The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The folks at Money.co.UK have built a global timeline looking at “how and where it started, when Britain became involved in the economical downfall and how the world have built themselves back up.”

Money.co.uk:

The worst economic crisis in decades played out like a soap opera of epic proportions – the bad guys were vilified, speculation ran wild and drama unfolded on an almost daily basis.

We’ve tracked the credit crunch in the UK and beyond, from the very first rumblings of trouble to the official end point, and present it here in what may be the most detailed timeline of the recession online.

By using the links alongside each headline, you can find more detail about that particular event – however, rather than use traditional news sources, we’ve linked to quality blogs that reported on the news as it broke in an effort to accurately reflect the sentiments at ground level.

Needless to say, money.co.uk is not responsible for the quality of outside content, nor are we affiliated with any of the opinions expressed therein. That said, it is interesting to note how accurate many of the predictions made by the bloggers below came to be.

Very cool . . .

Music video by The Superions performing Fruitcake. (P) (C) 2010 Fanatic Records.

QRO Magazine:

Christmas came early to QRO when we got to interview the one & only Fred Schneider. The singular B-52s singer talked about his new side-project, The Superions, and their new holiday album, Destination… Christmas! (QRO review), the upcoming Halloween album (unfortunately, nothing for Arbor Day…), The B-52s’ Funplex (QRO review), why these days Rock Band is more of a money maker than records, singing Scott McClellan on The Daily Show, visiting his fellow Superions when “The B’s” play south Florida, being liberal when they play Red State America (even Arizona), punctuation, “Any press is good press”, and more… (including, “Tin roof, rusted!)

Jon Stewart goes postal on the Senate for failing to pass the Zadroga bill:

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Worst Responders: Senate Republicans filibuster the Zadroga bill but pass tax cuts for the wealthy, which is great news for firefighters who make over $200,000 a year. (05:18)

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9/11 First Responders React to the Senate Filibuster: 9/11 first responders watch as Mitch McConnell cries over a friend’s retirement, and Jon Kyl explains why the Senate can’t work the week after Christmas. (08:55)

I’ve been playing around with the Google Labs NGram book viewer, and you can do some pretty big picture stuff with it.

I mean really big picture:  As the NYTimes reported, Its a “mammoth database culled from nearly 5.2 million digitized books available to the public for free downloads and online searches, opening a new landscape of possibilities for research and education in the humanities . . . It consists of the 500 billion words contained in books published between 1500 and 2008 in English, French, Spanish, German, Chinese and Russian.”

Just punching in a few key terms over the past century yields some pretty interesting results:

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Main Street vs Wall Street (1920-2008)

click for larger graphs

Wall Street seems to get mentioned more after massive crashes — 1929, 2000 (above)

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Check out the Deflation focus around 1930s, and the Inflation focus in the 1970s thru 80s:

Inflation vs Deflation(1920-2008)

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The peak interest in Gold was around 1935, and rising again in 200s — with Oil getting lots of buzz around WWII and the 1980s.

Gold vs Oil (1920-2008)

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England completely dominated for centuries:

Russia,Germany,China,England (1700-2008)

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Uh-oh, there is a new kid int he neighborhood :

Russia,Germany,China,England, United States (1700-2008)

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Here’s a fascinating one, from 1500–2008 — were those 17th and 18th century mentions of Jews all anti-semitic remarks? (or did we Jews certainly start publishing more books?)

Christians, Jews, Muslims (1500 – Present)

The tale of two cities theme continues in Europe. As Germany reported that their Dec IFO business confidence figure rose to a record high dating back to ’91 and French business confidence rose to the highest since June ’08, Moody’s downgrades Ireland by 5 notches to Baa1. Now Moody’s is not some soothsayer here as their rating now is only in line with Fitch (and 2 below S&P) and the markets have priced in these lower ratings but they do highlight that Ireland and others in the developed world continue to suffer from too much debt and not enough growth. On the 2nd day of the EU summit, the EFSF bailout fund will likely become a permanent fixture with the details to be worked out later. Elsewhere, UK consumer confidence fell to the lowest since Feb ’09 while Brazil’s unemployment rate fell to 5.7% from 6.1% to the lowest since at least ’01.

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Source:
RealtyTrac: Foreclosures Drop in November But Will Come Roaring Back in 2011
Peter Gorenstein
Yahoo Tech Ticker, Dec 17, 2010
http://finance.yahoo.com/tech-ticker/realtytrac-foreclosures-drop-in-november-but-will-come-roaring-back-in-2011-535730.html

The Bond Herd, 6% and Gold
December 16, 2010
David R. Kotok
Chairman and Chief Investment Officer

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Europe is very cold, too. We’re back. Six days of travel, 8000 miles, and seven meetings later, we take away some conclusions about the recent, volatile, and scary spike in bond yields.

First and foremost, let’s be clear. This bond market riot is a global phenomenon. US-centric observers are blaming the rise of the benchmark ten-year Treasury note yield on an inflation-risk scare or on Fed money printing with QE2 (quantitative easing round 2) or on expanded deficits because of the tax-cut extensions. These observers are missing the boat.

This is global. Look at this chart (http://www.cumber.com/content/special/G4.pdf) on Cumberland’s website in the Special Reports section. The title is “Charts for Bond Herd Commentary.” In chart one we have rebased the yields of the four key global currency benchmark ten-year notes. We start at the low yield day of October 12. Since then the upward movement in yields has been correlated worldwide. We pick the four big denominations of debt, the yen, pound, dollar, and euro. Together they define the overwhelming majority of world capital markets.

This correlated movement suggests that the selling is coming from a reallocation of assets in large indexed global funds. They are moving monies out of the highest-grade sovereign debt bonds and into other sectors. We have now confirmed this with several large portfolios. We infer from our anecdotal evidence that there are many others doing the same thing. Their reasons for acting may be different but their actions constitute a herd mentality in this sector of high-grade sovereign debt.

Please note that we are using high-grade here for a reason. We want to examine this reallocation movement without the interference of price changes due to default risk or credit risk. That is why you see the German bund as the reference for the euro and not the Greek or Irish bonds. That is also why you see the Japanese bond. It is showing the same reallocation action. Japan is a country where QE has existed for years and where there is deflation.

We are often asked, “Where is the reallocated money going?” And we are asked, “Isn’t this due to a fear of inflation?” The questions are very fair. Let’s take them one at a time.

We think the first answer is that monies are moving into two asset classes: stocks and commodities. The evidence to support this observation is also clear. Nearly all stock markets of the world have been rising during the same time period that bond prices were falling. Rising markets mean inflows of cash, and that cash has to come from somewhere. In Japan, it includes outright purchases of ETFs by the central bank as they continue to expand their version of QE.

Commodity prices and precious metals have also been on an upward trajectory. Following a technique we learned from Dennis Gartman, we have indexed the four currencies of the four benchmark bonds we used in the first chart. Our index choice is to rebase the currency to a current gold price. That second chart (http://www.cumber.com/content/special/gold.pdf) is also in the Special Reports section on our website. Note the correlation. Some of the money coming from bonds is going into gold and other precious metals. Using that for a proxy, we infer those flows are also going into industrial commodities and into oil as well.

Now let’s add a dimension to this discussion. Chart three (http://www.cumber.com/content/special/Gold2.pdf) on our website smoothes the volatility during the period and combines the yield change and the gold price change into a single linear trend for each of the benchmark currency-denominated bonds. Note how Japan and the US are identical when you rebase the yield change and the currency change to the gold price. JP and US are the two biggest users of QE. Also note how close the UK and the Eurozone are. They live in the same neighborhood and are interrelated in their problems..

What we are trying to depict is the adjustments in interest rates and currency values. They normally are viewed in a relative way. We want to introduce a constant so we can compare them against each other. We choose gold.

Think of it this way. Each of these bonds is a promise to pay in a single currency. We rebase that promise to the gold price at the start of the period. We have already rebased the bond yield changes. So we need to convert the changes in the yields to the unit of gold that the bond represented at the start of the period. Chart three is the result. The correlation improves; hence, we conclude that a herd is at work and that the reallocation theme is supported by this evidence.

There is other evidence of a herd as well. Barclays Capital surveyed 2000 institutional investors in preparation for its 2011 outlook series. Respondents included “hedge funds, money managers, proprietary trading and corporate trading desks” among others. They were asked, “Which asset class will perform best in 2011?” 40% said equities, 34% said commodities. Only 9% selected “high-grade government bonds.” Credit (10%) and peripheral Europe (7%) were the other choices.

So what about the question of inflation risk? It may be in the expectations component; that one is very hard to measure or even estimate. But it doesn’t seem to be supported by what we can see.

The evidence is that the rise in yields has been in “real” rates and not in the inflation component of interest rates. Measures of real rates that are market-derived support this conclusion. Other measures that are inferred do so as well. And the inflation evidence itself remains very subdued. In the US there are measures of inflation that are near zero. In Japan there is deflation. In Europe there is very low inflation, and in the UK there is some inflation but its sustainability is questioned.

Sure we have rising prices in gasoline and food. That is worldwide. It is also the warning sign of the worst-case “nightmare scenario.” I borrow the words from Neal Soss and his team at Credit Suisse. They describe it as an “eruption of headline inflation (food and gasoline) with no accompanying pick-up in wages or real growth.” We think they have properly characterized the key risk for 2011. If they are correct, we get an economic slowing in 2011 and these rising sovereign debt bond yields will reverse and plummet.

That is not our forecast but it is a big risk. We see modest growth, stagnant wages and very little inflation for the US in 2011.

In the bond space, we have avoided the sovereign debt subsector and emphasized spread product. That has been a correct relative choice. Of course, all bonds have sold off in this recent rout. In an absolute sense all bonds fell in price. No bond performed well in the last six weeks.

What is our expectation? We continue to believe that high-grade tax-free bonds in well-selected credits are very cheap. The US state and local government debt sector is $3 trillion out of the total worldwide $90 trillion in tradable debt. In a global selloff it will fall in price just like everything else.

Does that mean it should be abandoned? No. Consider that a very safe, very good-credit (AAA), tax-free yield of 6% is available to a buyer who is willing to do the research. Think about that return and how much it is worth to the high-tax-bracket American investor (35% top federal rate plus 3.8% federal addition coming soon, plus your state tax if you pay it). Compare this to today’s environment where the inflation rate is near zero and the outlook for cash equivalents is also near zero.

At Cumberland we are raising our allocation to this sector for our balanced-account clients. I have also done so for myself.

Lastly, through the December 10 data, foreigners have not been buyers of US Treasury and agency debt. The home mortgage rate in the US has backed up to nearly 5%. US bond markets exhibit signs of panic selling. The Fed’s policy of US Treasury purchases appears to be defeated by the markets. That suggests a possible economic weakening is coming in the spring and another downturn leg in housing is possible. Spain is now paying a real interest rate of 5% to borrow, according to its latest auction. The Eurozone issues are not resolved.

In sum, this crisis and the disinflationary or deflationary consequences of deleveraging that originate with it are not over. 6%, AAA, tax-free looks pretty good to me.

Special thanks to my colleagues, Michael Comes and Sam Santiago for help with the graphics and the research. Any errors are mine.

All the best for the holidays and the New Year.

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David R. Kotok, Chairman and Chief Investment Officer

Let’s put aside the obvious issue with this cover — why Wikileaks founder Julian Assange was the better choice, and that Time magazine editors are a spineless eunuchs — and look at the psychology and market connotations of this year’s Man of the Year choice.

It is somewhat fitting that a decade after Time marked the very top of the internet bubble by putting Amazon’s founder, Jeff Bezos on the cover as person of the year in December 1999, this year, they opted for Facebook’s founder as their 2010 Person of the Year.

If history holds, TIME has just marked the top in the value of Facebook — at least for the foreseeable future. The Bezos cover marked the high point in Aamzon.com’s stock for the next 10 years.

Understand the psychology of why this is: By the time any phenomena reaches the editorial room meetings of a major non business publication such as Time, it is already a widely held social factor. (1999 Example: Buying books and other gadgets on the internet? Why you don’t say– that’s ingenious!)  Ubiquitous Facebook has 500 million users, is now at the point where its early and middle adopters are cringing as their parents sign up and “friend” them.

From a financial perspective, the mostly, kinda/sorta eventually efficient market has already reflected this. Facebook isn’t publicly traded, but its theoretical value has been pegged as high as $33 billion dollars, based on his paper donation to the Newark school system. In June of 2010, Elevation Partners paid $120 million for an implied valuation of $23 billion. Microsoft’s 2008 investment of $240 million was at the $15 billion level.

Given the challenge in monetizing that massive user base, $33 $58.75 billion seems pretty rich. Time will tell if, like Amazon, Time just marked a decade long top in Facebook valuation. History suggests that its a pretty good bet it did.

What this means for the broader internet valuation and Web2.0 is yet to be determined . . .

A Decade Before Amazon Regained its TIME Top

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UPDATE December 17, 2010 9:22am:

I am told that the value of Facebook is now $58 billion plus,based on 2 million shares changing hands at $23.50 out of a reported 2.5bn shares — that out across the various classes. 85.75 billion dollars . . .

UPDATE 2 December 22, 2010 10:41am:

Paul Kedrosky reports FB is now at $67 billion dollars.

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Previously:
Magazine Cover Indicators

Source:
Person of the Year 2010: Mark Zuckerberg
LEV GROSSMAN
Time  Dec. 15, 2010
http://www.time.com/time/specials/packages/article/0,28804,2036683_2037183,00.html

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Here is a blast from October 2008 past: This chart as to who were the underwriters of the subprime loans.

Federal Reserve Board data show that:

-More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
-Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
-Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.

Here is the table of underwriters:

click for larger table:

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hat tip Econbrowser

Source:
Private sector loans, not Fannie or Freddie, triggered crisis
David Goldstein and Kevin G. Hall
McClatchy Newspapers, October 12 2008
http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html

Songs From ‘The Promise’ (Live)
Bruce Springsteen & The E Street Band

Mad props to David Wilson