealthy and highly educated immigrants.

We see this battle shaping up as the central conflict or a civil war within American society during this decade. So any one who pines for a united, 'can't- we-all-get-along' American society may be hoping against hope.

We feel so because we know of a similar battle on the other side of the world, a battle diametrically opposite to the one that will be fought in America. That battle is taking place in India.

India

As 2011 ends, we see Indian society in the grip of its own revolt, a revolt against widespread corruption in the government at all levels. But like in America, this reason is basically optics. The real reason for this revolt is the tectonic shift underway in Indian society, a 180 degree opposite shift to the one occurring in America.

Since its independence in 1947, Indian society has been a society dominated by non-taxpayers. Even today, about 75% of Indians do not pay any income tax at all. As a result, Indian Politics and Indian Government has been dominated by policies that distribute free services and goods, that seek to distribute income and wealth from people who earn to people who need.

The natural result has been corruption, endemic corruption:

corruption in the business class that tries to hide much of its income from tax collectors,
corruption in the administrative machinery that distributes government goodies to the poor, and
above all in the political class that seeks to build great personal wealth while in office after spending a lot to provide free goodies to gain political office.

The patient, quiet sufferers in this machine were and are the helpless middle class - the people who are unable to hide their income, the people who need services from the government - the middle class, especially the salaried middle class. But this hapless middle class has slowly but surely grown in size and confidence.

Today, this group is anywhere between 150-300 million strong, not strong enough to dominate Indian politics electorally but strong enough to create a revolt that can bring the Indian Government to its proverbial knees. In 2011, this middle class got a leader that it can rally around - a symbol more than an actual leader, a Gandhian figure who lives a simple life and is above personal corruption.

The Congress Party, the party in power, is the leader of traditional Indian politics - giveaway policies and maintenance of vote banks by rural politicians who today are screaming bloody murder of parliamentary democracy by what they term as non-elected civil society. The opposition parties, especially ones with a more urban political base, are supporting this revolt because it is their best chance to topple the Congress Party from power.

The political players in this war as not as clear cut as the two parties in the battle for political power in America. But the societal shift is the same and the demographic forces are arrayed similarly. The big difference is the direction and relative ascendancy.

There is an inexorable tide in Indian society towards higher income both in the urban and rural segments. Rise in incomes makes people more independent, more demanding of better conditions and prospects for a better future for their children. This is what they called the American Dream for the past century. People who strive for such a dream are willing to contribute to Government as long as their contributions are managed carefully and for the greater good by their chosen Government.

This inexorable tide is also reducing the societal chasm between various social segments or the Portuguese term "castes" imported by the British into India. Read what Lydia Polgreen of the New York Times wrote this week:

A recent analysis of government survey data by economists at the University of British Columbia found that the wage gap between other castes and Dalits has decreased to 21 percent, down from 36 percent in 1983, less than the gap between white male and black male workers in the United States. The education gap has been halved.

The battle we see in the streets of urban India, the battle seemingly against corruption, is really a battle of the rising middle class for greater control of their own tax payments, of greater say in the policies of the Government elected by the poor rurals. Slowly rising rural incomes will bring in more rural participation in this revolt. So we expect this revolt to broaden out during this decade.

This long battle is the same battle as the one that will rage in America, but one that will look diametrically opposite.

America & India - How will they look in 2020?

India has always had a large, seemingly permanent underclass that dragged down the entire country. India has always seemed a hopeless cause, a society that would one day become great but never does. The precipitous fall in the Indian Rupee has united all the Indo-pessimists and perhaps rightly so. No country in the world seems so utterly dumb and incompetent as India does from time to time.

But we see clear evidence that, underneath the stupidity, the chaotic surface, the utter failure of all Indian Institutions, there is a major shift towards a stronger, richer, smarter and more confident society. And luck favors the diligent. The current collapse of the Indian Rupee may actually be just the medicine India needs to make Indian labor, Indian products, India's services more competitive. The collapse of the Indian Rupee might be the medicine that forces Indian importers, including the Government, to become more efficient.

Sometimes, we think Chairman Bernanke & Secretary Tim Geithner might be looking at the fall in the Rupee and asking "why can't the US Dollar fall by 10%"? Not so precipitously of course, but slowly and inexorably. Because a weaker US Dollar is a consummation they devoutly wish for. Because that is the medicine to make America's underclass competitive in low level manufacturing.

Over the past 20 years, America has built up its own large and seemingly permanent underclass. This was ignored and glossed over in the technology bubble of the 1990s and during the credit bubble in the last decade. Now it cannot be ignored because it is on the verge of gaining long term political power.

In other words, America will begin to deal with the problem India has dealt with for the past 60 years. This may be a tougher problem for America. It never expected to have this problem. And this is a problem that has come about partly due to the best intentions of the American people.

But America will, after much loud and sometimes vitriolic debate, get around to finding solutions to its financial and societal problems. We feel confident that all segments of American society will take steps to get control of America's debt, to cut down on wanton government spending. As American society again becomes financially lean by the middle of this decade, America, we believe, will once again welcome highly educated immigrants, the type that will tempt companies to move jobs to America.

So we see both America and India taking different looking steps to become stronger politically and economically in this decade. They can learn a great deal from each other. We think they already are and they will continue to do so.

Therefore, we are willing to bet, here and now, that despite their vividly obvious differences today, America and India will look a lot similar in 2020.

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America & India - Economy & Finance - Look Back at 2011 & Ahead to 2012

2011-12-31T13:05:00Z

2011 began well for both America and India. The American stock market had closed 2010 with a 20% rally from the lows of August 2010. The American economy was expected to deliver reasonably good growth of about 3% in 2011. India was, of course, was riding the wave. The Indian Government forecast a growth of 9% in 2011 with a reasonable chance of double digit growth. The Indian stock market was enjoying a boom. Capital around the world was flowing into India and Indian companies were seen looking at or buying corporate assets in Europe & America. Prosperity was all around and Indian society was ebullient.

How did the year end? America still seems fine. The third quarter GDP came in around 2% and the fourth quarter look OK. The stock market closed unchanged for the year despite the massive crisis emanating from Europe. American corporations are in as good a shape as they have ever been. America's Banking Sector, hard hit in 2008, is now the strongest in the world.

In contrast, India seems to have fallen off a cliff. The Indian stock market is down about 26% this year, one of the worst performances of any country in the world. India saw persistent high inflation all year. This forced the Reserve Bank of India to raise interest rates several times. The Indian economy has already slowed demonstrably.

India's seemingly sudden fall from grace is evidenced by the precipitous drop in the Indian Rupee against the U.S. Dollar. The Rupee which traded around 43-44 fell in less than two months to 52-53, a 20% drop. This makes the Indian people about 20% poorer than they were just two months ago. This severely damages India's fiscal condition because India virtually imports all the oil it needs and oil is priced in US Dollars. It also creates severe problems for the Indian Corporations who purchased western assets or borrowed cheaply in US Dollars. In turn, that causes real stress for India's Banks, the principal lender to these foolhardy Indian corporations.

As 2011 ends, the financial conditions and economic outlook for America & India seem vastly different. America seems to have come out of its 2008 financial crisis and regained its primacy in the world. In contrast, India seems to have entered its own financial crisis, one potentially worse than America's 2008 crisis.

What happened? Why did it happen? What does this say about the two societies? What lied ahead? In this article, we lay out our views.

So Similar, Yet So Different?

Most people think America and India are very different economies. Financial lingo places America in the DM or Developed Markets category and India in the EM or Emerging Markets category.

But the Indian economy is more akin to the American economy than to the other emerging market economies. The emerging market economies in Asia and in Latin America are primarily export machines that have built fiscal surpluses and large foreign exchange reserves.

In contrast, both American and Indian economy are driven by domestic consumer spending rather than exports. Both economies benefit from free movement of labor within the respective countries from less prosperous states to more prosperous states. Both economies run fiscal and current account deficits. Both therefore are dependent on import of foreign capital to sustain their growth. Both countries have competent Central Banks that operate semi-independently under twin mandates of price stability and economic growth.

If this is the case, why do financial markets treat America and India so differently? Or to put it simply:

Why does money run out of India in every crisis and why does money run into America in every crisis?

Look back at America in 2008. At that time, it was a purely American crisis. The entire world recognized it as such. Lehman Brothers, a top tier US Investment Bank, filed for Chapter 11 bankruptcy. The world's largest insurance company, AIG, had to be bailed out with injection of over $80 billion in capital. The American banking system was in a deep and sorry mess.

Yet, even at the nadir of this American financial crisis, capital from all over the World ran, nay flooded into America. The U.S. Dollar rose in value against the Euro and the Emerging Market Currencies. And yes, the Indian Rupee fell to about 52 against the Dollar in 2008 even though India had no financial or banking problems.

In contrast, today's Indian financial crisis is seemingly smaller and more contained than the American crisis of 2008. Yet, the Indian Rupee has fallen precipitously, fallen harder and lower than just about any other currency in the world, fallen below the 2008 low of about 52. Chartists now forecast a further fall to the 57-58 level against the U.S. Dollar.

So if the two economies are so similar, why do financial markets treat them so differently?

Difference Between Economics & Finance

This is not just nomenclature. These two disciplines are related but very different. Economics is a science while Finance is a technology. Every country in the world understands economics. It is taught in every university in the world. India has excellent economists. The Prime Minister of India, Dr. Manmohan Singh, is a noted economist. And so is Montek Singh Ahluwalia, the foremost economic bureaucrat in India. These two were the brain trust behind the Indian economic reforms launched in 1990.

Yet, these two noted economists and all their colleagues in India proved inadequate in preventing the recent collapse of the Indian Rupee. It seems that they didn't even see the approach of this recent crisis. That may be because they completely misunderstood the true nature of America's 2008 financial crisis.

Think back to the proud proclamation of Sonia Gandhi in 2008 & 2009:

“It was my Mother-in-law Indira Gandhi who nationalized India's Banks. That is what protected India from the global economic crisis”.

This was not just her boast. Every single economist in India and the entire Indian 'elite' believed that the American financial crisis of 2008 had demonstrated that the Indian economy was based on sounder economic footing and free of excesses evident in America's freewheeling financial system.

So the Indian 'elite' concurred with Sonia Gandhi and the Indian Government poured economic stimulus into the Indian economy. This runaway spending together with large capital inflows triggered partly by US Quantitative Easing (engineered by the US Federal Reserve in the Autumn of 2010) created a credit bubble in India in 2011.

This bubble has now burst and we all see the result - massive flight of capital out of India, widening of fiscal and current account deficits, a weak, leveraged corporate sector and India's nationalized banking sector clogged with poor quality loans.

The American crisis of 2008 was only a banking & financial crisis. The state of the US Government and its Debt market was very sound. That is why the world's capital rushed into America, to the safety of the US Government Debt. This is why the U.S. Dollar strengthened despite the crisis in America's banking sector.

In contrast, the Indian crisis of 2011 is much worse. It is a Government-Banking-Corporate crisis all rolled into one. Would you keep your risk capital in India during such a crisis? Of course not. This is why global capital rushed out of India in a financial stampede in November 2011.

The reality is that India's financial 'elite' has never understood the difference between the science of Economics and the technology of Finance. An example might illustrate our meaning:

Think back to a comment by an Indian General just before the 1991 Gulf War. The Iraqi Army of Saddam Hussein was trained by officers of the Indian Army. This General was quoted as saying that the Iraqis would give "a good account of themselves" in the war. We all know what happened. The Iraqi Army, the fourth largest in the world, was destroyed in a week. The "Shock & Awe" of American military technology converted the huge Iraqi Army into a helpless flock of sitting ducks.

The Indian economy was geared by and towards the science of Economics. The Indian Government, the Indian Banking Sector, the Indian corporate sector had never bothered to build up the financial infrastructure necessary to protect the Indian economy from a financial stampede. The result is what happened in November 2011, what usually happens to a system, a country that does not understand or use modern technology.

Finance as a Central Technology - Difference between America & India

Look at the Indian Government, the Indian Finance Ministry, Indian Financial Markets, Indian Academic Institutions. They are all staffed by Economists, Bureaucrats or Politicians. And none of these have any first hand knowledge, any real experience with financial markets.

In contrast, look at the American Government and its Treasury Department. These are staffed by veteran financial market players who have first hand experience in dealing with financial market panics and liquidations. America was very lucky to have Hank Paulson, ex-CEO of Goldman Sachs, as the Treasury Secretary in 2008. It was he who contained the fallout and rammed the massive TARP program through a Congress that had no clue about the scale or ramifications of the crisis. Today, America has Tim Geithner who managed the 1998 financial crisis and worked with Hank Paulson in October 2008 from his vantage position at the New York Fed.

There is a deep reservoir of financial technology expertise in America's Wall Street and America's Academic Institutions. Talent from this reservoir moves to and fro between America's Government Institutions and Wall Street.

So America and India may have similar economies but their financial markets, their financial technologies are vastly different. This is true of military technologies as well. India's military generals were stunned by the collapse of the Indian-trained Iraqi military in 1990. It was an important lesson and the Indian military used it to begin a slow but steady modernization drive that continues to this day.

We know that India's financial generals are stunned by the sudden collapse of the Indian Rupee. We hope they learn the real lesson of this collapse. We hope they begin a slow and steady drive to modernize India's credit and commodity markets with modern financial 'technology'.

The United States of America is the world's foremost leader in the Technology of Finance. This is why America's Financial Markets are the deepest, most transparent, most liquid and most innovative in the world. This is why the world's capital runs into America in every financial crisis.

Until India embraces and implements this technology, India's financial markets will remain puny, illiquid and essentially powerless to protect India's economy from any financial crisis. Until this changes, the world's capital will continue to run out of India in every financial crisis.

A Silver Lining and Pure Luck?

Given the discussion above, our next statement might surprise readers. We suspect America's financial leaders, Tim Geithner, Ben Bernanke and perhaps even President Obama, might be looking at India with a touch of envy. We believe they would just love it if the U.S. Dollar fell by about 10% from current levels. Instead, they watch with a degree of trepidation as the U.S. Dollar rises against other currencies.

They realize that India, all of a sudden, is far more competitive as a nation. The services of Indian information technology staff, the core of India's technology exports, are now 20% cheaper than they were just two months ago. The Indian Rupee has not just fallen against the U.S. Dollar, it has also fallen against other emerging market currencies. As a result, India's manufacturing products are now 10%-20% cheaper than Chinese, Malaysian, Indonesian and Vietnamese products than they were two months ago.

Since India is primarily a domestic consumption economy, the average Indian is relatively unaffected by the fall of the Rupee against foreign currencies. And if the price of Oil falls because of a global slowdown, then India's inflation might go down and its balance of payments might improve despite the fall in the Rupee.

Indian economy has one advantage that most developed or EM economies don't - huge, secular, unmet consumer demand for just about every product known to mankind. So once the world economy stabilizes, India will again become a magnet for foreign capital flows, an India that will be 20% cheaper to enter than it was in October 2011.

We see a world in which every major country will try to lower its currency to make itself more competitive. India will not have to try. By sheer dumb luck, India has already achieved in a free market manner what others will try to achieve via government policies. And so India might have the pole position when the race begins for the new growth phase.

This is the silver lining we see in today's dark cloud that dominates India's economic sky.

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The 10 Most Popular Articles in 2011

2011-12-31T11:38:00Z

Below are this Blog's 10 Most Popular Articles in 2011 (in terms of viewer hits).

1. The Karna-Arjun Battle in The Maha-Bharat - Beyond Adjectives - September 20, 2008 - This is by far the most popular article since the inception of this Blog.

2. Gandhi vs. Lelyveld - Are Editors of Washington Post and New York Times Biased Against Hindu Ethos? - April 16, 2011 - This is the 3rd most popular article since the inception of this Blog.

3. New York Times vs. Washington Post - II - August 2, 2008

4. Cultural & Religious Defamation Tacitly Accepted By New York Times Editors? - January 23, 2010

5. Tajikistan Cedes Land to China - A Step Towards Af-Kash-Bet? - January 15, 2011 - This is the 7th most popular article since the inception of this Blog.

6. Article by Gurcharan Das in the Wall Street Journal - Glimpse Into How Brainwashed "Elite" Indians Have become? - October 23, 2010

7. Attock - If you have not heard of Attock, Read this Article - August 9, 2008

8. Interesting Videoclips of the Week (September 13 - September 18) - September 19, 2010

9. Another Flagrant Mischaracterization of Indian History by a Financial Times Writer? - Journalistic Negligence, Misconduct or Sheer Anti-Indian Prejudice? - May 29, 2010

10. Bahrain - Start of the Real Battle in the Middle East? - February 19, 2011

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Macro Viewpoints 2011 Awards for Financial Guests, Shows & Anchors

2011-12-26T14:30:00Z

This is the Third Year of Macro Viewpoints Awards. We began these awards in 2009 from a Viewer’s perspective, that of an Individual Investor Viewer. Investing, in our judgment, is the second most important task for an individual, for a family. Earning a paycheck is and will always be the first. But, these days paychecks are neither big nor growing. So families have to invest more and more for the proverbial rainy day, for children’s education and for retirement.

Individual investors don’t have many places to turn to for advice. Brokerage firm advice is flawed, biased and has become a sales tool for fee generation. So the only place left for supposedly unbiased advice is Financial Television. Networks like Bloomberg TV, CNBC & Fox Business have the opportunity, the challenge and the mission to help with hopefully unbiased and straight talk about turbulent and troubled financial markets.

Our annual awards were established to acknowledge and highlight the best we saw on Financial TV during the year. Our standards are as rigid as they are elastic, just as they were last year:

We like “expert” Guests, TV Anchors or TV Shows IF they make us money or at least IF we would have made money had we listening to them. In this context, we include “not losing money” or “saving capital” in our definition of making money. We like them more if they reveal an insight we would not have observed ourselves. And we adore Simplicity.

Our prior winners for the Most Useful Financial Guest Award are:

David Tepper – 2010
Meredith Whitney – 2009

Frankly, these two were in a zone in their respective years. It is hard to stay in a zone in any business. It is especially difficult to do so in the complex, turbulent, ever changing investing game. Take Meredith Whitney. She was prescient in 2009 but blew up in 2011 with her Muni defaults call.

Our prior winners for the Most Useful Financial Show Award are:

CNBC Fast Money - 2010
CNBC Squawk Box - 2009

The 2010 winner kept up its performance in 2011 but the 2009 winner essentially skidded off the road.

So who are the Macro Viewpoints winners for 2011?

I. Most Useful Financial Guest of 2011

The simplest way to make the most money is to be invested in the best performing asset class and to avoid the worst performing asset class. Like anything truly simple, this is profoundly difficult to achieve. That is why, the investment fee-collectors (sometimes known as long only managers) came up with the enticing buy & hold sales pitch to lull individual investors into complacency.

This year, the best performing asset class has been US Treasuries. So it stands to reason the most useful guest should be one who told you early and clearly to buy Treasuries. That guest is Jeffrey Gundlach of Doubleline. Mr. Gundlach not only told viewers to buy Treasuries but he also told viewers to stay out of financial stocks, especially Bank of America. His predictions about Europe were prescient.

Look at his performance as a guest on FinTV:

Friday January 14 in a Bloomberg phone interview – "If we break to lower yields thanks to weak economic data, then we should see a pretty good rally in the 10-year…As this correction to the downside is unfolding in the weeks ahead, Treasuries will be the best performer..."
Wednesday, January 19 on CNBC Strategy Session - "High yields are at the richest level in history vs Treasuries."
Wednesday March 9 on CNBC Strategy Session – "It is time to ring the register in risk assets…the US is a debt-clogged economy, credit card debt & public debts have been rung up and deflation is always around the corner...I think in the short term, meaning from now until labor day, we are going to make the most money in long term government bonds....Emerging Market Equities are topped out in a very convincing way..." .
Tuesday, May 24 on CNBC Strategy Session – "I kinda think we are looking at some sort of echo of the credit crisis coming up here. That's what I am afraid of.... I really do believe that we are looking at the beginning of a repricing lower in risk assets..."
Thursday, June 30 on CNBC Strategy Session – "I still look for further markdowns in credit...we are holding cash in anticipation of cheaper prices in credit……"
Monday August 8 on CNBC Strategy Session – "I just think the [US] downgrade is outright silly…I hate Bank of America ..It’s a freight train…Get off the tracks. The momentum towards lower prices of Banks is overpowering at this point. BofA – don’t own stock and their bonds…"
Tuesday October 4 on CNBC Strategy Session – "...high yield bonds were two standard deviations rich... in March-April and now you are one & half standard deviations cheap…you should not sell bonds to buy equities ever...there is a huge loss emanating out of Europe …means avoid Europe , avoid banks…no investments there at all..."

In summary, Jeffrey Gundlach told viewers to sell high yield bonds and buy Treasuries, sell risk assets, sell or short Bank of America, avoid Europe and Banks. This man has been in a zone all year. Anyone who followed his advise had a good investing year.

So we present the Macro Viewpoints Most Useful Financial Guest of 2011 Award to Jeffrey Gundlach.

II. Most Useful Financial Show of 2011

Posthumous awards are celebrated in the military. Extraordinary bravery is sometimes exemplified by the ultimate sacrifice by a soldier. But posthumous awards are very uncommon in non-military arenas. So we might be making new tracks in FinTV with this award. Our standards for this award are firm:

Add the most money-making value to viewers,
Provide insight that is not readily available elsewhere,
Keep it simple & profound.

On this basis and despite the cancellation of the show by CNBC, we present the Macro Viewpoints Most Useful Financial Show of 2011 Award to CNBC Strategy Session.

No other show consistently performed to these high standards this year. Others may disagree. In fact, CNBC Fast Money, the 2010 winner, might argue that they did this too. And they might be right to an extent. But CNBC Fast Money has a narrow mission and a narrow time horizon. What they tell you on one day becomes obsolete in a couple of weeks and this year, even in a couple of days.

In contrast, the investments of most individual investors are Slow Money and their investment horizon is medium term. For such viewers, for such monies, CNBC Strategy Session did a heroic job in 2011. Look at the evidence:

Content - Guests: Jeffrey Gundlach won the Macro Viewpoints Most Useful Guest of 2011 Award. His recommendations were simple and profound. Kyle Bass, another regular guest, provided insight about the European Debt Crisis better than just about any other guest on FinTV. The show brought in smart and relatively new guests like Steven Walsh who discussed the broken state of major bond markets. David Faber, the show's co-anchor, made it his mission to bring in veteran investment guests that are not ordinarily seen on FinTV.
Content - Topics: The show made it a point to discuss markets like Municipal Bonds, High Yield Bonds as well as a broader range of investment themes. This was a major departure from Old CNBC which was all about which mutual funds or stocks to buy and hold for ever. David Faber and Gary Kaminsky, the co-anchors, made it their mission to differentiate the show by its content.
Making Money for Viewers: Gary Kaminsky gave very valuable and timely advice to individual investors. He made it a point to focus on the need for income of American Families and how that should become a secular investment theme. He stood up and told viewers to buy Municipal bonds during a vicious sell-off in the first quarter. That sell-off was partly due to a vociferous call by Meredith Whitney about massive defaults to come in the muni space. Kaminksy vehemently disagreed and told viewers why. His public stand was a courageous call, not the type FinTV anchors make or get right. Viewers who listened to Gary Kaminsky are probably in a festive mood right now. This was simple, direct stuff, the sort that later gets to be called profound.

As we said before, we cannot think of another show that added so much value this year to slow money, medium term individual viewers. That is why CNBC Strategy Session deserves the Macro Viewpoints Most Useful Financial Show of 2011 Award. And "deserves" got every thing to do with it in our books.

III. Lesson of Strategy Session for all FinTV shows

Skill and content were paramount in the gladiator arenas of Rome. If you were not a skilled warrior, you were killed. The tactical content or the versatility in hand to hand combat was just as critical for survival. But to be really successful, to become so important to the masters that they kept you alive to generate money for them, gladiators needed something much more. What was it?

Remember the famous shout by Maximus Decimus Meridius in the movie Gladiator? After killing an ex-champion in the arena, an ex-champion brought back to kill him, Maximus turned to the crowd and shouted,

Are You Not Entertained?

This was the lesson, his mentor and his slave owner had taught the Spaniard, the name which Maximus carried into the ring. To survive, you got to get the crowd on your side. You own the crowd, you own Rome.

This is an all important lesson for FinTV anchors. We viewers are your crowd. To survive, you must keep our attention. Otherwise, you will lose us. Remember, finance puts most people to sleep. Markets are usually boring. Ideas and investing insight will attract viewers. But to make us regular viewers , you must entertain us. This is the secret of ESPN's success. This is what we have argued for over three years, that Financial Networks need to become EMPNs to remain successful.

CNBC Strategy Session not only forgot this, but looked down on it. Actually, we think, David Faber and Gary Kaminsky detested this concept. They felt they were doing missionary work in educating their "dumb" viewers ("masses" in TV Anchor lingo). Unfortunately, they let their viewers see their smug self-satisfaction about being "intellectual". It was a big turn-off. And we were scathing in our criticism expressed privately to the show.

CNBC Management also made a major mistake in placing this show adjacent to CNBC Fast Money Half Time Report. The Fast Money shows are the closest thing to an EMPN show today. The half hour Fast Money show that immediately followed Strategy Session was even faster in tempo than the one hour show at 5 pm. And self-satisfaction or intellectual "airs" don't stand a chance on Fast Money. Other traders on the show are just waiting to pounce on any such failings.

So, despite all the good it did and all the real value it added, frankly Strategy Session did not stand a chance. Fortunately, the failings of the show were mainly in its presentation. And these are easily fixed. We sincerely hope that CNBC Management does so. There was simply too much good in Strategy Session to let it die.

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Bloomberg TV vs. CNBC - Is It the People, the Culture or the Structure?

2011-12-26T13:05:00Z

CNBC is the leader in financial television in terms of longevity, size, presence and reach. No wonder, the network calls itself "First in Business Worldwide". It has become synonymous with financial television in the minds of individual investors.

Bloomberg Television is a good financial network as well. Bloomberg as an organization got its start with the Bloomberg machine, a must for every institutional investor. This virtual monopoly enabled the organization to launch Bloomberg News and Bloomberg Television.

We have made a conscious effort during the past few months to watch both CNBC and Bloomberg TV. There is no doubt that Bloomberg TV is a very good network. They have competent anchors, they focus on financial markets and they interview experts who provide valuable insight. They have the large resources of Bloomberg News to collect and deliver information and insight.

Yet, Bloomberg TV struggles to gain share among individual investor viewers. Why?

Is it the people, the "talent" at Bloomberg TV?

Bloomberg's on-air talent, anchors and reporters, are absolutely professional, knowledgeable and good at their job. There has been migration of talent back and forth between Bloomberg TV & CNBC. And we see no upgrade or downgrade of ability or competence in the transition in either direction. The expertise and content are similar and equal.

Having said this, there is no mistaking a Bloomberg TV show with a CNBC show. The tone, the tenor is very different. This makes the viewer experience different.

Bloomberg Anchors are professional and interact on air with colleagues politely. CNBC anchors are more free-wheeling. They seem to enjoy gently scoring points against their colleagues. CNBC's Melissa Lee is always ready to take a jab at her co-anchors. Veteran Joe Kernen has made a career of making fun of his co-anchors and reporters. Russell LeFrak, a real estate billionaire, paid tribute to this style by saying on air that he watches CNBC because of the camaredrie.

You don't see this free-wheeling behavior on Bloomberg TV. The tenor is just more businesslike. Recently, Erik Schatzker tried to add levity by calling his co-anchor Stephanie Ruhle a "credit girl" only to have her come back sharply by calling him "Canada boy". It appeared that Ms. Ruhle was not pleased and Schatzker backed off. The rest of show was a formal financial interview with a hedge fund manager.

This is a problem, we think. On most days, Financial TV is downright boring. Endless talk about markets even moves addicts like us to boredom. The easiest way to keep viewers tuned in is to make your anchors more human and personal. CNBC does a far better job of this than Bloomberg TV. That is why there are more personalities on CNBC than on Bloomberg TV.

So it must be the people, the on-air talent, right? Not so fast, as Coach Corso would say on College Game Day.

Is it the Culture?

We act like Lee Corso because we have seen what happens to anchors when they move between Bloomberg TV and CNBC. Brian Sullivan, a veteran anchor, was coldly professional at Bloomberg TV. The man has gone haywire on CNBC, or so it seems on many days. He engages reporters, battles with Herb Greenberg and even jousts with Jim Cramer. Most of the times, these histrionics have very little to do with the story at hand.

Before him, came Erin Burnett from Bloomberg TV to CNBC. From what we remember of her at Bloomberg TV, she was focused on the story and nasty in digging for information. She moved to CNBC and remade herself into a Girls Gone Wild act. She talked shoe-cleavage with Jim Cramer and once challenged her co-anchor Mark Haines to an athletic contest. Both Burnett & Sullivan remained professional and competent in their Fin Anchor roles, but they felt encouraged to exhibit their zanier side on CNBC.

Margaret Brennan moved from CNBC to Bloomberg TV where she anchors a daily two-hour show. She is thoroughly professional, competent and an excellent interviewer of serious guests on important topics. But no one can see her whimsical side, her eccentricities. That is for her Twitter persona which is sharper, more edgy and human. In one tweet-exchange, she made fun of CNBC's Steve Liesman about his habit of shaving at his desk. This Brennan is demonstrably absent on Bloomberg TV. Her TV persona prefers to have long talks with the ever prosaic Al Hunt. Need we say more?

So if anchors can change when they move, it is not people. Is it culture then? Bloomberg is a news organization. The aura is News. Their reporters, anchors are all dedicated to the business of hard news. Like old print journalists, some veteran Bloomberg anchors get stuffy at times with cultivated 'intellectual’ airs. This is also why Bloomberg TV does an excellent job with long and important interviews.

In contrast, when you watch CNBC, the aura is pure TV. They do have their own 'intellectually superior' anchors, but on the whole CNBC anchors enjoy being TV people than journalists. They carry and demonstrate an air of irreverence that comes with TV.

Serious Journalists, by definition, can never carry an irreverent air. They have a sense of mission, a sense of their obligation to inform their uneducated viewers. But this sense of haute oblige tends to be a turnoff on TV. This is why Bloomberg TV sometimes seems stuck in a bygone journalistic era, a sort of a financial PBS if you will.

If simple viewers like us get this difference, surely the highly paid Executives at Bloomberg TV get it too. But getting it and doing something about it are two radically different things. After all, corporate culture starts at the very top of the corporate structure.

Is it Corporate Structure?

This is not a Harvard Business School case study. We are rather simple-minded viewers. But even we can occasionally get to a logical destination. We see Bloomberg TV trapped within the Bloomberg News organization, within the juggernaut created by the Bloomberg machine. Bloomberg TV inherits its culture from its corporate parent.

In contrast, CNBC is not at all weighed down by NBC news. You rarely see NBC editors being interviewed on CNBC while you routinely see Bloomberg News editors interviewed on Bloomberg TV. Apart from the common letters in their names, there is no visual or content similarity between CNBC and NBC. CNBC is run as an independent network. This provides CNBC the freedom to be more innovative than Bloomberg TV. This is CNBC's greatest edge, its unique advantage.

It was CNBC that first hired investing professionals like Larry Kudlow and Jim Cramer as anchors. It was CNBC that launched Fast Money, the first ESPN like financial show. They have used the Fast Money format to launch Options Action and Money in Motion to focus on Options and Foreign Currencies. The best tribute to CNBC actually came in the form of a rebuke from CEO guest Jim Tisch who, during a rather unruly Squawk Box show, objected "this is CNBC, not ESPN."

The most vivid evidence of the difference in the two TV cultures can be seen on their websites. Bloomberg TV doesn't even have its own website. Bloomberg TV shows, Bloomberg Videoclips live as step children within the news-dominated, editor-regulated Bloomberg.Com. Look at it. It is purely a news site. Now look at CNBC.Com. It is purely a TV site.

So, in our opinion, if the Bloomberg organization wants Bloomberg TV to compete seriously in the individual viewer space, they need to allow Bloomberg TV to live freely, to breathe its own air. The first step, an inexpensive initial step, would be to let Bloomberg TV create its own web identity, a website that fits a Television network, - a network that understands it needs to entertain while it provides information.

Send your feedback to editor@macroviewpoints.com OR @MacroViewpoints on Twitter

Interesting Videoclips of the Week (December 19 - December 23, 2011)

2011-12-26T11:50:00Z

Editor's Note: In this series of articles, we include important or interesting videoclips with our comments. This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.

1. The U.S. Stock Market

This week, our summary will be rather short. Frankly, the only reason for this summary is to provide an update about the Santa Claus rally. The Dow, S&P, NDX all rallied by 3.6% this week. The S&P also closed above its 200-day moving average in the final spurt on Friday.

The outlier was BKX, the Bank index, that rallied by 6%. That must mean Europe was benign this week. For once, Europe surprised on the upside with the first LTRO. The other surprise on the upside was the vacation of Angela Merkel.

A week ago, we wondered:

This week, our featured clips are all mega bearish. Will this prove to be another contrary signal for the stock market next week?

And so it was.

2. Technician Calls on the S&P 500

This week, Tom DeMark appeared on Bloomberg TV (see clip 1 below) to defend his forecast of December 5 about a rally to 1313-1340 in 8 trading days (See clip 4 of our Videoclips of December 5-December 9, 2011). This is noteworthy in itself. Rarely does a pandit come on air to discuss his forecast when it is not working. It is also rare for a FinTV Anchor to keep updating the predictions of the pandit on Tweeter and then invite the pandit on his show to challenge him. Kudos to both Tom DeMark and Adam Johnson of Bloomberg TV. Following the interview, Adam Johnson tweeted the summary:

Tom DeMark: $SPX will likely trade thru 10/27 high of 1284 next 7-8 days and then top out 1313-1340. Caveat: if no 1284 by 12/31 problem.

Mr. DeMark also made the following comment that suggests caution ahead (see clip1 below):

VXO is what we really concentrate upon, it is getting very close to a bottom..two more lower closes in that volatility index, could identify a bottom and typically anywhere from 2-7 days later, the markets top

Mr. DeMark made this comment at around 3:20 pm on Thursday. The VXO closed down on both Thursday and Friday. So the requirement of "two more lower closes" in VXO has been met, we think. If the stock markets tops out in 2-7 more days, then Mr. DeMark and his host Adam Johnson will have rendered valuable service to Bloomberg TV's viewers.

Mr. DeMark was more humble and circumspect on this Thursday unlike in his appearance on December 5. Is humility a better prognosticator of reliability? We shall find out together.

Mr. DeMark's suggestion of a potential market top was somewhat shared by @ElliottForecast, which tweeted the following on Friday morning at around 10:40 am:

we see a market possible tending a Trap

As Lawrence McMillan forecast last week, the oversold condition ended up producing a short term rally. he warned on Wednesday that Tuesday's rally had converted the oversold condition into an overbought condition. What does he say about next week?

The $SPX chart is confined by two trend lines. A breakout through either trend line should propel a sizable move in the same direction. Currently, the breadth indicators are on buy signals. $VIX has been divergently bullish for some time now. ... In summary, the test of resistance is taking place now. We should know fairly soon whether or not it is successful. If so, bullish positions can be taken.

His charts can be viewed at Option Strategist.

Note however, Mr. McMillan's 2012 Market Forecast is very different and strongly worded:

...We still expect a bear market to unfold - one that will be far more severe than what we've seen in the last few months (although perhaps not so volatile). It is likely that the next bear market will take out the 2009 lows, thereby souring an entire generation (or two) on stock ownership for much of their lives - as it happened with investors in the 1930's.

Like some other technicians, Mr. McMillan is looking at comparisons between the current market and the 1937-1942 market.

We must hasten to add that the vast majority of "expert guests" on FinTV this week spoke glowingly of a big rally next week. They also predicted that stocks are the best place to be and Treasuries need to be sold or shorted. In other words, the same forecasts that pervaded FinTV in December 2010 and December 2009. They also suggested concentrating on high dividend paying stocks. Only a couple of brave contrarians like Steve Cortzez of CNBC Fast Money advised viewers to get out of high dividend paying stocks because it had become an extremely crowded trade.

3. Emerging Markets

A week ago, Michael Hartnett of BAC-Merrill Lynch wrote:

Meanwhile, global long-only equity redemptions of $23bn in past 5 weeks means we move very close to a "buy" signal for equities.

This week, he announced "Buy-signal triggered":

Our trading rule us flashing a tactical "buy" signal....Our backtesting shows that MSCI ACWI, on average, rallies 6% in the subsequent 3-4 weeks.....The rule last gave a "buy" signal on Aug 9, 2011, coinciding with the first trough in global equities after big 16% sell-off in Jul-Aug. ACWI rallied 4% in the subsequent 3 weeks before taking another leg down to the Oct 4 trough.

But, strangely, his EM trading rule is not a Buy.

EM saw big $4.3bn outflows (6 straight weeks of outflows and strongest since Aug'11); alas our EM trading rule remains in neutral territory

4. Interest Rates

Just as stocks rallied by 3.5%, TLT, the Treasury ETF, fell by 3.5% this week. The yields on the 30-year and the 10-year rose by 20bps and 17bps resp. to close at 3.06% and 2.02%.

We urge readers to read the article The ugly side of ultra-cheap money by Bill Gross in the financial times on December 21. This article begins with:

Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.

The article ends with:

Fed chairman Ben Bernanke blames policy rate increases in the midst of the 1930s for an economic relapse, and a lack of credit expansion for Japan’s lost decades 60 years later. But all central banks should commonsensically question whether ultra-cheap money continually creates expansions as opposed to destroying liquidity, delevering and obstructing recovery. Gresham as opposed to Keynes may become the applicable economist of this new day.

The next day, the Financial Times published the views of Jeffrey Gundlach in the article titled US bond manager fears debt 'crescendo'. The article describes his concept of Twin Towers of Risk that he articulated in his CNBC interview on October 13 (see clip 2 of our article Videoclips of October 10 - October 14, 2011). He answers the bond bears who expect inflation and much higher yields:

People who are looking for an explosion in bond yields on a better economy are thinking that somehow the world is still in 1995, where we have moderate economic growth, low inflation, stable tax policy and people getting along.

5. Europe

For once, Europe gave us a break. That in itself might explain the rally in US financials this week. Next week may not be so news-light with European auctions. Then Angela Merkel returns the following week.

Both Bill Gross and Jeff Gundlach agree that the European accord was hardly worth the paper on which it was written. Bill Gross tweeted his disgust, while Jeff Gundlach told the Financial Times how he felt:

It [the Euro] was the most heroic example of co-operation but the co-operation was on paper and it was lip service, because the countries started to violate the requirements – the fiscal requirements – of their own treaty almost immediately.

He expects the European sovereign debt crisis to reach a "crescendo" next year. In the FT article, Jeff Gundlach invokes the favorite dictum of Kyle Bass of Hayman Capital.

In contrast, Jim Rickards wondererd if Kyle Bass had lost his reading glasses. Mr. Rickards, author of the national best seller Currency Wars, appeared on Bloomberg's Money Moves on Thursday. He had tweeted earlier that the recent European agreement was far more than what the US Congress had dared to contemplate. Below is the summary of his opinions:

He thinks the next currency crisis will hit the British Pound due to massive money printing by Britain. Britain is isolated and has no gold.
He is positive on the Euro and on Gold. He thinks by the end of the first quarter of 2012, Deflation will be a reality in Europe. This will move the ECB to print money because deflation violates its mandate of price stability. But Europe has 10,000 tons of gold and so the Euro would be fine. Gold will of course be the big beneficiary.
He thinks China is in trouble and would set the peg at a lower level to the dollar. This, he thinks, will be the trigger for the US Fed to launch QE3.
He thinks the US is in a depression which began in 2007 and will last until 2014. But the US is the Saudi Arabia of Gold and so the US $ will be OK.

For a completely different analysis, see clip 2 below.

Featured Videoclips:

Tom DeMark on Bloomberg TV's Street Smart on Thursday, December 22
Megan Greene on CMC Markets on Monday, December 19
Robert Shiller on The Motley Fool on Friday, December 23

1. Better Rally by 12/31 or else - Tom DeMark with Bloomberg's Adam Johnson - Thursday, December 22

Kudos again to both Tom DeMark and Bloomberg TV's Adam Johnson for this follow up segment, the 3rd in the past few weeks. A summary of this entire interview was provided by Adam Johnson in his tweet on Friday afternoon:

Tom DeMark - $SPX will likely trade through 10/27 high of 1284 next 7-8 days and then top out 1313-1340. Caveat : if no 1284 by 12/31 problem

Adam Johnson opened the segment with a direct question:

Johnson - Two weeks ago, you came on on air and said you need to buy S&P 500. It is going higher - 1313-1340. You also thought it was going to happen by 12/21, yesterday. Didn't happen. What do you think about the S&P right now?
DeMark - Its difficult..it is difficult to define when a particular top or bottom is going to occur unless you use a model and the model we use has not spoken unfortunately. It is still directing us to the upside. We are currently at the same price level we were on the December 5th day and the market still looks like it could go higher...If someone were perfect, then obviously the business would be no fun.
Johnson - As I recall, you were trying to extrapolate - you had said the previous 3 upwards moves in the S&P were 17-21 days and based upon your model, you thought that December 21st would be the peak. You were extrapolating, is that right?
DeMark - that's right. Just for simplicity's sake, the rally of the August 9th low was 16 trading days, the rally off the October low was 17 trading days, so just for simplicity's sake, I said this one would probably be 17 days = December 21. Actually, you got the seasonal pull through the first week in January..you got a lot of other factors that hinted the market should go higher and it has. Usually when a market makes a top as it did back in first week in December, it does correct less than 5.56%, and rallies again. Typically, that peak is taken out and our models are still telling us the upside the direction to follow the market.
Johnson - you have also made the comment to me that we have to get through the high from October 27th, I believe it was 1284, and then you believe you are looking for 4-5 successively higher closes - that is still part of your thinking?
DeMark - Still active - what I am looking for - there is some confusion from prior two times I was on the air - the October 27th high close is very critical, once we exceed that..if we do that October 27th..close, we must record 3 successively higher closes and that will fulfill the requirements of our model to identify the market top - it is the same model we used for the August 9th low and the October 4th low, it might possibly be 4 closes but we are running against the beat the clock right now..I think we got may be 8 more days, the VXO is what we really concentrate upon, it is getting very close to a bottom..two more lower closes in that volatility index, could identify a bottom and typically anywhere from 2-7 days later, the markets top...so by the end of the first week of January, we should have accomplished what I am looking for..which is 3 successively higher closes over that October 27th close ..

What happens if the market does NOT go higher than the October 27th close by the first week of January? Bloomberg provided an update on Friday afternoon:

The latest forecast will expire by the end of the first week of January if it doesn’t come true, Market Studies’s Roderick E. Bentley said in an e-mail.

At this point, Adam Johnson changed the topic and began discussing the applicability of the DeMark model to Jobless Claims:

DeMark - I tell you, it doesn't look good. We have applied our model which are called Sequential and Combo, for primarily the markets, but also for have applications for economic indicators as well as politics..If you apply our model to the jobless indicator, you can see in 2006 it was a low bid and subsequently the jobless claims went up.. it peaked in 2009 and the market bottomed...currently we are at a low again, that doesn't bode well for the market....

At this point Adam Johnson gives Tom DeMark credit for predicting the Gingrich-Romney tussle using Intrade charts. Mr. DeMark said:

We called the Gingrich top and we called the Romney bottom...it was the right to the day when the thirteens (model rank) appeared...we are as surprised as most people are; the indicators do have some validation when they are applied to trends such as the popularity of a public politician...

2. Full Fiscal Union or Breakup of the Euro - Megan Greene of RGE with Michael Hewson of CMC Markets (21:20 minute clip) - Monday, December 19

We were alerted to this video by a tweet from Doug Kass in which he gave a shoutout to Zero Hedge for posting it. We thank both Zero Hedge and Doug Kass. This 21 minute clip is what Michael Hewson of CMC Markets calls his "brief chat" with Megan Greene of Roubini Global Economics.

Find some time during this holiday season and watch this clip in its entirety. Mimicking the "brief chat" understatement of Mr. Hewson, we include a "few" excerpts below:

It's not at all a debt crisis any more, it started off as a public debt crisis in Greece and a private debt crisis in Spain & Ireland, a bit of both in Portugal. But it has moved way beyond that by now. It is not just a debt crisis, it is a financial crisis, a political crisis. You have a banking crisis with the Sovereigns having to prop up all the banks. So there is a sovereign-banking negative feedback loop we see. It is impossible to break that unless you address both sides and you cannot do that unless you have political unity. But of course, you have a political crisis as well. It is very difficult to draw a line under this Eurozone crisis.

The announcements they made at the Euro summit in theory kinda address the short, medium and long term nature of the crisis.

So in the short term, they announced IMF funding from the national central banks that can be used for a big bailout of Italy and Spain.
In the medium term they announced they would accelerate the ESM next year from 2013 and
in the long term they talk about some treaty changes. But fundamentally, none of these measures actually draws a line under the crisis.

For the IMF bazooka for Italy and Spain, we could cobble together about 600-700 billion euros and that's enough to take Italy and Spain out of the markets for about a year and quarter, may be year and half....Some of it will come from the IMF possibly from national central banks lending to the IMF, some of it will come from the EFSF, there is 250 billion left over that has not been earmarked, and some of it will probably come from the ECB in terms of its continuing securities market purchase program. So using these different sources, you could cobble together around 600-700 billion euros.

It would be stretching it but it wouldn't actually really help. It would kinda delay the inevitable. So Spain and Italy both have new governments and immediately they have to implement austerity measures. And they also have to implement structural reforms.

And in the short term, the austerity measures would just undermine growth.
In the medium to long term, the structural reforms would help. But it would take a number of years for them to start supporting growth. So by mid 2013 at the latest, when Spain and Italy have to return to the markets, their debt dynamics are going to look even worse because their GDP would have fallen by then. So when they have to return to the markets, I don't think investors will be anymore willing to hold their debt than they are now.
So a debt restructuring is probably inevitable for both countries. But they have managed to do what they do best which is to kick the can a bit further down the road.

Greece - The tipping point is either the Troika says you have missed the targets so many times, we are not willing to lend more money to Greece or whether it is the Greece government or the Greek people say we can't do this anymore. I think ultimately EU leaders have said that Greece is a special case, it is really going to be a model of how we deal with weaker countries in the Eurozone, and ultimately Greek government will face a choice in terms of its growth strategy -

it can either continue down this road of austerity and recession/depression to regain competitiveness which will take about a decade for Greece probably and finally return to growth or
it should leave the Eurozone, reissue the drachma, see a depreciation massively, regain competitiveness and return to growth -

Argentina Parallel - that's not say that leaving the Eurozone is an easy choice, it will be messy and painful, but if you look at kinda the nuclear case of Argentina, the worst case scenario, Argentina defaulted and gave up the dollar peg, it returned to growth within months. It is a much faster route to growth and given that choice most weaker Eurozone governments will probably choose to leave the Eurozone.

EU Fiscal Compact - The idea of the fiscal compact is that it is meant to be the first step towards eventual fiscal union and I think the fiscal union and Eurobonds are potentially the only game changers left in this crisis. And these are supposed to be the first steps but they are not actually fiscal union. All the fiscal compact really does is institutionalize the asymmetric adjustment going on in the Eurozone whereby it is the peripheral countries that are having to make all of the adjustments with retrenchments while the core countries don't make any adjustments at all. Gemany has been really insistent that fiscal union happen a certain way, that there is political union first and pooling of assets and finally pooling of liabilities, with Eurobonds and I think this is the right way to go about it but they needed to have started that process about years ago and now we are in middle of a crisis and they need to do things differently.

LTRO - It doesn't deal with the problem at all. In fact, it exacerbates it, a terrifying prospect in my view. Because then you are just strengthening this banking-sovereign debt feedback loop - banks borrowing at the ECB to buy more sovereign debt- that just makes it worse. At the end of the day, if you see cascading defaults, it will be that much messier. I am not convinced the banks will actually do that. I have spoken to a lot of banks and it seems that actually they are not interested in same sort of carry trade that they previously carried out using cheap ECB financing of sovereign debt.

Germany - yeah, we will continue to lurch from mini-crisis to mini-crisis in this greater crisis. Unfortunately, fiscal union as I said is the only game changer and I don't think there is the political will to achieve that. I mean for there to be true fiscal union, Germany would have unlimited fiscal transfers to the weaker countries for ever. and I don't think the German government or the German people will ever be willing to accept that. I think fundamentally it will come down to the question of growth and growth is the one thing that no one has done anything to deal with.

ECB - For the ECB to do the "right thing", they would have to step in with unlimited, unsterilized fashion for ever. If it did anything short of that, if it did in a limited way, it would basically create the equivalent of a bank run in the bond market. All of a sudden, these investors who have been trying to get rid of this debt will see there is finally a big buyer and will line up to dump what they are holding. I think the ECB could actually exacerbate things if it stepped in a limited way. And I don't think there is any chance that the ECB will step in an unlimited way.

Binary Solution - Full Fiscal Union or Break up of the Euro -

the first country that will leave the Eurozone will be Greece, possibly as early as end of next year, they will still be running a primary deficit, I think, basically it will be like a divorce. The Troika and Greece will admit this wasn't really meant to be and I think because Greece is running a primary deficit, Greece will be frozen out of the markets if it leaves the Eurozone. The Troika will provide some kind of bridge financing to facilitate Greece's exit from the Eurozone. So, I think there is a chance it could be done in a negotiated orderly way - like a Marshall plan for Greece - there are a lot of triggers that could switch it from orderly to disorderly - certainly events could supercede best intentions, it is possible... but I think it is in everybody's best interests to have a default and exit be as orderly as possible. So I think they will probably deal with it that way..
Greece will become kind of a model for weaker countries. So I think Portugal won't be too far behind, and probably Ireland will end up going down the same route even thought it doesn't have to but it might choose to if no one is making their creditors whole then why would Ireland?
And I think Italy and Spain are the really the big question. Ultimately, it is the same decision and it will be much more difficult to make the exit of Italy and Spain more orderly but they will definitely try. Once you have Italy and Spain leaving the euro, there is essentially no Eurozone left. and at the end of the day, monetary union is really a political choice and so if you have that many countries dropping out there will be the political will to keep this euro project running any longer.

Growth in Europe - there is a laundry list of things that need to happen for this recession to bottom out next year and growth to return..

the ECB needs to cut rates really aggressively close to zero,
it needs to provide quantitative easing and credit easing, it needs to talk down the euro massively, that it depreciates to parity with the dollar, and
the core countries need to provide fiscal stimulus for the peripheral countries.. the probability of each one of these things happening is pretty low and I will give you two main examples...

Euro Depreciation - in terms of the Euro depreciating massively, I don't think either the US or China would allow that actually - every body now is trying to weaken their currency and so I don't think it is possible for that to happen and also you look at as things get better in the euro zone, then the Euro appreciates ..it depreciates as things get bad, it is impossible to engineer it so that things are getting better as the euro depreciates,
Fiscal Stimulus from the Core - I recently attended a conference with a bunch of German CDU MPs and they had an entire panel session on austerity and Germany and I finally asked why are we talking about austerity why aren't we talking about stimulus package and they looked at me as if I had 20 heads, - absolutely not on the table whatsoever...
German Bundesbank - if you walk into the Bundesbank, there is a trillion reichsmark note that is framed in the lobby - its a social memory at this point - but I think it is a very powerful one... but also there is a question of wage growth in Germany which if you look at the past decade, real wages really haven't risen in Germany - it has been really flat - whereas they have risen quite significantly in the rest of the Eurozone country - so if Germany were to all of a sudden be in favor of the ECB stepping in as a lender of last resort the Government would have to admit to its population - look you went through flat real wages for a decade which was really all for nothing...

This is probably the most detailed and understated discussion of the European mess we have heard.

3. House Prices may Decline for 30 years in Real Terms - Robert Shiller on Motley Fool - Friday, December 23

Robert Shiller is probably the best student and scholar of the American Housing market. Every time we listen to him, we learn something new, something important.

In this gem of an interview, Professor Shiller puts forth a view that would have gotten him burnt at the stake for sheer blasphemy a couple of hundred years ago. We speak of course about the prevailing American religion for the past 50 years or so - the deep and abiding faith that housing is a good long term investment.

Read what America's foremost expert on housing told Morgan House of The Motley Fool.

Robert Shiller - The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. And it was not informed by good history. If you look at the history of the housing market and I have taken it back to 1890, it hasn't been a good provider of capital gains - it is a provider of housing services, that's not exactly like a dividend,.... and so whether that is good or not depends on what you want - but capital gains is more of an investment aspect of housing and capital gains have not even been positive. From 1890 to 1990, real inflation directed home prices were virtually unchanged.
Morgan House - So is that what they [homeowners] should expect going forward that their house will be giving them a place to live, it will keep up with inflation and nothing else? Is that the basic model that homeowners should think about?
Robert Shiller - I think it is a reasonable first approximation to assume that home prices will just keep up with inflation. There is concerns that they will do something different and people are very focused on the possibility that there will be another boom which is possible. Over the ten years of one's ownership of a home, it is very hard to say what they will do. But I think we should also consider the possibility that home prices will decline in real terms over the next few decades. Why is that? well, you have to reflect on the fact that it has done it before. Home prices declined for the first half of the 20th century in real terms.
Robert Shiller - Economists discussed that back then - Why are they going down? The conclusion, if there was any consensus in say 1950, was, as I interpret what have read, of course home prices go down, there are technical progress, they are a manufactured goods, back in 1900, homes were hand made, you know, craftsman, now in 1950, we have all kinds of power tools and prefab and they are just better in 1950 than they were in 1900 and so of course home prices go down...and from that frame of reference, that is exactly what we should expect too. It is just a manufactured good and progress is always happening. On top of that progress, there is the outmoding, the out of style factor.
Robert Shiller - So what kinds of houses would they be building in 20 years? They may have lots of new amenities, computerized something, in some way that we can't anticipate now. People won't want these old homes. So the idea that buying a home is such a great idea is just wrong. They may very well decline in the next 30 years in real terms.

The house, our home as just a manufactured good! - Think about it.

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The Old U.S. Dollar has Collapsed; Long Live the New U.S. Dollar

2011-12-17T13:47:00Z

Editor's Note: This is our second review of the book Currency Wars by James Rickards, a counselor, investment banker, risk manager, and an advisor to the Department of Defense, U.S. Intelligence Community & global hedge funds. Our first review was published on December 10, 2011 under the title, Avalanches, Nuclear Reactors & Financial Markets - A Complexity Theory View by James Rickards

This is a period of intense turmoil in financial markets. The origin of the turmoil has been and remains the European Monetary Union. This week, the Euro broke down. It has already fallen by 12% from its summer highs. Forecasters predict another 10% decline against the dollar in the first quarter of 2012. Gold broke down as well this week.

The collateral damage is going global. Recently, the Indian Rupee fell in a steep vertical decline against the U.S. Dollar from about 44 to 53, a 20% drop. All emerging market countries are beginning to see flight of capital and loss of wealth. Stories abound of wealthy Chinese trying desperately to leave China to migrate to Vancouver, Sydney, Tampa, essentially wherever they can move with their money. China appears to be headed towards a hard landing.

In this turmoil, the U.S. Dollar stands tall and firm, a veritable mountain of strength. This is why the U.S. Dollar gets massive inflows of capital from all over the world. This is a good thing, because financial stability demands the existence of at least one risk-free asset in the world. That is the U.S. Treasury market and underlying that is the U.S. Dollar.

If the US remains the solitary bastion of safety in a turbulent financial world, then one can see a time when a large portion of the world's capital becomes resident in the U.S. Dollar. This would be the classic case of everyone piling on one side of a large boat.

This could be when the U.S. financial system, Treasuries, Stocks & Dollar, reaches a critical stage, or the state in which the U.S. financial system becomes vulnerable to a Phase Transition in the jargon of Complexity Theory.

This is when even a small event can begin a chain reaction within the U.S. Financial System, just like a small snowfall or a single snowflake can cause an avalanche.

Jim Rickards describes such an avalanche, a phase transition, otherwise known as a catastrophe, in the Section titled Chaos in Chapter 11 of his book Currency Wars.

Chaos

Mr. Rickards begins the section with:

Perhaps the most likely outcome of the currency wars and the debasement of the dollar is a chaotic, catastrophic collapse of investor confidence resulting in emergency measures by governments to maintain some semblance of a functioning system of money, trade and investment.

He then describes in detail (about two pages long) how a financial catastrophe can begin with a small trigger, then gain speed & mass to become a huge chain reaction that causes a global financial meltdown in just 2 days. He describes how all measures by government agencies to stop the meltdown, the Fed., the U.S. Treasury, global central banks, end up like pouring gasoline on the fire.

As the panic courses through Europe for the second day, all eyes slowly turn to the White House. A dollar collapse is tantamount to a loss of faith in the United States itself. The Fed and the Treasury have been overwhelmed and now only the president of the United States can recover confidence.

Frankly, much of the above has been written and discussed for years. A large constituency in America and the World is expecting this, expecting a collapse of the United States in a cauldron of financial inferno.

But they will be disappointed. Because, the United States does not break down. Instead, in the scenario depicted by Jim Rickards, the United States emerges as the center of the next global financial system.

This scenario is the reason for this article. It is based on a financial "nuclear" weapon the president of the United States has. The weapon is IEEPA.

What is IEEPA?

The acronym stands for International Emergency Economic Powers Act of 1977. Jim Rickards calls it "a little-known nuclear option of immense power". He writes:

...IEEPA, passed during the Carter Administration as an updated version of the 1917 Trading with the Enemy Act. President Franklin Roosevelt had used the Trading with the Enemy Act to close banks and confiscate gold in 1933.

The use of IEEPA is subject to two preconditions, as Jim Rickards tells us:

There must be a threat to the national security or the economy of the United States, and
the threat must originate from abroad.

There is some after-the-fact notification to Congress, but in general the president possesses near dictatorial powers to respond to a national emergency.

An Executive Order by the President of the United States under IEEPA

At 6:00 p.m. New York time on day two of the global dollar panic depicted by Jim Rickards, the president gives a live address to an anxious world audience and issues an executive order consisting of the following actions, all effective immediately:

The president will appoint a bipartisan commission consisting of seasoned veterans of capital markets and "eminent economists" to study the panic and make suitable recommendations for reform within 30 days.
All private and foreign-owned gold held in custody at the Federal Reserve Bank of New York or depositories such as the HSBC and Scotiabank vaults in New York will be converted to the ownership of the U.S. Treasury and transferred to the U.S. gold depository at West Point. Former owners will receive suitable compensation, to be determined at a later time.
All transfers of foreign holdings of U.S. Treasury obligations held in electronic book entry in the system maintained by the Federal Reserve will be suspended immediately. Holders will receive interest and principal as agreed but no sale or transfers will be allowed.
All financial institutions will record U.S. Treasury obligations on their book at par value and such securities will be held to maturity.
Financial institutions and the Federal Reserve will coordinate efforts to purchase all new issuance of U.S. Treasury obligations in order to continue the smooth financing of U.S. deficits and the refinancing or redemption of any outstanding obligations.
Stock exchanges will close immediately and remain closed until further notice.
All exports of gold from the United States are prohibited.

This interim plan would stop the immediate crash in the Treasury bond market by freezing most holders in place and mandating future purchases by the banks. It would not offer a permanent solution and would at most buy a few weeks' time within which to develop more lasting solutions.

The Long Term Result

The real result of this exercise according to Jim Rickards argues:

Now the hidden strength of the U.S. financial position would be revealed. By confiscating foreign official and most private gold on U.S. soil, the Treasury would now possess over seventeen thousand tons of gold, equal to 57% of all official gold reserves in the world. This would put the United States in about the same relative position it held in 1945 just after Bretton woods, when it controlled 63% of all official gold.

What would this mean?

Such a hoard would enable the United States to do what it did at Bretton Woods - dictate the shape of the new global financial system.

This is the new financial version of the old British cry - The King is Dead, Long Live the King. In this case,

The United States could declare the issuance of a "New United States Dollar" equal to ten old dollars.

This would not just be a name change or a reverse split like Citibank exchanging 10 old shares for one new share worth 10 times as much. The New United States Dollar would be backed by gold. In this Rickards scenario,

The new dollar would be convertible into gold at the price of 1,000 new dollars per ounce. Or equal to 10,000 old dollars per ounce of gold under the old dollar system.

This is clearly a devaluation of the old dollar. The strange part is that this devaluation would be par for the course for the USA and for the world:

This would represent an 85% devaluation of the dollar when measured against the market price of gold in April 2011, and would be slightly greater than the 70% devaluation against gold engineered by FDR in 1933, but not of a different order of magnitude. It would be far less than the 95% dollar devaluation measured in gold that occurred under Nixon, Ford and Carter from 1971 to 1980.

The irony is that such a massive devaluation would not be harmful to the New U.S, Dollar. Instead, Jim Rickards argues:

Because of its gold backing, the New United States Dollar would be the only desirable currency in the world - the ultimate victor in the currency wars.

This would be the New King Dollar, the currency that would rule as the center of the financial universe.

What about other countries? What about global trade?

Jim Rickards suggests:

The United States would then pledge generous concessionary loans and grants to Europe and China to provide liquidity to facilitate world trade, much as it had done under the Marshall Plan. Gradually, those parties whose gold had been confiscated, mostly European countries, would be allowed to buy back their gold at the new, higher prices.
Confidence would slowly be restored, markets would reopen, new prices for goods and services would be discovered and life would continue with a New King Dollar at the center of the financial universe.

What makes this Scenario feasible? - our own view

There is no other country on earth that could do this or get away with this. In contrast, the United States has already done this twice in the past, in the Roosevelt Administration and in the Nixon Administration in 1971. We think it is eminently feasible for the United States to do this again, at least in the next 10 years or so:

No other country on earth has the broad, deep and flexible financial system that the United States has. We witness the real problems, the deep fissures and the utter rigidity of Europe's financial system every day. China's financial system is both non-existent globally and deeply troubled internally. The United States is the only country capable of building the next version of the global financial system, obviously on its own terms first and later on favorable terms for its allies.
Europe will go along after vociferous protests as it did in the 1970s. Europe demonstrates every day, every week that it cannot function on its own. A system established by the United States and accepted by Europe would become the de facto global system. China, which depends on exports to Europe and America, will have no real choice but to go along.

Then there is that unspoken foundation of American power - the global dominance of the U.S. Military:

Today, even more so than in the 1970s, the United States military is the predominant global power in the world. It is also the one military capable of projecting its power in all corners of the world. China, by its own admission, will not come close to matching the US militarily in the next 10 years.

The reserve currency of the world has always been the currency of the predominant global military power. The United States Military has been that power and will remain so for the near future.

This is why, in our opinion, his scenario of a New King Dollar is feasible.

An Alternative Scenario

The entry of China and Russia into the global financial system is relatively new. Already, we hear of increasing unrest in China and we have begun to see protests in Russia. A global financial collapse and severe devaluations of currencies might lead severe unrest in other countries as well. These countries have a longer tradition of socialism, of nationalization of corporate entities in difficult times.

Jim Rickards considers this as another possible response to a dollar collapse:

Another possible response...would be governmental intervention of a type that is far more extreme and coercive....Such coercion would more likely occur in Asia or Russia and may involve wholesale nationalization of capital stock and intellectual property, closed borders and redirection of productive capacity to domestic needs rather than export.

What would this do?

The world would retreat into a set of semiautarkic zones and world trade would collapse. The result would be the opposite of globalization.

We think, most countries in the world would prefer the first scenario depicted by Jim Rickards rather than the second.

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