FI Strategy Just Ahead - An Anchor

In our Sep/23 sketch – Off to the Races, Maybe –we were to be “off to the races” given a Nov/6 rejection of what has been a failed experiment. That did not happen. Thus, in the largest sense we are to look for “surprising” weakness just ahead, especially in jobs creation.  This is baked in the cake anyway; a potential tax on the top 2% simply aggravates the situation as most small businesses are S corps (passing the tax load to the owner).

Ever-changing rules and regulations and a smothering load of forms and restrictions will simply keep risk takers off the playing field.

And what is the translation, the reaction of corporate planners and consumers to this intrusion?  We highlighted two GDP components on the Q3 advance release, Oct/26 – business investment was down 1.3% and consumer spending up only 2%. These prints were revised to -2.2% and +1.4%.  This is a harbinger of things to come.

And Fed policy? It represents cheer leading at best, noise at worst. There will be little substantive impact on the economy as a whole. The Fed is a side show (except to street “watchers” who are paid to produce print).

We have an engine with the capacity to put us at 250 MPH+ in the quarter mile. The vehicle is fully fueled; there is ample liquidity. But there’s simply no one willing to drive the thing, given foggy conditions and the risk the track curves to the left just a few yards out.

From today’s Nov NFIB survey of small business we learned the optimism index plummeted. The NFIB board blamed this on the election (with Sandy playing a limited role). This is exactly the reaction we predicted, given an Obama victory. “Between…the promise of higher health care costs and the endless onslaught of new regulations, owners have found themselves in a state of pessimism,” noted NFIB economist Bill Dunkelberg.

To distill: most observers have yet come to grips with the reality of business fright tied to 4 more years; most observers have yet come to grips with the reality of “consumer wilt” tied to contagion from this event – job losses for example.  Job losses are not just burger flippers. We know from the ISM Nov Manuf survey that manuf employment in Nov declined for the first time in 38 months.

The E-Z and the “fiscal cliff” are but decoys (we hope we go off the “cliff,” but that discussion is not the stuff for this blog). No matter what happens to the world economy; no matter what happens in Washington, the key determinant of success in setting strategy, that application at the margin, is the understanding that what could have been a US renaissance, will have to wait.


Robert Craven

Backstage at the Fed - Q4 Edition

We attempt to survey the Fed every Qt or so, drawing on old contacts (those still with the living) and some of a fresher variety; the purpose is to measure staffer satisfaction with the Chair, alternative policy ideas, the landscape just ahead, etc.  Summarizing our findings today we do for pure relaxation, perfect as Thanksgiving gets underway.

First, there is no question Bernanke is liked by his colleagues; maybe not regarded as the best central banker that ever lived, but, most are fond of him. So are we. He is a fine guy, his candor - a welcome change at that post.

The next consideration is policy agreement. Few staffers we spoke with think present policy will do much good. Most, although they don’t use the phrase, compare it to cheer leading. Most understand that the power-lifting now must be done by Congress, not the central bank. 

To review what is presently in place: The Fed is swapping about $45 bln of short-term Treasuries for longer-term debt. The Fed is in addition buying $40 bln a month in mortgage-backed securities. Finally, when “twist” expires the end of December, it is very likely the FOMC will begin outright purchases of about $45 bln.

Most staffers we talked to admit “twist” amounts to little more than a change in the makeup of the Fed’s portfolio.  Next, most staffers we talked to think it will make little difference to the economy as a whole if the Fed mops up a little mortgage debt. Most feel that Bernanke is making what amounts to fiscal policy in desperation that Washington will not. But too, they figure none of this can hurt.

Beg to differ.

Interventionism is corrosive at a central bank (unless in time of crisis – ’08). We know from the painstaking work of Friedman, Schwartz, Taylor and others that only rule-based central banking delivers prosperity. We saw this in play in the 80’ and early 90’s. A dual mandate is also corrosive because it invites political tinkering, and, it is a redundancy - stable prices create full employment. Planners in central banking will be no more successful than planners in government.

So we have a Fed which is printing a ton of money, the majority of which goes right into “excess reserves” because these pay 0.25%.  Equity types do ok – temporarily - and seniors get busted. That’s about it. (Most staffers figure Bernanke will keep at it, but will switch to an economic goal as a target and eliminate the commitment to a calendar date.)

Next, “twist” has kicked up the rates in the repo market - the fueling place for funding new consumer and corporate loans, and for REIT’s. Thus “twist” provides a hindrance to this activity.

Excavation of faulty logic at the Fed is part of our job, but translation is the other.  This is where a handle on crowd behavior comes in useful. 

Recall that little bit of fun at trading Fed policy, when on Sep/14 we advised that readers (and instructed clients) to sell the US term structure. This of course was to take advantage of the crowd frenzy following the announcement of QEIII; 5-10, then 116, 2-30, 285.  These were taken in Sep/27 at 100 and 254. 

Yet these opportunities have come along all too infrequently; years past, with FI price change in a higher gear tied to Fed intent, they were plentiful.  Nowadays we have to be satisfied with ambushing a straggler or two from time to time.


Robert Craven
 

Keep it Simple

Keep it simple - the “fiscal cliff,” problems of the E-Z, East coast weather – all, already priced in the US fixed income market. The odds were never more than 15% for an off-the-cliff fiscal event. Some compromise will be reached – kick the can. Something will be worked out for Greece; that problem was priced in weeks back. France’s bad luck is a non-event for our mkt. The East coast will recover (but the process will add little to nothing to GDP). These things provide fodder for media types but end there. 

What is not on most radar screens, what observers have yet to come to fully understand is the regulatory cliff just ahead and its impact on CEO attitude, on job creation and, on consumer activity. Better to anticipate the headlines, than react.

Most are aware of some retardants provided by Obamacare – pay the penalty or cut the hours, cost increases in the form of a lower FSA cap of $2500, 1/1/13, etc.  But there is much more. Henry Miller, a physician and molecular biologist and a fellow at Stanford’s Hoover Institution, tells us that, “The administration has already imposed an array of dubious…regulations that will cost consumers tens of billions of dollars. Some of these in the form of hidden tax increases such as user fees for industry such as drugs, biologics, medical devices and food…”  We have already highlighted the effect of the catastrophic 2.3% excise tax on medical devices, a tax not on profit, but income! This will naturally be passed on to the consumer.

Next, Susan Dudley, director of the George Washington University Regulatory Studies Center says that about 35% of new regulations with an impact of $100MM or more per year have yet to be enacted, postponed for the election.

So it’s easy is it not? We have an interventionist administration. CEO’s are there to take to the field which means taking risk, something they are paid to do but not if the rules for the next quarter have yet to be written.

It is important that strategists understand this simple dynamic and its very deleterious impact on risk takers; when this is compounded by the existence of a central bank which combines industrial policy (assistance to select firms and industries) with money printing, no wonder, as the WSJ noted recently, that 40 of the nation’s biggest corporate spenders have announced plans to curtail capital spending in 2013. No wonder these types run for cover. No wonder hiring is going nowhere.  No wonder discretionary spending will wilt for goodness sake.

See your trades accordingly.


Robert Craven

Into the Swamp

We are not to blame Obama for our economic ills just as Marcus Tullius Cicero knew some 2000 years ago not to blame Ceasar. “Do not blame Ceasar,” said Cicero, “blame the people of Rome who have so enthusiastically acclaimed and adored him…blame the people who hail him when he speaks in the Forum of the new, wonderful good society…meaning more money, more ease, more security, more living fatly at the expense of the industrious. Julius was always an ambitious villain, but he is only one man.”


The results of Nov/6 cast a pall over the US economy. East-coast weather and E-Z events merely provide a distraction, cover, camouflage.

We noted earlier that readers were to look for surprising vigor in two sectors – jobs creation and discretionary spending – given an endorsement of free enterprise, Nov 6. That was to be translated to the bottom line Q1 by the simplest of means - the curve, Euro strip, and the selling of US debt to both the UK and E-Z.  

We noted also that clients were to look for something less than expected from these two key sectors given an extenuation of what has been a failed experiment.  That will be the result just ahead, even assuming a resolution to the so-called “fiscal cliff.”  One needs only to glance at headlines such as this one – “Medical Giant Stryker cuts 1170 jobs, citing ObamaCare” - to know that consumer discretionary spending just ahead will wilt. This kind of thing scares the pants off almost everyone. You don’t need a model to figure that out.

Other sectors will not contribute enough at the margin to do much good.  Manufacturing for example will go nowhere quickly as the sluggishness of overall economic activity and final demand, the ending of the inventory rebuilding cycle and worries about the global economic and political outlook will keep a lid on any rebound. With the inventory cycle complete, manufacturing will need to detect a real spurt in consumer durable goods spending before kicking in. That won’t happen.

We have monitored the US economy now for over thirty years; never have we seen such a kick-in-the-gut delivered to those who fire the US engine. Only the malaise delivered by Carter compares. The voter breakdown clearly shows that those receiving some kind of government largesse outnumbered those competing in the marketplace. Until it is mandatory for every high school senior to prove in a written test that he or she understands F.A. Hayek, we will remain in the swamp.


Just ahead: We all know that weather will distort certain key reads so that for example jobs numbers will not be taken at face value, near term. Weaker consumer prints will be similarly dismissed. But most economists will look for a rebound, Q1.  Instead, the clear risk is for something less.

We are no longer are interested in selling in the US (S 10yr) to either the UK or the E-Z; the next opportunity may be in fact to own US debt vs these credits.


Robert Craven
 

And So It Begins

Within 48 hours of the election the following companies have announced layoff plans (we do not yet have all the #’s): Boeing (30% of mgmt staff, def div), US Cellular, Westinghouse, Iberia, Research in Motion, Groupon (80), West Ridge Mines (102), Energizer Holdings (1500), ING, Ericsson, Bristol-Meyers (500), Corning, Boston Scientific, CVPH Medical Center,  Abbott Labs, St Jude, Caterpillar, Hawker Beechcraft (400), Pepsi (4000). 

Last week, Ohio-based auto parts manufacturer Dana Holdings warned employees of potential layoffs just ahead if Obama wins. CEO Roger Wood isolated the burden of “increasing taxes on small business,” and the need to “offset increased costs that are placed on us through Obama’s new laws and regulations.” The mandate will cost Dana, “approximately $24 million over the next six years,” Wood noted.

On Nov/7 a Las Vegas business owner with 114 employees fired 22 as a result of Obama’s re-election. “I explained to them a month ago that if Obama gets in office that the regulations for Obamacare are going to hurt our business and I will make provisions to make sure I have enough money to cover the payroll taxes, the additional health care I will have to do.”

In almost all cases, the layoffs listed above are tied to Obamacare; the rest are industry-specific such as pharmaceutical and coal (both industries penalized by the adm) and Boeing of course tied to likely defense cuts.

Through the period leading up to the election, then with a final installment on Sunday, Nov/4, we were very specific in our advice to clients – given an Obama second term, both consumer discretionary activity and jobs-related activity will wilt. 

Set trades accordingly.


Robert Craven
 

A Glance at the UK

We noted Oct/25 that the UK desk anchor set earlier would remain in place; that is, observers would continue to underestimate real-sector results.  We were mistaken; manufacturing and services PMI prints and industrial production did not cooperate.

Change of plan?  No. Some anchors need to be re-set when they fail.  Others just slip a tad.  We will let this one be.

From late June we have had a plan for trading the UK. Those clients who have adhered to our general guidance have done reasonably well; nothing spectacular, but better than a stick in the eye. Naturally we did not expect absolute vigor or anything of the sort, simply something more than was priced in – all that counts.

Therefore, from that beginning (6/27) we knew the course-of-least resistance for the term structure would be wider because 1) we expected additional Bk of England firing (or the view for such an event), because 2) we expected further flight to sanctuary (E-Z) and because 3) we knew that most models had excessive weakness built in, this seemed an opportunity.

Sure enough, the spread expanded nicely; it has now come in a tad of course but is nowhere near entry levels.

Yet be aware of a new retardant to world growth - that would be recent US election results. The event of Nov/6 will have a near-immediate impact on both US discretionary appetite, and on US job creation. To the extent these in turn will impact the UK, they will impede any progress just ahead.


Robert Craven

Market Vulnerability

Desk FI strategy into year-end and through Q1 will be tied to the results of Nov/6. 

Given a Republican victory we will look for “surprising” strength in both payroll and consumer-related releases. Given a Democrat victory, we will look for “surprising” weakness in both of these series. 

Strategy can be constructed in any number of ways; for the purpose of this blog we generally confine our sample to the term structure. Notwithstanding the instrument, the idea is to strike at the extremes.

Recall our last illustration. Given the market-crowd frenzy following the announcement of QEIII, readers were told 9/14 to sell this spread (S – L), then 116, 5 – 10yr, 285, 2 – 30 yr.  Those who resort to examination, versus association and sympathy, understood the opportunity. Readers were then instructed to take in this position 9/27 at 100 and 254, a handy little exercise.

The same general approach will apply just ahead, yet based on a vulnerability of a different sort.  For example, observers will grossly under-estimate CEO enthusiasm tied to a Republican victory; the same observers will completely miss the giant sucking sound as potential job creators and consumers withdraw, given the reality of 4 more years of what has proved to be a failed experiment.

So the concern for the bottom line is key. But we are also concerned for our Country. How She got this far is a mystery given the lack of scholarship of so many of those who enter the voting booth. We are hopeful that enough have come to understand that our prosperity (and by linkage, that of the free world) does not depend on an expansion of the public sector but on the unleashing of private activity through the elimination of gov’t and central-bank interventionism and the birth of a reformed tax system; and, all of this anchored by the rule-of-law.


Robert Craven

The US - Into Year End

Today’s advance Q3 GDP print was unusual for this series because it was actually instructive.

The report was freighted with two major clues pertaining to job creation ahead; here they are – consumer spending accelerated at 2% and business investment declined by 1.3%. 

US GDP well through 2% depends primarily on increased jobs creation. Chicken or the egg you may say? No. The demand side of the equation is there; this despite woes offshore.  We are the primary economic engine; we don’t need China or anyone else to break 3%. We stated a while back that consumer appetite would surprise to the upside Q3 – nothing resounding naturally, but pretty darn good considering the circumstances.

So on the margin, forget exports. We have more than enough domestic pent up demand to kick the world’s lead engine out of first gear.

What is needed then to break 3%?  

Those of us who are listeners have the answer. It is not conjecture but from the horse’s mouth – interventionist policies have scared major employers half to death, with Obamacare at the top of the list.  Which brings us to the 1.3% decline in business investment – it’s not worth the risk, or hasn’t been.

However, we know that when CEO’s have once again encountered a level playing field, a game where the rules don’t change every Qt, they will hire, and quickly. This is economic reality ahead, or hopefully will be. 

Thus, any serious FI trading operation will look to Nov/6.   And what is to be done when the failed experiment is rejected?  You will sell US debt to the UK and the E-Z; you will own the US term structure and the Euro strip. 

From neighbor Vic Hansen, “As we see in New Jersey, Ohio, Texas, and Wisconsin, the cure for the present economic malaise is not rocket science — a curbing of the size of government, a revision of the tax code, a modest rollback of regulation, reform of public employment, and holding the line on new taxes. Do that and public confidence returns, businesses start hiring, and finances settle down. Do the opposite — as we see in Mediterranean Europe, California, or Illinois over the last decade — and chaos ensues.”

Easy.


Robert Craven

Navigating the UK

The last post on the UK was 10/9. This sketch provides an update.

The flaw to most economists’ models remains in place – to understand this reality is to be better equipped to capture fixed income price change over the near-to-intermediate term.

We all have our method.  Ours is the reverse of most others. We assign a risk-of-result to key releases. Historically this has worked very well.

Economists / analysts are like members of any crowd; they share the same characteristics.  Into the fall most observers, holding hands together, shouting out in the dark could only see reason for real sector weakness; they were overwhelmed. Into the fall, most observers assigned too much relevance to sentiment measures, consumer and business – always a hazardous practice. Finally, into the fall, observers sold the Administration short – on public finances and fiscal consolidation, and on various schemes such as the regional growth fund.  

So once we understand how the consensus is flawed, we have captured price change just ahead. We had/have an anchor and in the case of the UK it was/is this – most analysts will miss most key releases to the side of weakness.  That is exactly what happened. Not every key print, but most. Naturally the UK is not strong in the absolute sense but we are only concerned with economic reality vs expectations.

We are not journalists; rhetoric is not enough; we need to convert to the bottom line. For purposes of this blog we generally revert to the simplest of spreads – the term structure (there are a galaxy of other ways traders may have converted our insight). Knowing then that the UK real sector would just outperform, and knowing the view remains in place for additional Bk of Eng firing ahead, it was simple – own the curve.

Results have been nothing spectacular for goodness sake – 5-10, 95 / 2-30, 268, mid July recommendation  / last, 105, 292 – but worth the effort. And this spread has never run against those entry levels.

Do not look for the opportunity to sell this spread.  The course-of-least resistance to remain wider into year end.  But key to any operation is to understand the flaw built into most models.


Robert Craven
 

Politics and the Bottom Line

Most economists avoid politics like the plague.  That’s fine, but anyone responsible for the bottom line better not.

Making satisfactory FI strategy could be accomplished without politics as part of the mix, or at least with it confined backstage, earlier years.  Not now.

In the US for example, one key is this - understanding job creation ahead. We have maintained for two years that the #1 retardant to job creation is Obama. This was not our invention; we had it from the source – CEO’s.

A very recent source is Steve Wynn, CEO of Wynn Resorts.  Wynn created 250,000 jobs in Nevada according to that state’s figures. Wynn in a recent interview, “I’m afraid of the president.  I have no idea what goofy idea, what crazy anti-business program this administration will come up with. I have no idea. And I have to tell you Jon that every business guy I know in the country is frightened of …Obama and the way he thinks.”

 This is the norm in America, not the exception. Left-leaning observers may argue with this.

Be our guest, but that won’t do much for your track record.


Robert Craven

The UK Just Ahead

In the broadest sense we can expect the UK real sector to just out-perform, Q4; that is, to do a tad better than UK economists expect it will – not every print, but most. This is because models are flawed, omitting as they do the spark provided to job creation and consumer attitude through the administration’s example.

George Osborne is now very quickly becoming a role model for responsible leadership. He told the Conservative Party Conference in Birmingham the truth about the UK economy; and he told them what to do about it – 80% spending cuts vs 20% tax hikes.

Granted the UK economy is not going anywhere very quickly, yet. The Sep All-Sector PMI index indicated just that. In a nutshell, the modest growth of the service sector is perhaps 75% offset by less-than-modest manufacturing and construction reads.

Fine. Those who drive at 90 mph with their eyes in the mirror come to an unwelcomed end.

We are concerned with FI price change just ahead, either intra UK or vs other credits. Our intra-UK general strategy has been the right one – own the term structure (clients have on several variations of that trade as we keep our blog illustrations to a minimum). Wider is the course-of-least resistance into yearend for this spread. The trade will be assisted by the view for further central bank accommodation. We say the “view,” not necessarily the reality.

Next, as much of a fan of Osborne as we may be, we want to sell the US to the UK, and to do so before the election.

Obama has done more to discredit the Keynesian notion of correct economic policy than Milton Friedman and FA Hayek could have done in 100 lifetimes.  Employers will be cheered by a Romney victory – the likely result; that will quickly translate into better numbers.


Robert Craven

What if ?

Many of us poor souls in California are paying north of $5 for a gallon of petrol this weekend, the recent premium tagged primarily to supply constraints. This experience however provides a fascinating little window into the “what if's” of world events.

Gasoline at $5 has a profound psychological impact on the US consumer (except in Hawaii). We don’t know that as an economist, we know that as a consumer. A quick survey today of three local restaurants is all we needed. Business this week dropped like a rock.  No surprise.

A national average of $5 for an extended term would take perhaps 1 1/2% from GDP, probably more. So “what if”?

A good portion of the impact of a strike on Iran is priced in.  Not all of it naturally because we cannot be certain just how much of the noise from our mullah pals is just that. We suspect very little is substantive; nevertheless, no one knows for sure if the mullahs will strike the Saudi fields within the first five minutes; no one knows if they can close the Strait within the first thirty.  So this potential event remains a bit of a wild card, and thus a threat; one capable of putting US growth at 0%.

But we may be spared that. We have argued that the preferred method to rid Iran of these troglodytes is the one from within.  After the masses suffer enough, they will oust these clowns.  They tried to do just that two years ago but were abandoned by our administration.  Now, they may not need our help.

The quickest way to a solution from within is to blockade gasoline exports to Iran. Because Iran can only refine about half of what it needs, this would put the consumer in a very bad mood.  We saw a year or two back just what happens when gasoline is scarce – they burn gas stations to the ground. So that would work.  But wait!  A depreciated currency may serve the same purpose.

The rial hit an all-time low of 35,500 to the dollar last Tuesday, down from 24,000 a couple of days earlier. Iranian’s are not one bit happy and have taken to the streets.

The rial’s decline is due to a combination of gov’t mismanagement and the bite from sanctions; this is not lost on the consumer. Only the mullahs stand in the way of a new pair of Levis.

Key is to make day-to-day life so uncomfortable for Iranian consumers – every one of whom wishes to ape Western style and values - that they complete the inside job, sparing Israel the alternative, and, sparing the US a 0% GDP print anytime soon. 


Robert Craven
 

7.8%

7.8%?

Is this a fix?  Not a chance.

We respect Jack Welch but on this occasion – claiming today’s number was gamed by the Obama camp - he came untethered.

The truth is that the 7.8% is part quirk, due to sampling volatility, and, part due to a declining labor force the past year (1.1MM folks disappeared).

There is no change in the labor picture – consistent with about 1.8% growth.

There will be a change in the labor picture however given the end to Obama’s interventionist policies.


Robert Craven

Broad Guidelines - US / UK FI Strategy

UK – Coming into summer, economists, caught up in the rush of the crowd, built a collective error into their models, a slight underestimation of real-sector activity. Thus, we recommended that clients look to own the UK term structure, the simplest method to transfer this insight. That has worked moderately well, from 270 to the present 292; 5 -10, from 95 to 104.  A slight error remains to the consensus view vs. economic reality just ahead. Thus, as we have warned earlier, do not look for the opportunity to sell this spread as course-of-least resistance is to remain wider into year end.

US – Here we had a little fun with the crowd, catching them at their most vulnerable after the announcement of so-called QEIII.  Clients were to sell (S-B) the US curve Sep/14, then 116, 5-10 and 285, 2-30.  This came in nicely and clients were advised in our Sep/27 sketch to take this spread in (then 100, 254); under no circumstances to take the position into today’s NFP. Last, 106, 270. 

We did not have the numbers to today’s print naturally but we had the risk for something more than expected. Leave it alone at the moment but look for the opportunity to get long (L – S) at the next bout of “weakness.” 

The US engine will just out-perform into year end.


Robert Craven

Interested in the Bottom Line? Watch tonight's debate.

This time, politics is key to understanding FI price change ahead.

We have a radical at the helm, the first such experiment of our generation (given that McGovern was rejected). If we were simply journalists we would mourn our present situation. We are strategists and thus responsible for something aside from noise.

Haven spoken personally with a few CEO’s , most notably Paul Otellini of Intel (and having worked closely with his brother, Monsignor Otellini) we have known the key hindrance to US vigor, that prime retardant – employer disgust with administration policy.

All of us received the results of the recent Business Roundtable, NAM and NFIB surveys in which respondents cited gov’t policies such as taxes and regulatory changes as their biggest concerns.  We knew that but it is nice to hear it from the horse’s mouth. This has them putting off hiring and spending decisions because they don’t know what to expect in the months ahead.

Thus, put considerable stock in the November results. Otellini and other corporate leaders will be cheered by a Romney win.  They will be discouraged given the reality of another 4 years of Obama.


Robert Craven

Backstage at the Fed

Let us take just a moment to distill the current policy view, backstage at the Fed.  As we do so, it’s best to tune out the siren song of complexity.

Very, very few staffers (various districts) seriously think the present program will make much difference for the economy as a whole. Those Fed officials who claim otherwise are performing the combined feat of whistling in the dark in their cheer-leading outfit, twirling their pom poms.

There is no “party line” any longer, as in the Greenspan days; we have wayward children to be sure. But, it is still Bernanke’s view that is key. Bernanke is greatly concerned with lack of progress in Washington and so is acting as a surrogate. This is what we meant in an earlier sketch - the Fed is attempting to make fiscal policy.

Many of us understand that it is in the best interest of our Country if Bernanke were to sit on its hands.  But Bernanke, although highly uncertain his programs will amount to much is very keen to continue with his cheer leading. He figures it’s about all he’s got.


Robert Craven
 

US Interest Rates - near term

We want to take in that last recommended position - US term structure. Exploiting the frenzy tied to the announcement of QEIII, we advised selling (S-B) this spread near the close, Sep/14, 2-30, then 285 or so, 5-10, 116 or so.  Last, 254 /100.

This was a satisfactory little exercise; now look for an exit; certainly do not take this or something similar into Sep NFP, Oct/5.


Robert Craven

A Failed EU? Does a One-Legged Goose Swim in a Circle?

An ECB, an EFSF, all the rest are just fine; they keep the elites busy. But they are a sideline compared to the reality of the minute-to-minute culture of an everyday people.

For example, as a family friend reported after a summer trip to the E-Z, “Germans pick up trash; in Athens, Greeks toss it. Germans do not honk. In Spain the pedestrian is a target; in Switzerland he is considered perhaps your father or grandmother. A bathroom in Germany is where someone else uses it after you; in Greece … it is where you pass on the distaste of using the facility to the sucker who follows you.”

I remember when I was there last time. Take traffic courtesy for example, which tells a lot about a culture. If a fender-bender, in northern Europe, addresses and information are exchanged; south of Milan, shouts and empty threats of mayhem follow.

Our friend continued: “When I check out of a German hotel, I know the bill reflects what I bought or used; when I check out of a Greek hotel, I dread all the nonexistent charges to appear, and a '50/50 split the difference' settlement to be offered. Germans like to talk in the abstract and theoretical; with Greeks it is always ‘egô’ in the therapeutic mode. I rent a car in Athens and expect charges for ‘dents’ to appear; in Germany, there are such charges only if there are actual dents.”

It all adds up; any fool knows that these two regions won’t make it locked in a financial marriage. We have a Germany for example that creates vast wealth and we have a Greece for example, whose mode of operation is nothing but a big con job – landing as much of that vast wealth that it did not create, as it can.

Culture is everything.  Thus, there are only two futures for the EU – sudden death, or the death-of-a-thousand  cuts. The problem with the death-of-a-thousand cuts route is that it risks anarchy – Metaxas of Greece comes to mind for example; or the equivalent of a Pattakos, in Spain, and right now. Readers will understand.  This is a very great and very present danger.


Robert Craven

Strategy Update

Let’s take just a moment to review that strategy set recently.  For the purposes of this blog we keep it rather simple and of late have used the term structure, both for the UK and US, to illustrate our view. Of course when one has price delivery in hand for this spread, one has a leg up any number of related strategies.

UK – Readers were to look for the opportunity to own (L-S) this spread from late June (270); under no circumstances look to sell it. The spread expanded nicely, then came back in mid-July to the beginning level, at which time we advised for those not long to get that way. Last, 292, back in a tad from 296, Sep/14.

By all means remain long this spread. We were originally motivated when it was clear economists had under-shot economic reality ahead for the UK; nothing strong naturally, just a miss.  And that is what delivered the welcomed priced change. The expectation for additional BkofE firing ahead had not hurt either. Naturally the E-Z and Iran remain wild cards; still, the odds favor our view.

US – Readers were told to sell (S-L) this spread on Sep/14 following the announcement of QEIII, 2-30 then 285, 5-10, 116.  Last, 267, 107.  Unlike its UK counterpart we will not want to stick with this strategy, but take it in fairly soon. Its purpose was simply to convert mkt-crowd fawning on the Fed, to the bottom line.



Robert Craven

The US Economy - Off to the Races, Maybe

Let us look to the US for a moment; after all, we own the key to a better economic world.

Paul Volker, when addressing a conference at Gleneagles in Scotland last week said that, “We can no longer look to China to rescue the world. The Chinese economy has slowed 50pc since its peak and is no longer able to support international growth. Europe is in or near recession, including the UK. So don’t look to the UK, to China, Brazil or India — the US is the only country that can create the type of economic hope and market leadership the world needs. We have a weaker platform than we used to but it is still the most important platform in the world.”

Most of us knew that but it’s nice to hear it from this gentleman, the finest central banker of our generation, a Fed chairman who arrived by the way of merit, not by the way of political promiscuousness. Volker also noted at that conference that re QEIII, “…it will fail to fix the problem. There is so much liquidity in the market that adding more is not going to change the economy.” Correct.

Now, many observers have the US heading for a stall; some, even worse, 2013. Some of this is of course tagged to the “fiscal cliff,” some to a flagging world economy. They will be right, unless…

First, a brief look at key US sectors as they exist at this writing - our version of “around the US in 60 seconds.”

Trend job creation is about 150M per month, consistent with maybe 1.5% - 2% growth. / Both personal and disposable income rose modestly, last look, reflecting the so-so gains in jobs, a steady workweek and sluggish hourly earnings. / Inflation pressures at the consumer level jumped in Aug and are now 1.7% above their year ago level; they have been slowly retreating from Sep/11’s 3.9%; “core” prices are 1.9% above their year ago level. No one seems worried. / Real consumer spending is up moderately but on a trend basis (year-over-year) has slowed over the past 1-1/2 years. / US manufacturing is slowing less than elsewhere in the world but we saw that in Aug production finally followed orders lower. / Nondefense capital goods shipments, proxies for capital spending, are modestly above their Q2 levels, suggesting that capital spending should accelerate slightly in Q3. / The trade picture has changed little, with both exports and imports retreating slightly. / Housing has entered a recovery phase but from a very depressed level. For example, new home sales are now 25.3% above their year ago level and have been on a gentle rising trend over the past year. Nevertheless, they are still a stunning 73.2% BELOW their July 2005 peak.

Next, we want to know where if anywhere there may be a major surprise just ahead vs present Street view; that is, vs that which is priced in the FI market. There is little potential for surprise, + or -, for any sector, our view. If it does exist, it will reside with consumption, where the risk is for something just a tad stronger than expected into year end.

We all understand that jobs creation is the key to our economic health past year end and by linkage, to that of most of the free world. And real jobs creation won’t happen until the playing field is leveled and the burden lifted from employers and consumers and until the rules and penalties no longer change every Qt. Many left-leaning economists and politicians are in denial regarding this matter but as Irwin Stelzer noted recently in the Weekly Standard, one of their own - Lyndon Johnson - was not similarly confused. Johnson proposed to Congress that it get the economy moving by 1) cutting spending and 2) lowering taxes. As Stelzer reports, “Cut spending and taxes right now, he urged, to eliminate uncertainty. This left-leaning president delivered a State of the Union Address that argued, ‘The most damaging and devastating thing you do to any businessman in America is to keep him in doubt and to keep him guessing on what our tax policy is.’ Add guessing as to health care costs and from many businessmen’s point of view you have a recipe for inaction, for not expanding staff. Tenured academic economists might think businessmen don’t need certainty, but then they are not the best judges of what makes risk takers run.”

So there is hope if we have the leadership (as they have had in Canada) to articulate this truth to the masses, and get that done before November; if that is accomplished, we are off to the races.


Robert Craven

The Fed as a Side Show - Part II

The Fed’s cheer leading is welcomed by a few, equity types for example but most serious observers understand it is simply noise at the sidelines.

However, not everyone who reads this blog has spent any time on Wall Street; some may have a real job in fact – say an Army pilot or a cinematographer - yet are curious nevertheless. This post is for them.

What does the Fed do exactly when it comes to executing monetary policy? For this, don’t think of reality on the farm; don’t think of the household budget; don’t get confused by inserting reality into the equation at all; no, instead, simply fantasize for just a bit. The Fed can buy whatever it wants - a herd of cattle in Wyoming maybe.  Usually it sticks to gov’t or near-gov’t securities because these things are more liquid. To pay for these things, that is, to inject $ into the financial system the Fed simply credits banks with electronic deposits – called reserve balances. And the Fed gets the money to do that from – guess where?  The thin air.

When it does this the Fed expands what is known as the money base – currency, coin and bank reserves. In the past, with all else equal (which is exactly what it was in the past) this meant something.  Now it means almost nothing.

So lately the Fed has been very busy doing this thing which amounts to almost nothing. And it amounts to almost nothing for the simple reason that banks don’t do much with the money.  For example, from Aug/08 until Aug/12 the money base has gone from $908 bln to $2.64 trl. Whoa now! Why aren’t we off and running? Because 85% percent of the Fed's printing press expansion since August 2008 is sitting idle in the nation's banks as excess reserves. Why is that? Because also since ’08 the Fed decided to pay banks a bit of interest on those reserves they weren’t required to hold - the excess reserves - of ¼ of 1% to be precise.

So banks can get short-term deposits at near zero, then turn around and re-invest with no risk at all at ¼ of 1% and then pocket the difference. Think this is peanuts? Not on the kind of money these guys have. In 2011 the Fed paid the banks $3.764 bln on their excess reserves. That’s a lot of burgers.

So of course the banks aren’t about to get out and kick up the dust. There are unknowns and bankers don’t like unknowns, so why bother.  And after all, it would be a tad unseemly to have to come back to that same depositor/taxpayer once again and ask once again for a bailout, if the banks screw up. They’re gun shy, figuring it’s better to lay low than run the risk of being lynched.

Thus, we have a massive expansion of the monetary base and nothing to show for it. This provides fuel to Bernanke’s critics, and, to authors of legislation which would do away with this perk and in fact do away with almost all discretion the Fed now owns. If some have their way, they will also do away with Bernanke.

But back to Fed policy. Now we have a QEIII, remember? – it was just announced with great fanfare. What does QEIII mean? It means the Fed will pump about $85 bln per month into the economy; Oops, sorry, into the banks until the end of the year. Where do you think most of that $255bln will go? Maybe the bank who turned you down for that loan, that loan your established business needs to weather this economy, that same bank which would have jumped at the chance a while back will now jump at it again, drowning as it is in a sea of liquidity provided by QEIII? Nope. Most of it will stay right in bank reserves, earning that reliable ¼ of 1% and without lifting a finger. You’re on your own (but thanks for the bailout).


Robert Craven
 

A Tale of Two Credits

In judging near-to-intermediate term FI price change one must have a view of economic reality ahead but key is to have a view of the market crowd’s notion of reality ahead and understand the FLAW that exists therein, if any. Thus equipped and assuming one’s insight is correct one can do well as the herd reverses direction, stampeding back from where it came. It is only key to get the timing right so as not to be converted to crow bait.

Recent developments in the UK and the US illustrate this point quite nicely.

We advised late June that traders look for an expansion in the UK term structure, that course-of-least resistance for this spread would remain wider into year end and under no circumstances were traders to look to get short (S-L) this spread. (That advice has performed fairly well, 2-30 out from 270 to 297 or so, 9/14, now back in a tad.) Why?  Because of the key FLAW to consensus for this credit; because economists, caught up in the dash for security, badly underestimated economic activity ahead, and, we knew it. Once we had that in hand we had captured price change ahead. Thus, UK Industrial Production, Exports and Employment have blown through consensus. Not strong naturally, simply stronger than most models predicted. Of course we do not want to be accused of cherry picking; a few reads have come in south of consensus; but on the whole, observers were taken in. 

For the US we did not see opportunity in real-sector activity ahead vs street consensus as we did in the UK; that is, we did not think St consensus was far off.  But the opportunity for this credit hinged on crowd behavior and Fed policy. We and our readers have understood that behind the scenes most policy makers understand they can’t do much, that their role has been reduced to that of cheer leading.  But Bernanke and others figure it can’t hurt, and nothing wrong nowadays with making a little fiscal policy when you’ve got nothing much else to do.

Thus, the moment so-called QE3 was announced and the term structure blew out – opportunity knocked, and loudly.  We recommended on Sep/14 that traders sell (S-L) this spread that moment, 2-30 then 285 or so, 5-10, 116; last, 268, 107. As we noted then, real sector developments would not support the crowd’s mad dash, “…the US economy just ahead does not justify the much weaker FI prices logged last two days, even given the Fed move. This will dawn on the market crowd in short order.” 

It just has, with a little help from the E-Z and China.

In both cases we have used the spread that eclipses most other trading activity – the term structure. Very simple, even boring but with that in hand, one can do wonders for the bottom line, through the galaxy of other instruments available.

Finally, this illustration brings us back to basic rules of behavior in trading in this arena. Avoid complexity like the plague. Make way for the crowd's rush, and then strike as the same are about to go off the cliff. Economists and investors – shouting out, holding hands together in the dark.


Robert Craven

Trading the Fed

Now that the dust has settled, let us consider the most realistic trading approach over the near term.

The US term structure blew out 20 bps or so, 2 – 30 (mostly directional) and 12 bps, 5 – 10,  as a result of the Fed announcement.  This presents opportunity. Traders are to look to sell this spread at present levels, not to join the crowd and look to own it (we will want to do that a bit later).

Background: We all know that the Fed committed to a program of purchases of a specific item for one Qt. We also know they left this commitment open ended; they can close at any time, or continue indefinitely, expand or contract. Fine.

Fiscal policy making at the Fed is linked to the absence of responsible fiscal policy making in Washington. Those who have reviewed our recent sketches understand what it will take to provide a real spark to US employment. We wait for that.

But to return to our markets; the US economy just ahead does not justify the much weaker FI prices logged last two days, even given the Fed move. This will dawn on the market crowd in short order.

The trend growth in job creation is about 150M /month, consistent with a growth rate of maybe 1.5%.

Manufacturing activity was off in Aug for the third straight month, the first back-to-back declines in 3 years. It is likely that the recent softness in manufacturing activity and capital spending will continue for at least a few more months.

Although total and core retail activity took a spurt in August, much of the gain was due to the pumps. On a trend year-over-year basis, sales activity has been slowing for the past year.

We also learned today that industrial activity dropped in August, and it was not all Isaac. On a year-over-year basis output has been growing moderately. Those who passed Econ 1-A understand that we will need a spark in consumer durable spending – the best kind of final demand – to strengthen this activity because the inventory cycle is complete. Nothing else will. That won’t happen without a spurt in employment, and hours, and earnings.

Bernanke’s buying of a few mortgages is merely a side show.


Robert Craven

Fed Announcement

There will be little substantive accomplished for the US economy through the Fed’s latest program.

There is a spark for equity types (the 20% who own 93% of equities) and a bit of a boost for mortgage types, but only a bit. Lower, longer rates make hardly any difference. And we are awash in liquidity.

Bernanke is a fine, fair and honest guy; he is a stranger to deceit. Thus we saw his appointment as a welcome change. He is however, as is true with most of his colleagues (Fisher and a few others excepted), out of his league in understanding the auction markets. These markets, like any crowd, demand a god; only a lightning bolt from time to time gets their attention. Bernanke’s Kumbaya-around-the-campfire, soft and cuddly approach does not allow for that. And so he is in a fix, the very fix we predicted in earlier posts.

And this is not lost of most policy makers.  Behind closed doors they know there is little they can do, except favor a few pockets of activity, and, further penalize seniors.

Most policy makers know it is up to Congress but they aren’t sure that Congress will do much.  That is why the Fed itself is trying to make fiscal policy of the stealth variety.

Most of us who have observed the Fed for years know what they should do – sit on their hands (and stop the foolishness of paying interest on reserves).

We have plenty of evidence, thanks to Friedman, Schwartz and others that rule-based monetary policy works and random interventionism does not.  Naturally the Fed is there for another 2008 if need be.  But aside from crisis, a general trend to planning at the Fed is bound to fail. No one can do it; it is beyond any single individual’s competence, either in central banking or government.

The prosperous 80’s and 90’s were birthed by a steady-as-you-go monetary policy (they were also birthed by the reduction of gov’t interventionism and an end to suffocating regulations).  We may return to that next year, but now what? That is, how do we translate today’s announcement to the bottom line?  We will take that up in tomorrow’s sketch.


Robert Craven

 

A Plan for the UK

From late June we have had a plan for trading the UK. Those readers who have adhered to this general guidance have done reasonably well, bottom line; nothing spectacular, but better than a stick in the eye.

Key of course is that under no circumstances were traders to look to sell (S-L) the term structure, only for the opportunity to own it. Because 1) we expected additional Bk of England firing, because 2) we expected further flight to sanctuary (E-Z) and because 3) we knew that most models had excessive weakness built in, this seemed an opportunity (and there haven’t been many of those around lately).

Thus, traders were to own this spread at or near 270 (2-30) on June/27. We made it clear then that this was not a directional strategy, then 0.29 – 2.99%.  The spread expanded nicely into early July (285), then fell back to 270 mid July.  Again, readers were instructed to get long if not already long. That has worked satisfactorily, last 297, or .12 – 3.09%, this writing. 

We were of course gifted today by both the July PPI and Industrial Output prints. The spread may come in a tad from today’s spurt, considering something less than expected from the US NFP read. 

Realize some profits at his juncture but maintain a balance.

Naturally there are many ways to put our insight to use, not simply the ratio spread. But key is to be cognizant of this overriding reality into year end.

Keep it simple.

Robert Craven 

The Federal Reserve - A Side Show

After a long summer vacation we return to the keyboard. OK, we hear the moans out there!  Come on folks, buckle up!

We have known for some time that Bernanke personally favors further accommodation; that was explained in an earlier sketch (Aug/1 – US – A Primer).  From his testimony in Yellowstone it is clear that we were right. Yet aside from harming seniors even further, there is little he can accomplish.

Key to understanding economic reality ahead for the United States – something our readers must be intent on doing or they are reading the wrong blog - is to understand political reality ahead, not central banking. There is no need for verbal gymnastics, no need for complexity; it is simple – a Republican victory in November will cheer large potential employers and small businesses alike.

We are not interested in taking sides; we are only interested in being right, in the bottom line.  Thus, any trading operation keen on anticipating US real-sector activity is best advised to take near-term opinion polls quite seriously.

A reading of our last piece – An American Renaissance – provides background.  A failed US experiment has simply placed the US job machine on hold; a new employee represents a liability, a time bomb. Unburdened of the slew of regulations and likelihood of even more, and of the constraints of higher taxes, employers will come alive. Abolish flagrant government interventionism; abolish gimmick-based central bank policy and we will really take off. We know this to be true; there is precedence here, unseen only by the willfully blind.

Certainly the world economy is less-than-buoyant; certainly the US economy is hitting on 5 or 6 of 8. And there are major unknowns (Iran, E-Z, other), as always. But what is not acknowledged at this writing, that dynamic which has not been captured by even the most optimistic models is the stirring of American enterprise which will be unleashed by the return to Founding values. 

Economic planning always and everywhere ends in failure. This has been true past decades, plain as day for those who cared to look. But we move 3 ahead and then 2 back because there are always just enough of those who excel in noise making yet lack in scholarship to cause the rest of us to sit idly by as these types (hopefully) learn their lesson. This time, there may be just enough who did.


Robert Craven
 

An American Renaissance

We detour a tad with this sketch. Our intent has been to highlight near-to-intermediate term FI strategy (2 – 4 weeks) - spreads within or between the US, UK and E-Z. However, we have offered very little of that recently. There are major wildcards, at least to us and every one birthed in Brussels; with but few exceptions we have been on the sidelines. 

With this piece we switch gears and look instead to a potentially profound change within our electorate, an awakening of sorts and the implications for the US economy.

Let us begin by borrowing from Stephen Moore, a member of the WSJ’s editorial board and his Aug/1 sketch on Milton Friedman. “In the early 1990s, Friedman visited poverty-stricken Mexico City for a Cato Institute forum. I remember the swirling controversy ginned up by the media and Mexico's intelligentsia: How dare this apostle of free-market economics be given a public forum to speak to Mexican citizens about his ‘outdated’ ideas? Yet when Milton arrived in Mexico he received a hero's welcome as thousands of business owners, students and citizen activists hungry for his message encircled him everywhere he went, much like crowds for a modern rock star.”

Yes, Friedman, Hayek and some others are indeed rock stars to those of us who understand that the only way for the masses to do well is to embrace capitalism and free trade, to those of us who understand that during the period between 1980 and 2000, that time that Harvard’s Andrei Shleifer describes in The Age of Milton Friedman as an era “that witnessed remarkable progress of mankind..when the world embraced free-market policies, living standards rose sharply while life expectancy, educational attainment and democracy improved and absolute poverty decline,” that well over 200 million were liberated from poverty thanks to the rediscovery of the free market. 

How could this be? In the early 60’s when Galbraith was ambassador to India and found that Friedman was about to lecture there, the almost always wrong but still witty Galbraith wrote, “I can think of nowhere your free-market ideas can do less harm than in India.” And yet India embraced Friedmanism in the 90’s and we all know the result. 

What is it exactly that is working here? To understand, let us look to Friedrich Hayek.

From Hayek’s The Road to Serfdom: “Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law. Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”

This single paragraph explains the failure of Obama’s experiment. 

From a recent piece by John Taylor we learn that,  “Hayek traced this idea through the ages—first to Aristotle, then to Cicero, about whom Hayek wrote: ‘No other author shows more clearly . . . that freedom is dependent upon certain attributes of the law, its generality and certainty, and the restrictions it places on the discretion of authority.’ Hayek also cited John Locke, who wrote that the purpose of the law was ‘not to abolish or restrain, but to preserve and enlarge freedom. . . . Where there is no law, there is no freedom.’ Finally, Hayek pointed to James Madison and other American statesmen who put these ideas into practice in a new nation. These thinkers distrusted government officials as protectors of freedom; the rule of law, they believed, was more reliable.”

Key, our view, is to realize that there is a morality to capitalism, to free markets that is lacking in a system of economic planning. It takes some reflection to understand why the politics of government gifting to certain segments of society while penalizing others always proves corrosive (except for tyrants) and that a rule-based system of free exchange founded on the rule of law, does not.

Indeed, we need not wonder why the US economy did so well in the 80’s and 90’s – flagrant government interventionism was abolished and so was gimmick-based central bank policy. We moved back to our founding principles – a rule-based framework. The boundaries were set.  Stimulus programs were out and permanent tax reform was in. And potential employers did not have to worry about a shotgun approach to regulations that might for example greatly increase their costs / employee, two years ahead (obamacare).  They knew up front and could go about the planning exercise confident the rule book would not change mid game.

Now, in the hands of a radical who, granted, may not be an outright socialist (gov’t ownership) but is clearly a statist (gov’t control), one with a peculiar distaste for the almost everything the Founders championed, we are beginning to make the worst of Europe look mild in comparison.

This brings us to the choice of Ryan as Romney’s vp candidate. Ryan is well versed in those principles that Hayek, Von Misses and Friedman championed but unlike many others including Romney, Ryan has actually shown the ability to articulate these dynamics to the masses. It is not an easy sell; gov’t largess seems on the surface to be the soft and fuzzy, easy way out. We think Ryan can convince just enough that this is bunk, to get the job done in November. If we are right, we will witness the firing of the American engine which has sat idle past years.

Robert Craven


Addendum:  Glenn Hubbard, Columbia Business School dean and Romney adviser, recently laid out the specifics of Romney’s economic plan, as summarized in a Kudlow article: “The plan would lower the spending share of GDP to 20 percent from 24 percent by 2016, which is probably the largest proposed spending cut ever. The cumulative net savings of that cut could be a whopping $1.8 trillion, which not only would finance huge deficit reduction, but also would help pay for Romney’s pro-growth tax reform: a supply-side, across-the-board 20 percent personal-tax-rate reduction, a limit or end to various tax deductions for upper-income payers, and a dramatically reduced corporate tax rate, from 35 percent to 25 percent -- perhaps the most powerful growth stimulant of all. Rounding out the economic program is a regulatory rollback, entitlement, trade, education, and energy reform, and a sound monetary policy (replacing Bernanke at the Fed).”

The UK in Brief

Let’s take a look at the UK once again with the aim of setting or renewing FI strategy.  A brief commentary will suffice and the term structure will suit the purpose of demonstration. This is the single key dynamic to any desk, no matter how sophisticated the operation.

Readers may recall that in early June we identified 270 as the preferred entry point to own the curve, 2-30, and noted that this strategy, even for 2-30 was not simply directional. Key, our view, was that the course-of-least resistance for this spread was to be wider over the intermediate term. The E-Z panic of 6/27 afforded the 270 print and clients were to be long (L–S) this spread, or something similar from that juncture. The spread then expanded satisfactorily to 285 +/-, July/5 with both ends cooperating.

We did not recommend profits be taken; the spread came back in to 270, mid July.  We continued to recommend entry at this point; see our post of 7/17.  Again the spread expanded nicely to something on the order of 286, 8/7, and this despite weak Manuf PMI, Retails Sales prints, etc., for the very reason that this weakness was priced in at 270.

Then of course there was yesterday! Yesterday King’s less-than-buoyant economic outlook and hesitancy to provide additional firing brought the spread in quickly, last 281.  The less-than-buoyant outlook was something we predicted to clients; the hesitancy to print more money we did not.

Now what?

The UK real sector will not cooperate with King’s view. It will remain weak naturally, just not that weak. But as a central bank chief and thus god to the market crowd, his prognosis is taken as gospel, for now.

It is true that the UK will get no help from the E-Z; simply witness today’s trade figures.  But there will be more appetite from the US and Canada than is now priced in.

Avoid outrights like the plague naturally but expect the course-of-least resistance to remain wider for the UK term structure.  Readers do not want to look for the chance to sell (S-L) this spread.  Sure there are unknowns – after all, the business of the future is to be dangerous but the odds favor our approach over the intermediate term.


Robert Craven

 

Draghi, the Market Crowd and Price Delivery

Anyone determined to make strategy, to discover near-to-intermediate term price change must be aware of the dynamics of crowd behavior; if not, that individual operates under a handicap.

The market crowd is no different from any crowd, be it a lynch mob in the antebellum South or the multitudes of Paris at Longchamps on Bastille Day. 

All crowds acquire an identity but this identity is not a composite or an average of its members. No, the market mob becomes something else altogether; it is its own organism, generally acting in the extreme, without reason or reflection, sowing violence along the way.

Crowds demand a leader, a god and they at first follow that individual with mindless obedience, gifting to him a whole galaxy of powers to which no one mortal could claim ownership.

Central bank chiefs serve the purpose of demonstration for this sketch.

The ECB’s Draghi has been selected by the market mob as a god. He is expected to deliver and if he cannot they will turn on him in an instant, with an awful vengeance, being the subjects they feel of a gross betrayal.

Draghi simply stated recently that new tools are to be embraced – “whatever it takes.” He did not offer immediate magic, or magic at all but it was expected of him. In fact yesterday he implied these tools will include unsterilized open-market operations but of course only once the EFSF/ESM funds are activated.

The market mind conjured up something else altogether. Desperately grasping at words and taking possibilities to the extreme, refusing to reflect as individuals might reflect the market mob demanded instant gratification and threw a destructive fit yesterday when it did not get it.

Draghi did all he could do but he is not a magician.  Due to that shortcoming he would have lost his head in the old days.

In understanding crowd behavior we can often prepare for extreme price movement - that which is manufactured by the market mob but which is to be exploited knowing that it lacks anchorage and underpinnings.


Robert Craven

US - A Primer

Most of us understand the Fed can do little to spark the US real sector; most at the Fed understand that too. Still, if for nothing else but the sake of cheerleading they will continue to gesture.

Not with Twist however which is simply rearranging the balance sheet – lower rates at the long end are not an answer.   Bernanke knows that too.

Massive Fed purchases will add to high-powered money and Bernanke figures this may help a tad (even though most of us know a lack of liquidity is not the problem). Indeed, M2 - money and close substitutes - is growing, in the past 6 months increasing 6.8%, in the past 12 at 9.3%.  That is fine, but of course most of that increase is parked. That is why the Fed is considering cutting the interest it pays on reserves from the current 0.25% to 0.0 (just as the ECB recently did).

None of this will make much difference however.  It won’t make much difference until the fog is cleared regarding future government policy. An interventionist, statist administration has scared the pants off employers.  Want to know the single key reason explaining a less-than-robust employment picture? This is your answer.

Small businesses, normally the spark to any recovery won’t take up the slack this time. They would be fools if they were to do otherwise. They’re worried about future health costs and the president’s promises to raise their taxes plus inflict who knows what additional pain down the road on the private sector.

Business leaders take risk but not when the rules change every play. The last we heard, only one in five plan to add jobs next year unless clarity is delivered in November.

The Fed has been an enabler for Washington’s fiscally insane. That is why we have lectured Bernanke to sit on his hands.


Robert Craven

Backstage at the Fed

We’ve chatted with a few folk past days from Fed districts here and there, to get some idea of staff reaction to Bernanke’s recent Congressional testimony. There is nothing official about our survey, nothing statistically significant; just a few friends with nothing better to do at lunch time.

First, no one thinks that another “twist” would make any difference. The interest rate level at the long end is not the problem. All twist represents is a change in the makeup of the Fed’s portfolio; this is the same as doing nothing they say.

However, most of the folk we spoke to do not think the Fed is impotent. One reminded us of Friedman’s 2000 comments re Japan: “Now, the Bank of Japan’s argument is, ‘Oh well, we’ve got the interest rate down to zero; what more can we do?’ It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy. The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy.”

And it is true; the Fed can buy anything it wants to, including a herd of cows in Montana. So outright purchases of all maturities remain an option – continue to expand “high powered money”, that is - currency and bank reserves, until she fires up. Still, a hawk or two may stand in the way, for now.

Next, most have conceded that the Bernanke Fed has resorted to cheer leading and will continue to do so.  Fine.

Finally, most are exasperated with the “mental midgets” in Washington; referring here to those who stand in the way of a rule-based fiscal agenda vs the flagrant, shotgun approach of an interventionist administration; referring in this case to the left.  This is the only place that staffers fault Bernanke’s testimony – “the case is obvious.” Why was he circuitous in his testimony? Why not more direct?  “This is not a secret,” one source noted.

Who knows?  He does the best he can, trusting in his instinct. We have to do the best we can, trusting in our instinct to translate Fed policy to the bottom line.


Robert Craven

 

UK Term Structure

Let’s revisit the UK term structure for just a moment.

Early June we advised that clients were to look own this spread, that course-of-least resistance was to be wider over the intermediate term. The spread 2-30 for example was 277 at that writing (6/12). We noted that there was no hurry, but that the aim should be to acquire a position ongoing, and that 270 was a reasonable entry point. The E-Z panic of 6/26, 27 afforded that print and clients were in some fashion to be long from that juncture. 

The spread expanded satisfactorily, printing 285 +/-, July 5, assisted by the announcement of further Bk of England foraging. This is why we noted that owning this spread was not simply a directional exercise. Indeed, the short end improved substantially.

Following, the spread has come back in, last 269. The overall plan remains the same. Gather a long position, or, set other trades but with this background in mind. The total collapse of the Euro might prove corrosive to the strategy but that’s a ways off yet. The rest in priced in.


Robert Craven

Next Meal Through a Slot

As we wait it out, the LIBOR “scandal” provides instruction, maybe even salvation.

When we worked on the street there were gentlemen to be found, a sense of order, a shared moral compass.  Now it appears that all that remains are moral lepers. Of course that must not be true; we are eternal optimists, always in search of the good in mankind.  Are there any of the good left on Wall Street?

Sure.  But on the whole you are paid for how much dough you bring in, not for how much worldly good you may accomplish. There is nothing illegal about this, about greed. If you go to work for a St firm don’t expect respect from your fellow human beings in the sense of respect directed towards a nurse, paleontologist or astronaut. You’ll have plenty of money, a good thing and you’ve earned it all legally, maybe. You just haven’t contributed much, like say a skilled irrigator for an artichoke farmer in Monterey, or a filmmaker or an Apache pilot, but again, there is no law yet against churning for a living.

But for some of the anointed, the big guys – major firms – the temptation can be too great. They’re not sure about the masters of the universe bit but they saw the movie and figure they’ll try it out now and then, see if it really works.  One way to do that is to pay a depositor 0.05% on his CD, then risk the $ on a structured product that implodes, then come back to the same depositor and ask very kindly for a bailout, and lo and behold – get it! That’s pretty slick. 

Yet human nature requires a stretch now and then, just to the edge, for the thrill of it if nothing else, even though the risk is to be taking your next meal through a slot. Cut corners and see what happens.

Here is where submitted rate manipulation comes in. Any fool knows it’s not just Barclays; no doubt BofA, Citi and good –ol JP are in up to their necks too. And with this will come the chant from Washington for more regulation. But in my time we behaved as gentlemen, at least those of us who submitted official rates did. We all behaved honestly. We had respect for ourselves and our firm; we did not change jobs every 9 months for a measly buck either. We most certainly did not need to be regulated because there was nothing to regulate.

So the problem is not one of lack of regulation, nor intrigue but society and the lack of civility.  Licentiousness in our financial dealings has grown exponentially past two decades. Things are too easy.  There is no respect for elders or for once-great institutions. There are no longer standards of behavior, only modes of behavior.

Finally, and key – there is no sense of responsibility on the Street any longer for the simple reason that you can get away with it; that is, you can be irresponsible and do quite well.  In what other occupation is that possible? A plumber? Don’t think so.

So we have the answer. No longer is any bank, or anyone else, too big to fail. No longer is a phony currency cooked up by elitist types in Brussels too key to fail. No longer is there a parachute for fools and lechers.  You screw up and that’s your own look out.


Take the pain. Stop the nonsense. Listen up, Washington.


Robert Craven

Politics and the US Jobs Machine

Coming into Q2 we attributed more horsepower to the US jobs machine than she could muster. We want to understand why; thus equipped, we will have an accurate view of reality ahead for this sector, of those factors needed for a burst in this activity.

In earlier posts we highlighted employers’ lack of enthusiasm for the current administration’s interventionist policies, Obamacare chief among these. Our problem at making strategy for the jobs sector, Q2, is that we underestimated this concern.

From reported interviews and those of our own we know the dynamic remains firmly in place – businesses which have an increase in demand are meeting that demand by working existing employees longer hours, only adding to staff when the shortage is extreme. Or of course they hire temps who are not freighted with benefits (nor much salary either). This should be news to no one.

Employers do not have any idea yet how much Obamacare will add to the cost of new employees. They won’t have an idea of tax rates or health care costs until after the Nov election. The threat of an expanded regulatory burden coupled with the mess in the E-Z simply keeps them on hold, swimming in cash.

CEO’s are paid to take risks but not in a game where the playing field is uneven and rules change every Qt.

Next, there is little the Fed can do and most policy makers know it. 

We praised Bernanke for the impulse towards openness but warned him last year it could well get him in trouble if taken too far. That has been the result – there is no longer the power of impact, of announcement, the wallop so needed is gone.  There is only crazy making.

The Fed’s “dual mandate” (a huge mistake) gives everyone, policy maker and politician alike a license to meddle. The Fed regularly refers to its dual mandate in justifying its unusual and mostly harmful interventions. We are not referring to 2009. Something bold was needed, but now, Bernanke’s tinkering, his non-rule based activity is nearly as corrosive to business and investor confidence as Obama’s. 

Potential employers hope that given a Republican victory in November, Washington’s interventionist policy will be jettisoned. The hope is that microeconomic planning, the hallmark of a statist president gives way to a coherent, long-term fiscal policy instead.  We can also hope for a return to sound and sane rule-based policy making at the Fed; if we are lucky, a return to a single mandate of price stability. These two measures will lend considerable confidence to business planners, and away we will go.

In the meantime, the best thing Obama and Bernanke can do for America and the rest of the free world is to sit on their hands.


Robert Craven

UK Term Structure

We noted on June/12 that the course-of-least-resistance for the UK curve over the intermediate term would be one of expansion, and that under no circumstances were clients to look to sell this spread (S – L) as a strategy.

We had expected that UK real-sector weakness had been priced in, including a stagnant service sector, and that the better part of contagion to the E-Z was priced in also, short of another panic.

Thus, we recommended clients look to own the curve given when for example (2-30) approached 270, then 277. The panic of June/26, 27 did the trick (270). Last, 276.

Many may of course consider 2–30 simply a directional play. It is not but that is fine. Then work something else along the curve, or of course any of the other strategies based on expansion of the term structure, that is, with this dynamic as their foundation.

The approach is to gradually gather a position; the first accumulation should have been June/26, 27.

We personally hope for a complete and sudden failure of the Euro. But of course that is not likely over the intermediate term. Only if we knew that it were, would we want clients to stay away.

Bank of England firing ahead will not hurt, nor will the emergency lending scheme, nor will the Bank’s recently announce plans for liquidity relief. 


Robert Craven

Thank you Anna

Most know by now that the great Anna Schwartz passed yesterday, at 96. As an economic historian she was without equal. As a critic of Fed policy she often shot from the hip; unfortunately for her antagonists, she did so with the accuracy of a Wyatt or Morgan Earp, or a Bat Masterson - cool and accurate.

We worked a tad with Anna and her co-author of A Monetary History of the United States, 1867 –1960, Milton Friedman.  It was October 19, 1993 in front of the House Banking Committee’s hearing on HR28, the Federal Reserve System Accountability Act, that Anna and I and Jim Miegs, with the help and endorsement of Friedman, were able to waylay Greenspan’s plans for continued cloak and dagger operations at the Fed.  The Act itself went nowhere but the hearing got policy makers’ attention, scaring the pants off most of them.

All were there that day, the first time all presidents and governors were under one roof. Guys in black suits with bulges under their vests were everywhere. Anna and I sat directly behind Greenspan and watched him sweat it out, deceiving the Chair that afternoon. That’s history. Greenspan saw the light; his illegal leaks to one of two reporters to the WSJ ceased immediately.  Seeds were planted for reasonable accountability. The FOMC decision was soon announced same day. 

It was Anna’s presence which really fetched the attention of the Fed in that she liberated Street economists to finally speak out. Before, most were afraid to say much under the threat of being fired (given the incestuous relationship between recognized dealers and the Fed) but Anna embolden these types, giving them courage; soon after, they came out of the wood work.  Suddenly a Goldman or Nikko couldn’t fire their economist for complaining about the obvious, on the pain of looking foolish and petty.

So we can bet that Anna is upstairs right now, researching away to her heart’s content.

Thanks again Anna for the inspiration. You and your work – neither could have been improved upon.


Robert Craven

Classroom

There is a flip side to today’s worrying events. Not just for arm chair philosophers, but even for example, spread traders, those of us who must have a notion of relative world dynamics to make a living. Thus it is better to understand the core of the present crisis so as to anticipate the next.

(Just for the record on the Euro: The thing was suicide from the start.  If Greece or others are ejected, fine; if they leave on their own accord, fine; if we have a disorderly break-up, fine. Bring it on. For those of us subjected to constant condescension from European elitist types a few years back, this event is just about perfect. US mutual funds and banks have less exposure to this region and are less linked to their European counterparts than ever. And we won’t starve without the E-Z for exports. Bring it on. We understand at this writing that today’s election may provide a pause. Greece will still head to the door, maybe September, maybe December. No way that economy can meet the bailout requirements and now way the Germans will throw them enough slack to make a difference.)

In the meantime we can learn something as to cause and effect. Whether it be the anointed who forced a common currency on the European masses (while skilfully avoiding the ballot box) or a far-left US administration which is trying to force a health plan on an unwilling populous – the result is the same. They defy human nature; thus, they will fail.

Witness success stories like New Jersey, Wisconsin, Indiana and Texas where voters faced and accepted the task at hand (unlike the E-Z) – simple but hard – cut spending, taxes and pensions; treat unions like the parasites that they are; cut bureaucracy. These states are thriving.

But why is it that California is losing folks at the rate of 50M per month? Why are CA businesses fleeing to Texas? Businesses cannot get out of here fast enough. We have beauty; Texas?  Well…. No matter. And “right-to-work” states in the south are booming. But CA is a poster boy of the left – school performance in the cellar, oppressive income and sales tax, a joke of a prison system, infrastructure a mess and, “a lordly public employee caste,” as Vic Hansen of the Hoover Institution so appropriately labelled this bunch.

Whether the Euro or Obama’s “vision,” Hansen notes that, “these are unsustainable ideas that are contrary to human nature and demand coercion for their implementation, given that they are increasingly anti-democratic and have to be implemented from high by an elite technocracy whether in Brussels…or Washington.”

The E-Z’s core problem then is not a hesitant ECB, not Merkel’s stubbornness. All but the wilfully blind now understand, as Hansen explains, “that the left’s statist model of trying to provide cradle-to-the-grave benefits, administered by an elite technocratic class, using demonization to bully the opposition and redistribute income, not only does not work, but cannot ever work.” It does not work for the democratic socialism of the E-Z nor the neo-socialism of Obama.

And this is why we welcome that feared, cataclysmic event - the breakup of the Euro. The rest of us, at least here in America, want past this nonsense. And this is why we welcome a return to balanced politics in the US, meaning a rejection of Obama and the radical left.  It too cannot happen fast enough.


Robert Craven

Strategist's Lament

It used to be all we needed to make strategy was a handle on the real sector just ahead.  Now it’s necessary to have a bug in Brussels, or Washington.

Without the plant we have no idea what our E-Z pals may come up with. Thus, we have had no recommendations to clients for fixed income, this region, nor spreads to this region.

We have a little better idea of events in the UK. It is true that after a satisfactory run, all of 2011 we over-estimated UK consumer appetite for H1, ’12, and manufacturing.  Weakness is now priced in, including contagion to the E-Z.

Thus, in the broadest sense the default or course-of-least resistance for the UK term structure is wider, even though mkt consensus is for more general weakness ahead. This spread may come in a bit given the circus in the E-Z; if it does so, and for example 2 – 30 approaches 270, then look to own (L-S) the spread.  Do not look to sell it under any circumstance.  The odds are not on your side, especially if the Bk of Eng decides for additional firing.

Things are simpler for the US.  As we highlighted earlier, key to understanding economic reality ahead is to be acquainted with politics, more so than any other time since the 30’s.

Thus, to the extent corporate planners expect a Republican victory in Nov, one can expect NFP’s to spark.  This is not about party affiliation; it is about being right.

Uncertainty is death for corporate types. They are paid to take risks but not on an uneven playing field with rule changes every quarter. They stay at the sidelines, which means cash.

Key culprit to a recovery is Obama. From Harvard prof Robert Barro: “Consider the expansion of social-safety-net programs, including food stamps, unemployment insurance, Medicaid (prospectively) and housing and mortgage programs. In a study published last month by the National Bureau of Economic Research, University of Chicago economist Casey Mulligan observed that, because these programs were means-tested (falling or ending as income rises), expanding them raised the effective marginal tax rate on labor income.”

Barro continues, “To achieve a real recovery, government policy should focus on individual incentives to work, produce and invest. Central here are tax rates and regulations, including especially clarity about future policies. In a successful policy package, the government would get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.”

But then we all know that, don’t’ we?  You want to devastate jobs creation?  “The most damaging and devastating thing you do to any businessman in America is to keep him in doubt and to keep him guessing on what our tax policy is.”  Who said this?  Lyndon Johnson.

But then Johnson was not a radical.


Robert Craven
 

Politics

Most economists usually side step politics. We don’t. If there is a linkage to the US real sector, let’s highlight that.

Obama inherited a situation he had a direct hand in creating. When in the Senate, along with Clinton, Dodd and others, he protected the twins from needed reform. As president, he then made things worse (although he blames lack of progress on the Republicans). The WSJ noted that he got almost all he wanted – stimulus, Obamacare, housing bailouts, Dodd-Frank and more. “…Obama has had the freest run of policy of any president since LBJ.” But as we explained for three years in our political blog, these were all policies bound to fail. This was the result.

Yet even given these man-made headwinds we expected the good ‘ol economy to do a bit better than it has, not hitting on 8 of 8 but at least 6 of 8. 

First, we missed the psychological impact of the potential fiscal blow coming at the start of 2013, on both consumer and business, but especially on job creation.

Most don’t need reminding that a calamity is scheduled to occur on Jan/1/13 unless politicians work to prevent it. The tax increases are from the expiration of the ’01 and ’03 tax cuts, the expiration of the payroll tax cut and the start of Obamacare tax increases – all to the tune of maybe $495 bln. The top tax rate on dividends will almost triple (15% to 45%); capital gains taxes will be 50% higher; taxes on wages will also spurt. Business planners will sit still. From the Heritage Foundation, “One business official says that ‘as long as proposed changes remain up in the air, companies will be forced to continue to burn fuel operating in a holding pattern rather than charting productive courses forward.’”  Translation – they will continue to hold cash rather than create jobs.

Next, although it was clear that employers had permanently done away with many job positions because new employees are to represent a time bomb (health care), the interventionist policies of the administration caused even more of an adjustment that we thought. For example, the explosive cost of Obama’s health plan is of course independent of the number of hours worked, only the number of workers. This is one reason hours worked are now back to pre-recession levels but the per cent of adults who have a job is in the cellar. Easy.

Finally, the antics of the deer-in-the-headlight types - elitists of the E-Z, are beginning to worry even the US, and not just exporters. It is opaque, it is fuzzy to most laymen but they have grown a tad uneasy nevertheless. Tiny Greece is one thing; Spain is quite another. Of course the equity market may be part crap shoot, but it worries folks when it tanks and the media links this to E-Z events. This breeds hesitation on the part of the consumer, equity holder or not.

To get outside and off the keyboard we do a bit of landscaping during daylight hours. Plants are fun but the exercise also provides a heads up. Gardens are a great litmus paper for consumer activity (or lack of) just ahead. They - gardens, are the first to go. Past two or three weeks we’ve noted a hesitation; folks less likely to put in a few more penstemon or clematis than they might have been in April. “We’ll wait a bit. Thanks.”

Politicians had better not.


Robert Craven

Opportunity

Critics abound; there’s always noise from the cheap seats when things get tough in the arena. Thus, one must be careful to judge.  We’re not sure we could handle things any better than Barroso and the other EU types.  But from the comfort of the keyboard, one thing is clear – they’re deer-in-the-headlights, every one.

We noted much earlier, and refreshed the other day that it is either fiscal union or the end. And the end may be a good deal more frightening than most expect.  This is because extremists, especially leftists, are revolting at the mere hint of austerity. Already Greek types are casting the Germans as Nazis (as they beg for even more German money).

For many, lurking just backstage, this is the opportunity of a lifetime.

We will see, are seeing in fact a lead up to WWI all over again - the blame game so typical of European politics. It is time to invent an enemy, just as the Muslim troglodytes know exactly how to invent a diversion, a camouflage for their blunders. For these thugs, it is the West; for failed E-Z states, it is Germany.  Right now, the weak and incoherent - most of Europe, are damning the unified and solvent - Germany; they, who have done almost everything wrong and Germany who has done almost everything right.

The final step in this choreography - to be interrupted only if the German culture suddenly remakes itself to accept flip flops at work, 3 hour naps, and chronic tax cheating as a national pastime, and abandons its meritocracy and the rule of law for self indulgence and cynicism - will be the appearance of another Mussolini, or Franco, or a Metaxas, just this time in a pin stripe suit.


Robert Craven

Fear

Kaiser Wilhelm II failed; so did Hitler.  Not Merkel.  She took Europe without firing a shot.

It is a new era for this region, something which all but the willfully blind must recognize.  And certainly every trading desk must recognize.

So there is angst among those nations of lesser merit; actually, there is fear. Hollande shouts (while trembling) that the Mediterranean notion of “growth” should trump Germanic notions of austerity. All over Europe the gospel is that prudent Germans are at the root of the E-Z meltdown. But in bashing thrift and industry, debtors run the risk of a backlash from a nation which is called upon to deliver even more capital to salvage the reckless. And past “backlashes” were not pleasant for those involved.

WWI, WWII – Anytime Germany was 1) unified and 2) isolated, armed conflict followed. And nowadays, there are better ways than the tank and the Messerschmitt.

Our neighbor Vic Hansen wrote the other day that, “History is quietly whispering to us in our age of amnesia: ‘I would not keep poking the Germans unless you are able to deal with them when they wake up.’”

Indeed, the old WWII constraints are eroding, if not gone. The allies had a solution – split Germany. Germany recently paid $2 trillion to become whole again.

Germany played by the rules while the EU has turned into a Ponzi racket – poorer southern members cooked their books to get German cash. Once caught, they blame their plight on German mercantilism and export-driven profit mongering.  This is as stupid as it is dangerous.

Where is America? America leads from behind, if at all. A rag-tag NATO is confused and afraid, abandoned to face a united and very rich German state.

It is this reality which is the overlay to all the rest – the noise, the phony solutions, all of it; they mean nothing.

It is the fear of German retribution, of a smothering out of what little is left of E-Z member national  identity, that is the common denominator driving every debate.


Robert Craven.

The Anointed

Whenever an individual or group of individuals set about to direct economic affairs, disaster is the result.  This has been everywhere and always true; along with death (we omit “taxes” as the Greeks have demonstrated this exercise is voluntary) it is a guaranteed outcome. 

Just a bit of knowledge of history, a tiny serving of economics is all that is needed to understand this reality.  But lessons are never learned. Round and round we go.

We have witnessed this result in the US as an interventionist administration, gifted with great insight passed down directly from the gods has thwarted what otherwise would have been considerable economic progress. 

And now we have witnessed the same result but many times expanded as European elitists, the anointed, “their minds dulled by generations of inherited wealth,” as Liam Halligan of the Telegraph put it, set about to create their own commune (just as so many of the similarly afflicted did in Taos New Mexico in the 60’s; trust babies, nursing on the milk of Marx). Or that was the plan - one big happy E-Z family. Their motto, as borrowed from N.L. – “From each according to his ability; to each according to his needs.” 

Scornful of those of us who warned it could not work, we were dismissed as cranks at worst, as the simple working folk at best.

The books of Hayek and Freidman were thrown to the bonfire, those of Engels, Schumpeter and Veblen enshrined.  Lessons unlearned.

And now? And now most expect we are to live with this mess for years. Not likely. As we highlighted many weeks back, it is either fiscal union or the end. And it will come faster than most expect.


Robert Craven