Posts filed under “Think Tank”

Where do we go…ah, where do we go now

Following the biggest rally in terms of speed and distance since the 1930′s, Friday’s better than expected Payroll figure begs the question of what happens now. First thing is determining whether the # was a harbinger of a sea change in the economy, is it sustainable or was it just an outlier that will be reversed since other data doesn’t confirm. The 2nd thing is seeing how much of the rally was based on an improvement in the economy off the dramatic declines in late ’08, early ’09 and how much was due to the drug of easy money. The bounce in the US$ and prospect of higher interest rates clearly tempered the initial market pop on Friday and that is a sign that good economic data now is not an easy green light for stocks as their recent boost has had other impetuses. The Asian markets were mixed in response to the US jobs report and Europe is giving back some of Friday’s rally. After a bounce on Friday, Dubai’s market tumbled again by 6%.

Category: MacroNotes

A Conversation with John

December 4, 2009
By John Mauldin

A Conversation with John
Unemployment Positives
New York, London, Monaco, and Zurich

This week I am in New York, and have a whirlwind of meetings (and I admit, a lot of fun on the side) and not much time to write. I have been saving today’s letter for a month or so, for a time such as this. Damien Hoffman of the Wall Street Cheat Sheet interviewed me and posted the transcript on his web site. I thought it was one of the better interviews I have done recently, and so it is this week’s Thoughts from the Frontline. In addition to the wide-ranging economic questions, he asks for my thoughts on how one becomes an investment writer. I often demur when asked that question (what do I know?), but did my best to answer this time. I think you will enjoy the letter. (By the way, he does a lot of interesting interviews, which he posts for free on his web site at

But first, a quick commercial. Are you reconsidering your investing strategies for the year ahead?

I am pleased to invite you to join me, together with my US investment partner, Jon Sundt, President and CEO of Altegris Investments, for a special live webinar on Thursday, December 17th, at 11:00 am Dallas time (that’s 9:00 am on the West Coast and 12:00 noon on the East Coast).

In this special webinar, we will discuss the forces that are shaping today’s economy and their influence on financial markets, as well as the potential impact on your investing decisions. This is an excellent opportunity to learn about alternative investment strategies designed to provide noncorrelated diversification for your portfolio, as Jon and his team are experts on alternatives. We’ll set aside time to answer your questions.

Due to regulatory issues, this event is limited to US investors who qualify as “accredited investors” (generally, net worth of $1.5 million or more). It’s easy to sign up; just allow yourself a few minutes to complete the steps. First, register online on my Accredited Investor website. From there, if you are a US investor, you’ll be directed to register for the webinar.

Click here to register

If you have already registered on my Accredited Investor site, please contact your Altegris Account Executive for a streamlined registration process. Space is limited. So even if you can’t make it at this specific time, I urge you to register so you can listen to the replay at your convenience after the event. (In this regard I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

And for those of you who are not quite accredited investors but are on your way, I suggest you go to and register there, then talk with my friends at CMG about alternative managers and strategies available to you. As I mentioned above, there is no better time than now to think about your investment strategy for 2010.

Unemployment Positives

This morning’s unemployment number, though still down by 11,000, is the best we have seen in a very long time. The birth/death ratio only added 30,000 jobs, and previous months were revised upwards. Given that the ADP employment number on Wednesday was so high, and the service ISM was not good, this comes as a very pleasant and positive surprise. Is this a trend, or something seasonal because the main driver was temporary jobs? We will see in a few months. Let’s hope we see a real turnaround soon.

A Conversation with John

With Damien Hoffman

John Mauldin coined the incredibly popular phrase, “Muddle Through Economy.” If the next few years continue to drag along as we rebuild from the greatest credit bubble in history, then John’s term may become the catch phrase used by every financial journalist and economist in the land.

John is a passionate traveler with business partners all over the world. He also puts out a free newsletter to over one million people worldwide. This reach of friends and travels give John an excellent macro view of the world economy. Further, his multidisciplinary interests offer some unique insights into economics and human behavior.

I had a chance to catch up with John and talk about his experiences as an economist, his perspective on which countries will grow the fastest in the coming decades, how he sees demographics affecting the world, and a bonus question from one of our 1400 Twitter followers …

Damien Hoffman: John, was economics part of your schooling or a passion of yours right from the start?

John: I had a triple major in college, one of them being economics and history. So I’ve always been fascinated by history, economics, and finance. The markets are a big puzzle to me and I’m a puzzle addict. So it feeds my addiction. I started reading the Austrian economists first, in the early ’80s as I entered the investment world. That was my real introduction to economics. Over time, if you stay around long enough and read enough, you can pick up all the other schools of thought, like I did.

Damien: Based on some of your newsletters, I can see you are also interested in anthropology via the studies of the generations. These are major themes for investors to trade, because they’re based on slow-moving macro phenomena. Can you share what interests you about this particular framework?

John: That’s a good question and a difficult one. This topic covers a book I’m trying to write. I don’t know if I’m ever going to get it done, but it’s called The Millennium Wave. It’s about what the world is going to look like in twenty years. My basic thesis is, we’re going to see a pace of change that far exceeds anything human beings have experienced since the dawn of man. Furthermore, in terms of technology, that change is going to accelerate. We’re going to have multiple waves of technological change. It would be as if electricity, the steam engine, and the automobile all showed up at the same time. Boom!

We’re going to see massive technological revolutions. However, as human beings, our psychology was developed on African savannas, dodging lions and chasing antelopes. So we have a much slower rhythm to us. We’re not paced for change. Therefore, we’re going to have a backdrop of slow-moving generational changes.

Demographic changes are predictable: we know how many people are going to be here in forty years because they’re already born. We know how many forty-year-olds we’ll have in forty years because they’re already born. So, we can see these changes coming at us.

If you’re Japan, you’re walking into a demographic nightmare. Russia is a demographic train wreck. And it’s not going to be but a few decades, in the grand scheme of things, until Iran will have more people than Russia. That’s got to be fit into your equations. You’ve got to look at these large, broad changes that are happening.

In the US, we’re going to be running into the freight train of Medicare and Social Security. There’s just not any way to get around it. We’re going to have to make tough generational decisions about how to handle that. And how we handle it is going to have enormous implications for our economy. If we handle it the way it’s likely to be handled – which is by raising taxes – then we have said we’re making a decision, conscious or not, that we’re going to become Europe. That means high residual unemployment and difficult, slower growth of individual opportunities.

There are other large changes when you talk about the demographic issues. Europe would have to take massive numbers of immigrants in order to support their system. They’re just not prepared for that. Neither is Japan. The US is blessed with a world population that wants to come here and are not very culturally different from us – especially the Hispanic populations. We’re going to need those immigrants. I think that one of the most economically suicidal things we’re doing today is trying to figure out how to close the borders. We need to be doing the opposite. We need to figure out how to open the borders. It needs to be a more rational policy than we have now. Again, you have to put those things into the financial equations.

We also have the fast-moving things such as the growth of biotech and the complete retooling of our telecommunications network over the next ten years. The way we communicate with each other and the way we receive information is also going to be significantly different in the next ten years. There will still be human beings talking, but how we sort through and assess information is going to be different. There are going to be winners and losers in that competition.

I do a lot of biotech research to determine where it’s going. For instance, you could construct an investment play where you are long life insurance companies and short annuity insurance companies, because we’re going to live much longer than any of the actuaries would tell us. That means life insurance companies aren’t going to have to pay, while annuity companies are going to have to pay longer. That trade is probably not ready to happen yet. But when the perception kicks in, that’s going to be a very good trade.

The new medical devices and therapies that are coming along are going to be transformational. I think about what kind of impact that will have on societies and generations – what John Howe and Richard Strauss call “the Fourth Turning,” which we’re in the middle of. All of these things have an impact on the way I think.

Read More

Category: Think Tank

Trading Idea: Sell AIG

12/3/2009 We have been watching AIG after it fell below its recent support (red lines on the attached chart) around $32.75…Now after almost a week of trying, and failing to move above (failing on higher volume) we now see AIG moving lower. Our first trading target would be low $20’s….and use the level of the…Read More

Category: Short Selling, Think Tank, Trading

IF US$ rallies further, what will carry trade impact be?

If today’s payroll # is the beginning of a US$ counter trend rally, one thing we’ll be for certain, we’ll get a really good idea of the size of the US$ carry trade that has been so talked about.

Category: MacroNotes

Rate Hike Odds

The fed funds futures has somewhat shifted its rate hike odds in response to the big upside surprise to Nov payrolls. By the June meeting there is now a 66% chance of a 25 bps rate hike up from 34% yesterday. There is now a 100% chance of a 25 bps hike by the Aug…Read More

Category: MacroNotes

US Payrolls rock!

The Nov Payrolls fell only 11k, much better than expectations of a fall of 125k and the prior two months were revised up by 159k. The household survey rose by 227k after a decline of 589k in Oct and combined with a drop in the labor force sent the unemployment rate down to 10% from…Read More

Category: MacroNotes

US Payrolls rock

The Nov Payrolls fell only 11k, much better than expectations of a fall of 125k and the prior two months were revised up by 159k. The household survey rose by 227k after a decline of 589k in Oct and combined with a drop in the labor force sent the unemployment rate down to 10% from…Read More

Category: MacroNotes

It’s that time of the month. Can we deliver? Canada did

Payrolls are expected to fall by 125k in Nov, down from a drop of 190k in Oct and it would be the smallest rate of decline since March ’08 but would mark the 23rd month in a row of job losses. The unemployment rate is expected to remain unchanged at 10.2%. The clues on today’s…Read More

Category: MacroNotes

King Report: Gold Bubble?

> A worse-than-expected ADP Employment Change for November (-169k vs. -150k exp) chilled traders’ appetite for stocks. But gold is a different animal, and it’s in a parabolic rise. Bad news is really good news for gold because it means ‘more juice’. Several weeks ago, we noted that gold was about 20% above its key…Read More

Category: Gold & Precious Metals, Think Tank

Liquidity vs. Solvency: Interview with Bob Eisenbeis and David Kotok

Interview of Eisenbeis and Kotok by Chris Whalen of Institutional Risk Analytics
December 2, 2009

Liquidity vs. Solvency: Interview with Bob Eisenbeis and David Kotok
Interview released on November 30, 2009, for the direct link use:

“Mr. Chairman, we have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the Fed. The Fed has cheated the Government of these United States and the people of the United States out of enough money to pay the Nation’s debt. The depredations and iniquities of the Fed has cost enough money to pay the National debt several times over… This evil institution has impoverished and ruined the people of these United States, has bankrupted itself, and has practically bankrupted our Government. It has done this through the defects of the law under which it operates, through the maladministration of that law by the Fed and through the corrupt practices of the moneyed vultures who control it.”

Rep. Louis T. McFadden (D-PA)
Committee on Banking & Currency
US House of Representatives
Congressional Record/Page 12595

First we must pause to note the passing of our friend Mark Pittman of Bloomberg News. He died last week of a heart attack. Mark was one of the great men of financial journalism. He led the fight to force the Fed to release details of its corrupt bailouts for AIG and other insolvent financial institutions. We shall carry on that fight in Mark’s memory.

We publish this issue of The IRA as the global financial markets seem to be teetering on the brink of a new period of instability. The final Q3 2009 data from the FDIC is loaded into The IRA Bank Monitor and, as we reported several weeks ago with our preliminary results, stress in the banking industry is up from Q2 2009 and by a significant margin.

The number of FDIC-insured bank units rated “F” rose from 2,256 at the end of June to 2,337 as of Q3 2009. Even with the heavily subsidized money center banks added back into the equation, the Stress Index results suggest that the US financial services sector is still sinking bow down under the weight of the highest loss rate experience in the post-WW II period. Whereas 2008 was about fear, 2009 has been about buying time. But now dwindling cash positions inside some of the largest financial institutions and investors seem to suggest that 2010 will be about resolution, whether we like it or not. This suggests that the economy will muddle along through next year and that the 2010 US mid-term elections could be problematic for all incumbents.

With the apparent default by the leading government-owned holding company in Dubai, investors have been reminded that solvency remains a core problem in the global economy despite ample official liquidity. While the Fed and other central banks have thrown a great deal of fiat paper money at the solvency problem, many obligors still have piles of liabilities that were predicated on price levels and volumes in many markets that no longer pertain. Ponder why the government of China might publicly state that its banks need more capital and the next leg of the proverbial systemic risk stool may come into sharper focus.

One of the initial solutions offered to deal with the problem of insolvency in financial institutions is mandatory convertible debt or “CoCo” bonds. This is a capital finance mechanism we have long advocated because it provides additional funding for large banks to absorb losses without liquidating the entire enterprise. The advocates of “Too Big To Fail” or TBTF are right to say that sudden liquidation of a global bank is unreasonable. CoCo bonds solve this issue by allowing a partial liquidation of a bank’s portfolio without a legal liquidation of the company.

To that precise point, Robert Eisenbeis of Cumberland Advisors of Vineland, NJ, wrote in a recent commentary:

“Lloyds Bank has announced its intention to exchange outstanding subordinated debt for a new debt instrument that would be converted to common equity if its capital ratio declined below a critical value. Specifically, in the Lloyds proposal, the security would convert when its Tier 1 capital ratio fell below 5%. The instrument is called contingent capital and has recently become the latest fad among regulators both in the US and abroad. It has even been incorporated into Senator Dodd’s recently introduced financial regulatory reform bill as a means to bolster bank capital positions. Sounds like a good idea, right? Especially if an institution can be recapitalized at no cost to the taxpayer. The instrument is billed as providing an additional buffer should an institution fall on hard times. But does it really and is it the panacea that regulators see?”

The IRA spoke to Bob and David Kotok of Cumberland last week.

The IRA: So Bob, David, congratulations on announcing your new office in FL. We were on the radio last week with Dr. Karl Case, founder of the Case-Shiller Home Price Indices. He is not convinced that real estate in FL has bottomed yet. Indeed, between his comments and the Q3 2009 data from the FDIC, we are heading into year-end expecting a rough ride in 2010.

Kotok: Thank you. We are expanding with a new office in Sarasota. For us, it has been two great growth years and the firm is larger in assets, head count than ever before. Many of the new clients are in Florida. Our people are finding property at 40% and 50% of recent valuations and that makes it easy for us to move staff. Climate and friendly tax structure certainly help. We think the Florida property problem is old news; everyone will tell you about it. That seems like a sign of a bottoming process to me.

The IRA: Ah, take note that Kotok is optimistic about FL real estate. Bob, you wrote an interesting comment about contingent capital for banks this past week. You are pointing out some very obvious issues, chief among them is that given the way in which the G-20 nations have been subsidizing the bond holders of the largest banks, what is the point? Do you believe that we can restore market discipline to our financial community after such a reckless expansion of TBTF and the benevolent corporate state? It’s like having no-fault insurance for auto accidents for decades, but then returning to strict liability. Are these convertible CoCo bonds really workable? This represents a pretty big change from the current socialist policy.

Eisenbeis: I presume you are asking whether firms will actually find it attractive to issue CoCo bonds, but more importantly, will they work as a means to address the too-big-to-fail problem and will the regulators have the will to force conversion?

The IRA: Yes and to actually force conversion. We’ve been arguing for debt to equity conversion to fix the money centers for over a year. But debt conversion is a pretty big departure from the free ride that Tim Geithner and his colleagues at the Fed have given global bond holders under TBTF. The officials of the Fed wrote the bond holders of Bear Stearns, AIG, Wachovia and Merrill Lynch a check c/o the US taxpayer. Eventually the Fed will be calling for tax increases to pay for this generosity. Our mutual friend and fishing companion Josh Rosner, as well as other colleagues in Washington, fully expect a VAT to be proposed by President Obama to pay for the global financial fiasco.

Read More

Category: Think Tank