Musing on the Markets : Geopolitics

Beyond the Sound Bite: An Interview with Dr. Ian Bremmer

Vinny Catalano, CFA — Wed, 08 Apr 2009 18:15:00 GMT

My interview with the president of Eurasia Group and coauthor of The Fat Tail: The Power of Political Knowledge for Strategic Investing explored key themes from his new book - notably the investment importance of political risk management, the power shift from capitals of finance to capitals of politics, and the factors involved in quantifying political risk. We also discussed his views on emerging markets and Brazil.

The length of the interview is 12 minutes 53 seconds.

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Helicopter Hank

Vinny Catalano, CFA — Thu, 15 Jan 2009 00:30:00 GMT

“It is like if you are in an airplane and the oxygen mask comes down,” said Stefanie Kimball, (Independent Bank’s) chief lending officer. “First thing you do is put your own mask on, stabilize yourself.”

"In Michigan, Bank Lends Little of Its Bailout Funds"
NY Times, January 14, 2009

The above quote and article captures the essence of the TARP money dump by Helicopter Hank in 2008. This is, no doubt, a large part of the dynamic that has investors worried, but not in the way that may seem apparent.

Under Obama and the Democrats, TARP funds will be allocated in a striking different manner. And this fact justifiably has many investors concerned that a significant increase in bank failures will be a part of the economic landscape this year: something that the accompanying chart from the Economist strongly suggests. Moreover, with no political dynamic at work this year, it is hard envision any scenario in which the second wave of TARP money would find its way to undeserving banks and with such poor transparency and regard for the terms under which such money is made available. As a result, investors should expect that banks with shaky balance sheets are headed for the operational dustbin. And with them, the economic consequences of the deleveraging process will continue unabated.

Investment Strategy Implications

Were it not for the fact that the stock market is deeply oversold, this morning’s 10 to 1 down ratio (both the advance/decline and advance/decline volume) might lead some to conclude that a return to the really bad old days of last year (with 5% + down days, rising VIX levels, banking crisis du jour, and more pain to follow) is underway rather than a second selling climax based on fears well known, defined, and, yes, manageable.

On the assumption that the plethora of money already doled out and what’s in the monetary and fiscal pipeline (including the Fed’s acquisition of selected “toxic assets” and the prospects for bank “write ups”) will have the desired effect of injecting into the US economic body enough juice to trigger the badly needed multiplier effect on corporations and households beginning in the second half of the year, a cautiously optimistic view of equities does seem warranted - at least for the next several months.

Helicopter Hank did what he did and in a manner that only he fully appreciates*. In short order, his actions will be perceived as they should be – a prelude to the real work of restoring the US and global economy to a more balanced era of growth and stability.

*A more conspiratorial mind might suspect there was a political dimension to his largess as 2008 was a presidential and congressional year. Providing “walking around money” to banks who did not qualify under the agreement that healthy banks should receive TARP funds does make one wonder just what was Helicopter Hank thinking?

A Most Dangerous Inflection Point

Vinny Catalano, CFA — Tue, 06 Jan 2009 15:51:00 GMT

“If we don’t act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment.”
President-elect Barack Obama
January 3, 2009

There is a major economic battle underway pitting the resurgent Keynesian forces of President-elect Franklin Delano Obama against the monetarists and the remnants of the laissez faire/supply side crowd. To exemplify this policy struggle, consider the following two recent quotes from Paul Krugman:

“The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.”

“(Milton) Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time.”

To help complete the picture of this economic/political battle royal we have the factions of the newly empowered Democratic Party and its liberal wing seeking to spend the political capital they think they have earned courtesy the recent election results. Then, on top of all this is the stickiness of Washington business as usual and the reality that entrenched power is rarely ceded without a fight.

Needless to say, the task before Mr. Obama is daunting. And we will all learn if his campaigning skills can be translated into effective policy decisions.

Investment Strategy Implications

The central question is not whether all the money being thrown at the global economy (both fiscal and monetary) will produce positive results. It will. Rather, the key question is whether the policy actions under vigorous (and potentially divisive) debate involving trillions of dollars ends up stabilizing and then turning things around or merely mutes the decline to an era of lessened living standards and a lower quality of life. If the former, a new era of growth ensues. If the latter, get ready for the Great Depression II and a highly dangerous future.

Beyond the Sound Bite: An Interview with Dr. Rob Atkinson

Vinny Catalano, CFA — Wed, 03 Dec 2008 13:15:00 GMT

I was able to catch the the president of the Information Technology and Innovation Foundation (www.itif.org) between his meetings with the Obama transition team for a most informative discussion that included his views on the importance of productivity enhancing public policy, the intricate blend of old fashioned consumer demand, industrial style infrastructure spending, and technological tax policy, and the key role innovation economics can play in producing sustainable growth for the US economy.

The length of the interview is 12 minutes 21 seconds.

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Beyond the Sound Bite: An Interview with Dan Clifton

Vinny Catalano, CFA — Tue, 26 Aug 2008 23:30:00 GMT

Sandwiched between the political conventions and the debates (President and Vice President) are key congressional and economic issues that will likely have a significant impact on the markets in the ever volatile month of September. Notably the Frank/Dodd hearings, the CFTC energy speculation report, an FOMC meeting, the ban on offshore drilling ends, and a major debt rollover for Freddie and Fannie.

My interview with the astute Head of Policy Research for Strategas Research Partners includes many of these issues along with the geopolitical driver behind Biden's selection as Democratic Vice Presidential candidate, the impact of political convention bounces, a more activist US Congress, plus the rolling back of the Reagan revolution in tax policy.

The length of the interview is 15 minutes 58 seconds.

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Beyond the Sound Bite: An Interview with Jason Furman

Vinny Catalano, CFA — Wed, 06 Aug 2008 18:58:00 GMT

In an exclusive befitting the major cable networks, I am pleased to provide listeners with the ability to compare and contrast the US presidential candidates' economic plans - last week's interview with McCain economic advisor Steve Forbes and this week's guest, Obama chief economic advisor Jason Furman.

In this week's interview, Furman describes the Obama campaign's take on tax policy, the budget and current account deficits, regulation, and the campaign's emphasis on pragmatism.

The length of the interview is 16 minutes 57 seconds.

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Wonderland: Is John McCain Stupid?

Vinny Catalano, CFA — Fri, 01 Aug 2008 06:46:00 GMT

As the Obama campaign has to deal with Ludacris' latest ludicrous rap "song", one of the most popular postings in the online edition of yesterday's Wall Street Journal with the above title is sure to provide the McCain campaign with its own set of headaches - this one self induced.

In the media dominated world of politics, words and image matter a lot. So, when a presidential candidate provokes comments from a usually supportive voice like the Journal, it is worth noting.

For those of you who do not have a WSJ online subscription, here is Dan Henninger's commentary - quotable quotes the McCain campaign could, no doubt, do without:

Is John McCain losing it?

On Sunday, he said on national television that to solve Social Security "everything's on the table," which of course means raising payroll taxes. On July 7 in Denver he said: "Senator Obama will raise your taxes. I won't."

This isn't a flip-flop. It's a sex-change operation.

He got back to the subject Tuesday in Reno, Nev. Reporters asked about the Sunday tax comments. Mr. McCain replied, "The worst thing you could do is raise people's payroll taxes, my God!" Then he was asked about working with Democrats to fix Social Security, and he repeated, "everything has to be on the table." But how can . . .? Oh never mind.

Yesterday he was in Aurora, Colo., to wit: "On Social Security, he [Sen. Obama] wants to raise Social Security taxes. I am opposed to raising taxes on Social Security. I want to fix the system without raising taxes."

What I'm asking is, does John McCain have the mental focus, the intellectual discipline, to avoid being out-slicked by Barack Obama, if he isn't abandoned by his own voters? It's not just taxes. Recently the subject came up of Al Gore's assertion that the U.S. could get its energy solely from renewables in 10 years. Sen. McCain said: "If the vice president says it's doable, I believe it's doable." What!!?? In a later interview, Mr. McCain said he hadn't read "all the specifics" of the Gore plan and now, "I don't think it's doable without nuclear power." It just sounds loopy.

Then this week in San Francisco, in an interview with the Chronicle, Sen. McCain called Nancy Pelosi an "inspiration to millions of Americans." Notwithstanding his promises to "work with the other side," this is a politically obtuse thing to say in the middle of a campaign. Would Bill Clinton, running for president in 1996 after losing control of the House, have called Newt Gingrich an "inspiration"? House Minority Leader John Boehner, facing a 10-to-20 seat loss in November, must be gagging.

The one thing -- arguably the only thing -- the McCain candidacy has going for it is a sense among voters that they don't know what Barack Obama stands for or believes. Why then would Mr. McCain give voters reason to wonder the same thing about himself? You're supposed to sow doubt about the other guy, not do it to yourself.

Yes, Sen. McCain must somehow appeal to independents and blue-collar Hillary Democrats. A degree of pandering to the center is inevitable. But this stuff isn't pandering; it's simply stupid. Al Gore's own climate allies separated themselves from his preposterous free-of-oil-in-10-years whopper. Sen. McCain saying off-handedly that it's "doable" is, in a word, thoughtless.

Speaker Pelosi heads a House with a 9% approval. To let her off the hook before the election reflects similar loss of thought.

The forces arrayed against Sen. McCain's candidacy are formidable: an unpopular president, the near impossibility of extending Republican White House rule for three terms, the GOP trailing in races at every level, a listless fundraising base, doubtful sentiments about the war, a flailing economy.

The generic Democratic presidential candidate should win handily. Barack Obama, though vulnerable at the margin, is a very strong candidate. This will be a turnout election. To win, Mr. McCain needs every Republican vote he can hold.

Why make it harder than it has to be? Given such statements on Social Security taxes, Al Gore and the "inspirational" Speaker Pelosi, is there a reason why Rush Limbaugh should not spend August teeing off on Mr. McCain?

Why as well shouldn't the Obama camp exploit all of this? If Sen. Obama's "inexperience" is Mr. McCain's ace in the hole, why not trump that by asking, "Does Sen. McCain know his own mind?"

***

In this sports-crazed country, everyone has learned a lot about what it takes to win. They've heard and seen it proven repeatedly that to achieve greatness, to win the big one, an athlete has to be ready to "put in the work."

John McCain isn't doing that, yet. He's competing as if he expects the other side to lose it for him. Sen. McCain is a famously undisciplined politician. Someone in the McCain circle had better do some straight talking to the candidate. He's not some 19-year-old tennis player who's going to win the U.S. presidential Open on raw talent and the other guy's errors. He's not that good.

There is a reason the American people the past 100 years elevated only two sitting senators into the White House -- JFK and Warren Harding. It's because they believe most senators, adept at compulsive compromise, have no political compass and will sell them out. Now voters have to do what they prefer not to. Yes, Sen. McCain has honor and country. Another month of illogical, impolitic remarks and Sen. McCain will erase even that. Absent a coherent message for voters, he will be one-on-one with Barack Obama in the fall. He will lose.

Have a good weekend.

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Beyond the Sound Bite: An Interview with Steve Forbes

Vinny Catalano, CFA — Wed, 30 Jul 2008 08:46:00 GMT

Steve Forbes, in his capacity as economic advisor to John McCain, shares his perspective on the Senator's position re tax policy, the federal budget (including entitlement programs), regulatory issues, and working with a Democratic Congress.

The length of the interview is 11 minutes 20 seconds.

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If Not Now, When?

Vinny Catalano, CFA — Mon, 28 Apr 2008 16:34:00 GMT

excerpts from this week's report:

"While most investors are rightfully focused on economic and domestic political matters, it would behoove all not to lose sight of the increasingly more probable event of a military strike on Iran before George Bush leaves office. An attack on Iran stands an even higher probability this year if “bomb, bomb, Iran” McCain does not win this fall..."

Investment Strategy Implications

"Exogenous events, such as terrorist attacks, might be hard for some investors to prepare for but not hard for seasoned investors to incorporate into the equity valuation equation..."

"...it is difficult to understand why the risk appetite for investors has recently increased (as the reduction in the VIX has recently shown) when so much remains so uncertain. For this reason (and for several others, including the far from resolved credit crisis), I have not adjusted the risk parameters in the Expected Return Valuation Model (see report*).

By not adjusting the risk parameters the market has eliminated its undervalued level of the past months and now sits just a touch over fair value**. Not enough to warrant a reduction in the fully invested position of the Model Growth Portfolio (see page 5 of the report*). At least, not yet..."

also in this week's report:

* Expected Return Valuation Model
* Moving Averages Scorecard
* Model Growth Portfolio
* Sectors and Styles Market Monitor
* Key US Economic Indicators

*To gain access to this week's report (and all reports), click on the newsletter subscription information here.

**click on image to enlarge.

A Moment of Clarity

Vinny Catalano, CFA — Thu, 10 Apr 2008 15:26:00 GMT

“…it is now clear that the current turmoil is more than simply a liquidity event, reflecting the deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper, and more protracted.”

IMF Global Financial Stability Report
April 2008

This has been a truly remarkable week, one that alcoholics refer to as a “moment of clarity”.

On the foreign policy front, US Senators and other congressional members awoke this week from their multi-year stupor and managed to pin the clarity tail on the Iraq donkey when they finally and pointedly asked the right question – what constitutes success? Combined with the now clear evidence, courtesy of the testimony of Gen. Patraeus and Ambassador Crocker, that in 2006 the Bush Administration, just prior to the midterm elections, “misled” (“misspoke’?, pick your euphemism for lying) the US public with statements regarding the state of affairs in Iraq, perhaps a more clear-headed discussion re Iraq can now ensue.

As vital as this matter is, it is the clarity that emerged on the financial and economic front that I wish to focus on.

This week witnessed the publication of a must read document for every investor – the IMF’s “Global Financial Stability Report”. Having just picked up my printed copy of the 208 page tome, I have begun to wade into the report and can see from the very first pages that this report will pin the clarity tail on the credit crisis donkey in a way that no other report or commentary has done thus far. Here is a sample of what I have read thus far:

• The report provides a clear recognition of not just the scale ($945 billion loss estimate) but the scope of the credit crisis, specifically it’s not just a subprime problem.
• The report identifies perhaps the most critical aspect of the crisis, namely deleveraging.
• “Macroeconomic feedback effects” are a high concern, specifically the likely consequences that deleveraging and the reduced credit lending capabilities of financial institutions will have on further economic activity. (This point has been noted on this blog and in recent reports published by my firm.)
• “Private sector incentives and compensation structures” will need to be addressed. This is a clear reference to the agent/principal problem that animal spirits unleash. Normally, a market problem only but not when bailouts and politics come into the mix.

Investment Strategy Implications

Any investor thinking that the credit crisis has passed is operating in a state of denial.

The ramifications of a new financial order cannot be over emphasized. The feedback effects on the real economy and its likely self-reinforcing aspects portend a double dip in the US economy in 2009. The respite equity investors are experiencing this spring might run even into the summer. However, Joe Battipaglia may be right (Beyond the Sound Bite interview last week) when he predicts that S&P 500 operating earnings will fall to and through the top down 2008 number of $80. When combined with the risk of rising inflation, the valuation target for equities could match the longer-term predictions of many technical analysts for a much lower market next year and into 2010, suggesting that what has been experienced thus far is a dress rehearsal.

All investors must and will come to their own moment of clarity on this issue. It’s just a matter of time.

*To learn how to gain access to my weekly research report, "Sectors and Styles Strategy Report",click here