Posts filed under “Think Tank”
Europe on the Brink
And Then There Was Leverage
Too Big To Save
Those Wild and Crazy Swiss
A Positive Third Quarter?
New York and Maine
We have avoided Armageddon, at least for now. The cost to the US taxpayer has been a few trillion. Some in the media are loudly announcing the end of the recession. But we are not out of the
woods yet. There are a few more bumps in the road. Actually, some of them are quite steep hills. As big as the subprime problem? Maybe.
When asked a few weeks ago what was my biggest short-term concern, I quickly replied, “European banks have the potential to create significant risk for the entire worldwide system.” This week we will glance “over the pond” to see what gives me cause for concern. Then we briefly look at a few of the bumps I mentioned, which are likely to stretch out any recovery, and maybe even dip us back into recession.
But first, a quick announcement. We are making dramatic changes to my free Accredited Investor E-Letter and service, and will have a new web site and much improved content in a month or
so. But in the meantime, I have just finished a new letter; and if you sign up at the current site, you will of course get all the new services and benefits when we make the changes, as well as this new letter. Basically, this service is for accredited investors (net worth of $1.5 million or more) who are interested in learning more about and investing in alternative funds like hedge funds, commodity funds, and so on. You will get a call from one of my worldwide partners (Altegris Investments in the US, Absolute Return Partners in Europe, Nicola Asset Management in Canada, Plexus Asset Management in Africa, and Fynn Capital in Latin America) and gain access to a lot of information and an easy way to preview what I think is a great line-up of quality funds and managers. You can go to www.accreditedinvestor.ws and sign up today. Don’t procrastinate!
And for those of you in the US who are on your way to becoming accredited investors (but not there yet), my friends at CMG have a platform of alternative managers that can be tailored to your specific needs. You really owe it to yourself to see the managers on their platform. The link to their form is
And now, let’s jump into the letter.
Europe on the Brink
Globalization is a two-edged sword. On balance, it has brought prosperity to those who have
embraced it, with rising lifestyles, better health, longer lives, and more. The
more we need each other, the less likely it is that we’ll shoot each other.
Shooting your customers is not a good business strategy. And while the growth
has not been even or smooth, only a Luddite would want to return to the early
1800s or 1900s, or even 1975.
The other edge of that sword? We are connected in so very many ways, far more than
most of the world suspected. Who thought that insane lending policies at US
mortgage banks would bring the world financial system to its knees, increasing
unemployment and leading to a global recession? World trade is down 20% or
more. US railroad shipments are down more than 20% year-over-year. Chinese (and
Asian) factories have seen their orders drop, as US consumers have gone on
strike. The US trade deficit was just $25 billion last month; and while our
exports are still dropping, our imports are dropping more. Oil is becoming a
bigger and bigger share of imports, and that does not come from Asian
The US is far and away the country with the largest gross domestic product (GDP).
California would be the 7th largest country, but few think of California
in such terms. For this letter, at least, I would like to think of Europe as a
whole rather than as 27 countries. From that perspective, Europe is as
economically important to the world as the US. What happens in Europe makes a
difference in the US.
Last week we looked at the precarious position of Japan, the second largest economy
(or third if you think of Europe as a whole). It was a sobering letter. When
you realize the extent to which Japan has funded Asian expansion, what is
happening there cannot be good for the world.
But Europe’s banks have been much more aggressive in funding emerging-market
expansion than US or Japanese banks. Western European banks have lent $4.5
trillion to various emerging-market countries, businesses, and consumers. Many
Eastern European businesses borrowed in low-interest-rate euros. New homeowners
in Hungary and the rest of Eastern Europe borrowed in Swiss francs and euros,
and as their currencies have collapsed they now find they owe more on their
homes than they’re worth.
And here’s the problem. Europe’s banking system is in far worse shape than the US system. The losses may be bigger, and their capital to meet those losses is certainly less. Let’s look
at some charts. Remove sharp objects or pour another adult beverage.
As I noted last week, one of the
real benefits of writing this letter is that I get to see a lot of really
interesting information from readers and meet with very savvy investment
professionals. I recently had the privilege of sitting with a team of analysts
from Hayman Capital here in Dallas. Hayman runs a global macro hedge fund, so
they spend a lot of time thinking about how all the different aspects of the
global markets fit together. This week we again look at some of their analysis.
There was a lot of work (as in months) done here; and Kyle Bass, the founder of
the firm, graciously allowed me to share some of it with you (and kudos to Wes
Swank, who pulled this together). The graphs are theirs, and my discussion about
them is certainly informed by our meeting; but I am using the material as a
launching point, so they are not responsible for my conclusions and
Category: Think Tank
Good Afternoon: After surging for four straight sessions this week, U.S. stocks spent most of today consolidating those gains. The quiet, sideways action we had today is fairly typical of summer Fridays, but, as always, there are longer term issues to consider. What, for example, will happen to the myriad middle market businesses that depend…Read More
June Housing Starts totaled 582k (highest since Nov ’08), 52k more than expected and May was revised up by 30k. Permits were also above the consensus coming in at 563k, 39k more than expected. The gain from May was solely in the single family home category as multi family starts fell. Single family starts rose…Read More
Lakshman Achuthan is co-founder and managing director of the Economic Cycle Research Institute (ECRI), an independent organization focused on business cycle analysis and forecasting in the tradition established by ECRI’s co-founder, Geoffrey H. Moore. ECRI maintains business cycle chronologies for 20 countries around the world other than the U.S. Lakshman is the managing editor of…Read More
Earnings season continues to be on a solid track with upside surprises from IBM, GOOG, BAC, GE, and MAT. However, if we refer to Q2 reports as Revenue season in terms of gauging economic activity, the quarter so far from companies that have reported is more of a mixed bag. The discrepancy is similar to…Read More
The July Nat’l Assoc of Home Builders index rose 2 points to 17, 1 point more than the consensus and it’s at the highest level since Sept ’08 (which is the case now with many economic numbers). But, it’s still obviously well below the magic 50 level. There was a 3 point improvement in the…Read More
Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. He is the main architect for developing their proprietary stock selection models and trading algorithms. Mr. Lane is a member of the Market Technicians Association. ~~~ After testing the lower end of its’ trading range just…Read More
The July Philly Fed survey was -7.5, 3 points weaker than expected and down from -2.2 in June and in contrast to the better than expected NY survey yesterday. New Orders and Backlogs did improve but remained negative while the Employment component fell by 3.5 points to -25.3 off the lowest level since Oct. Inventories…Read More
David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More
Initial Claims totaled 522k, 31k less than expected and down sharply from 569k last week. Again, the auto sector is depressing the number. In July automakers normally shut down plants but because Chrysler and GM shut plants over the past few months due to their bankruptcies and just restarted them, we aren’t going to see…Read More