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  • Recession Watch

    I think it’s pretty much a given that we’re in for a cyclical bear market in the coming quarters. The question is, will it be 1998 or 2001/2007? Will the recovery look V-shaped, or will it drag out? Remember, there is always a recovery. But at the same time, there is always a recession out in front of us; and that fact of life is what makes for long and difficult recoveries, not to mention very deep bear markets.

    The problem is that our most reliable indicator for a recession is no longer available to us. The Federal Reserve did a study, which has been replicated. They looked at 26 indicators with regard to their reliability in predicting a recession. There was only one that was accurate all the time, and that was an inverted yield curve of a particular length and depth. Interestingly, it worked almost a year in advance. The inverted yield curve indicator worked very well the last two recessions; but now, with the Federal Reserve holding interest rates at the zero bound, it is simply impossible to get a negative yield curve.

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  • The End of Monetary Policy

    What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government. This is not to say that there will no longer be events to fill the pages of Foreign Affairs' yearly summaries of international relations, for the victory of liberalism has occurred primarily in the realm of ideas or consciousness and is as yet incomplete in the real or material world. But there are powerful reasons for believing that it is the ideal that will govern the material world in the long run.

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  • The Future of Public Debt

    In This Issue:

    The Future of Public Debt
    A Bit of Background
    Drastic Measures
    The Future Public Debt Trajectory
    Debt Projections
    Phoenix, Tokyo, and London

    This week I find myself in Bangkok, and I must admit to enjoying the experience a great deal, so much so that I am going to preview a portion of my coming book, Endgame, so that I can go back out and play tourist. Next week I get back to my more or less regular schedule, but I think you will enjoy this first portion of chapter six, where we look at an important paper from the Bank of International Settlements on 'The Future of Public Debt.' It is not a pretty one. We are watching one of the last great bubbles begin to deflate - the bubble of government and government debt - all over the developed world. This is a serious weight that will be a drag on our growth, and it is interesting to contemplate as I sit in Bangkok, a city that is vibrant and teeming with opportunity.

    Endgame will be in the bookstores in a few weeks, but let me once again ask you to not pre-order the book from Amazon or online. Pre-order books do not get into the book sales numbers (long story and more information than you want to know). I encourage you to pre-order from your local book store if you have one. Let me note that in the portion below, the pronoun we is used a lot. It is not the royal we - I do have a co-author, Jonathan Tepper, and this book has very much been a collaboration. More on some Thai thoughts at the end, but let's jump into today's Thoughts from the Frontline.

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  • Kicking the Can Down the Road

    How often did we as young kids go down the street kicking a can? 'Kicking the can down the road' is a universally understood metaphor that has come to mean not dealing with the problem but putting a band-aid on it, knowing we will have to deal with something maybe even worse in the future.

    While the US Congress is certainly an adept player at that game, I think the world champions at the present time have to be the political and economic leaders of Europe. Today we look at the extent of the problem and how it could affect every corner of the world, if not played to perfection. Everything must go mostly right or the recent credit crisis will look like a walk in the Jardin des Tuileries in Paris in April compared to what could ensue.

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  • Texas, Ireland and Ten Little Indians

    Why is it that the Irish must take upon themselves the debts of their banks, which in reality are debts owed to German and French banks? Why should the Germans bail out the Greeks and the Spanish? Is the spread of 'contagion' starting to taint the debt of Italy and even Belgium, the home of the EU? This week we look over the pond (of the Atlantic) and wonder how all these things will end. As I noted last week, we are getting a string of not so bad news out of the US, so now there are really just two things in the short term to worry about (at least in terms of a positive US GDP): will Congress extend the Bush tax cuts and will Europe sort itself out?

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  • The Last Half

    There are a number of economic forces in play in today's world, not all of them working in the same direction, which makes choosing policies particularly difficult. Today we finish what we started last week, the last half of the last chapter I have to write to get a rough draft of my forthcoming book, The End Game. (Right now, though, it appears this will actually be the third chapter.) We will start with a few paragraphs to help you remember where we were (or you can go to www.investorsinsight.com to read the first part of the chapter).

    But first, I recorded two Conversations yesterday, with the CEOs of two biotech firms that are working on some of the most exciting new technologies I have come across. I found them very informative, and we will post them as soon as we get them transcribed.

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  • The Debt Supercycle

    I have been writing about The End Game for some time now. And writing a book of the same title. Consequently, I have been thinking a lot about how the credit crisis evolved into the sovereign debt crisis, and how it all ends. Today we explore a few musings I have had of late, while we look at some very interesting research. What will a world look like as a variety of nations have to deal with the end of their Debt Supercycle. We'll jump right in with no 'but first's' this week.

    Part of this week's writing is colored by my next conference. Next week I go to Vancouver to speak at the Agora Investment Symposium. I have a number of very good friends who will be there, both speaking and attending. This is generally a 'hard money,' gold-bug-type crowd (and a very large conference). Some (but not all) of the speakers believe that all fiat currencies, including the US dollar, will default in one way or another, either outright or through inflation, as mounting debts and out-of-control entitlement obligations force large-scale monetization, leading to high inflation if not hyperinflation.

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  • There’s a Slow Train coming

    The question before the jury is a simple one, but the answer is complex. Is the US in a 'V' shaped recovery? Are we returning to the old normal? A great deal hinges on the answer, and this week we look at some of the evidence before us.

    But first, a follow-up thought to last week's letter. I wrote about why countries can reduce their private debt, reduce their public debt or run a trade deficit, but not all three at the same time. If a country wants to see its government run a fiscal surplus (or small deficit) and at the same time its private citizens want to reduce their leverage (common desires throughout the developed world), it must run a trade surplus. That's a simple accounting statement.

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  • Europe Throws a Hail Mary Pass

    In a 1975 playoff game, the Dallas Cowboys were nearly out of time and facing elimination from the playoffs, down 14-10 against a very good Minnesota Vikings team. The Cowboys future Hall of Fame quarterback Roger Staubach had no very good options. He later said he dropped back to pass, closed his eyes and, as a good Catholic, said a Hail Mary and threw the ball as far as he could. Wide receiver Drew Pearson had to come back for the ball and, in a very controversial play, managed to catch the ball on his hip and stumble into the end zone. Angry Vikings fans threw trash onto the field, and one threw a whiskey bottle that knocked a referee out. After that play, all last-minute desperation passes became known as Hail Mary passes. (That was a very thrilling game to watch!)

    And that is what Europe did last weekend. They threw a Hail Mary pass in an attempt to avoid the loss of the eurozone. Jean-Claude Trichet blinked. Merkel capitulated. Today we consider what the consequences of this new European-styled TARP will be for Europe and the world. We do live in interesting times.

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  • The Future of Public Debt

    Everyone and their brother intuitively knows that the current government fiscal deficits in the developed world are unsustainable. They have to be brought under control, but that requires some short-term pain. Today we look at a rather remarkable piece of research from the Bank of International Settlements (BIS) on what the fiscal crisis may morph into in the future, how much pain will be needed, and what will happen if various countries stay on their present courses. Some countries could end up paying north of 20% of GDP just on the interest to serve their debt, within just 30 years.

    Of course, the markets will not allow that to happen, long before it ever gets to that level. And what makes this important is that this is not some wild-eyed blogger, it's the BIS, a fairly sober crowd of capable economists. We will pay some attention. Then I'll throw in another few paragraphs about Goldman.

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  • What Does Greece Mean to You?

    How does an event like a problem in Greece (or elsewhere) affect you, gentle reader? That is the question I was posed this week. I mean, down where the rubber hits your road. Not some formula or writing about the velocity of money or the effect of taxes on GDP. 'I want to understand why you think this is so important.' So that is what I will attempt to do in this week's missive, as I write a letter to my kids trying to explain the almost inexplicable.

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  • The Implications of Velocity

    This week we do some review on a very important topic, the velocity of money. If we don’t understand the basics, it is hard to make sense of the hash that our world economy is in, much less understand where we are headed.

    But before we jump into that, I want to let my Conversations subscribers know that we have posted a recent conversation with two hedge-fund managers, Kyle Bass of Hayman Advisors [and his staff] here in Dallas and Hugh Hendry of the Eclectica Fund in London. Our discussions centered on what we all think has the potential to be the next Greece, but on a far more serious level. It was a fascinating time.

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  • Between Dire and Disastrous

    The news is somewhat 'All Greece, All the Time,' but most of the pieces miss the more critical elements, and in today's letter we will look at what I think those are, as well as at the important point that Greece is a precursor of a new era of sovereign risk. Plus, we glance at a few rather silly recent comments from economists. It will make for a very interesting discussion.

    A few weeks ago I mentioned my friend Sir Walt Ratterman, who was in Haiti at the time of the earthquake. Long-time readers know that every Christmas I ask you to make a donation to Knightsbridge and projects that Walt runs. You have been very generous over the years. Tragically, they have found Walt's body. For those interested, I will provide a few details about this true hero, toward the conclusion of the letter.

    Before we get into the meat of the letter, I want to give you a chance to register for my 6th (where do the years go?!) annual Strategic Investment Conference, cosponsored with my friends at Altegris Investments. The conference will be held April 22-24 and, as always, in La Jolla, California. The speaker lineup is powerful. Already committed are Dr. Gary Shilling, David Rosenberg, Dr. Lacy Hunt, Dr. Niall Ferguson, and George Friedman, as well as your humble analyst. We are talking with several other equally exciting speakers and expect those to firm up shortly.

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  • This Time is Different

    When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe that there were no problems in the US (or Japanese or European or British) economies in 2006 and now we are mired in a very difficult situation. 'The subprime problem will be contained,' said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults. Plus we take a look at the very positive US GDP numbers released this morning. Are we finally back to the Old Normal? There's just so much to talk about.

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  • Thoughts on the End Game

    When I was at Rice University, so many decades ago, I played a lot of bridge. I was only mediocre but enjoyed it. We had a professor, Dr. Culbertson, who was a bridge Life Master at an early age. He was single and lived in our college, playing bridge with us almost every night. He was a master of the 'end game.' He had an uncanny ability to seemingly force his opponents into no win situations, understanding where the cards had to lie and taking advantage.

    Traveling in London and on into Europe, I have some time to think away from the tyranny of the computer. Over the last year, and especially the last few months, I have written in depth about the problems we face all across the developed world. We have no good choices left, only hopefully choosing the correct unpleasant choice is now our option.

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