Article Collection 03/12/14

Macroeconomics

George Soros on “The World Economy’s Shifting Challenges

Deutschbank predicts which hedge fund strategies will work – and how well – in 2014. I suspect this will turn out to be more accurate than inaccurate.

Goldman Sachs’ major macro worries in 2014 – includes their top 5 risks to their forecast and another top 5 risks to their market view. More recently, Goldman has cut their forecast of US 2014Q1 GDP growth from 3% to 1.5%.

US most overvalued firms in terms of price to sales ratios (as opposed to other common metrics such as price to earnings, price to book, and price to free cash flow). Also from Goldman with more digression. For a full picture, see Seth Klarman’s excellent letter to his investors. There is also Mohamed A. El-Erian’s examination of what is going on with investment in the US, and a related overview of what’s up with capex investment relative to history and expectations. Some analysis from SocGen, “2013 was a year of weakening cash flow growth, lower profit growth, deteriorating earnings quality, and corporates pilling on the debt.” Interestingly it seems corporate America agrees on balance, as management is quietly selling off their holdings, suggesting even company management feels their stocks are overvalued.

Why are firms in the above discussion overvalued? Well here is more evidence that the Fed’s quantitative easing is your Huckleberry – tapering and hints of future rate hikes cause distress because markets are worried about what happens when money ceases to be free. (Reduction of purchases, i.e. “tapering,” should be worrying as markets have underperformed since the initial December taper dropped us from $80 billion to $65 billion per month, now April purchases are to be scaled down further to $55 billion per month. However I wouldn’t worry too much about rate hikes as the Fed can’t raise rates very high when the US’s total public debt is $17 trillion and counting, every rate hike of 1% is another $200 billion to our annual interest expense, i.e. it is nearly impossible to go from the current 0.25% to say, 5.25% as our annual interest payment would go from $225 billion to over $1 trillion.)

Did the “Obama Stimulus” work? It depends how you define work; some seem to think it worked far better than I do, but this definition of “work” is looser than mine; we debt financed a loan and then threw much of the money away, so I would say the return on investment from the stimulus was terrible. I also find the “stimulus was too small” claim ludicrous in light of the huge obstacles in efficiently enacting fiscal policy. There is also the lack of a counterfactual, as the stimulus did not occur in a vacuum but rather the Fed was engaging in policy as well, and this would mean any fiscal policy’s effects get overstated.

To the extent that QE has reduced unemployment and boosted confidence, it could be considered a success. For the counterfactual, we need only look at the EU. However, to the extent that QE has attempted to unleash a wealth effect it has failed, as wealth inequality is getting worse. In order for a wealth effect to fuel consumption, wealth must be more widespread rather than centralized. Incidentally, if firms seek to boost profits, they buyback shares and maximize shareholder value by cutting superfluous jobs, however those losing their jobs now consume less, pay less in taxes, and need more government benefits; shareholders gain wealth, perhaps triggering a wealth effect increasing consumption of luxury items, they also pay less in taxes – wealth appreciation taxed as capital gains rather than income – than perhaps the people laid off originally. The result can be less tax revenue alongside higher government expenditure thus greater deficits, and greater centralization of wealth. I don’t have a problem that surgeons make way more than clerks (income inequality), I do however have a problem with people in possession of far more money than surgeons paying a lower effective tax rate than clerks (wealth inequality). The cynical, but not wrong, concise overview of QE’s effects.

Unemployment rises to 6.7%, number of working people aged 55-63 surges to new record high; the labor force participation rate is lowest in 40 years, while the young are working less than ever.

Laugh riot that is the Obama budget proposal.

Fannie and Freddie predictably to get a bullet to head; the proposed replacement mechanism looks cute on paper, though we’ll have to see what the lobbyists do and further research on the new questionable incentive structures is warranted.

Related, the housing market is not quite as fixed as you might think it is; and despite population growth home ownership rates are near 1996 levels.

More housing market news: home sales are markedly slowing and we’re seeing increases in the number of all-cash buyers, slowing sales is not surprising given the Fed taper and subsequent rise in mortgage rates. The Q4 rise in student loan debt to a new all-time high of $1.08 trillion has finally been blamed for slowing home sales, “20 percent of buyers under the age of 33, the prime group of first-time buyers, delayed their purchase because of outstanding debt. 56 percent of younger buyers who took longer to save for a downpayment identified student debt as the biggest obstacle.” I’ve been saying this was inevitable for over 2 years now: high student loan debt, weak job market, large expected (and necessary) future tax increases, the need for young people to buy homes at artificially high prices, and the need for young people to consume more than ever in order to fuel economic growth – the math simply doesn’t work. But then again I’m also that crazy guy who dares to say “housing is not an investment” because, well, it isn’t.

International Monetary Fund (IMF) forecasting failures; note, few forecasters do any better, this is the norm rather than the exception, for example see forward guidance projections. Forecasting is hard.

Russia, Ukraine, EU and the role of natgas. Incidentally, the Ukrainian yield curve is massively inverted. A bailout (by EU, as EU’s already weak banking system is very exposed to Ukraine) will probably be necessary to avoid default, although credit default swap spreads suggest the market still finds Argentina and Venezuela to be higher default risk (or conversely “lower chance of bailout”) than the Ukraine.

Very cogent argument by Michael Pettis regarding emerging market fragility, excerpted and full.

How to turn $1 in to $175,000 in Venezuela.

EU admits monetary union leads to “increased unemployment and social hardship”; to survive in present form the EU must have full fiscal union, however this all but requires political union and thus will not happen. Disinflation and deflation are also souring hopes of any EU recovery.

Global debt reaches $100 trillion, up $30 trillion from 2007; related is this excellent critique of the present state of global finance.

Abenomics lets out what is likely to be its final whimpers: December 2013 turns into rout, the trade deficit explodes from energy imports and less global demand, equity markets seem to have lost momentum, and nuclear power plants are to be brought back online mid way through 2014 out of necessity. Growing the money supply via QE can probably fix many things, but it can’t fix demographics. For those interested in the similarities between Japan’s 1989-crisis-until-now and the US 2008-crisis-until-now, this article from 2008 is a must read.

Bitcoin: MtGox implosion; Wired’s full story of MtGox; MtGox user information ransom demands; and a complete price history of Bitcoin itself (as well as a full report by Goldman Sachs). Of course we’d be remiss not to link Shit Bitcoin fanatics say 1, Shit Bitcoin fanatics say 2 and Bitcoin’s COO explains what Bitcoin is.

In similar news, US penny stock pump-and-dump charlatans “AwesomePennyStocks” have finally been shut down; good riddance.

Microeconomics

The emergence of the so called “next industrial revolution,” a theory I subscribe to, has raised questions about the future of labor markets. The reality is capital remains a substitute for low-skill and repetitive-task labor. For example Momentum Machine’s burger making machine (given McDonald’s recent domestic and global sales declines, expect increased automation soon as a cost cutting measure), and the ongoing death of conventional retail by internet. Expect these trends to continue and then accelerate; some policy responses are discussed here by Laura Tyson and here by Kenneth Rogoff.

An interesting NYT article on low-wage workers.

No, women do not make $0.77 for every $1 a man makes; it’s around $0.95 or $0.96.

Even with my libertarian leanings, something about Henry George’s land-tax, as opposed to taxing the property built upon the land, has always made a lot of sense to me.

In the US, a recent study by a University of Maryland Law Professor indicates debt collectors abuse the legal system.

Demographically the EU also faces problems with nasty microeconomic repercussions specifically in labor markets. One result is lower future tax revenue streams despite huge entitlement burdens.

Is the US too corrupt for a single-payer system? In brief – yes – as our lobbyists hold far too much sway over the political system and financial allotments for single-payer to ever work. Recent polling data also suggests a large number of people are not going to sign up for Obamacare.

Amazon boosted the price of Prime Membership from $79 to $99, and it probably won’t matter. My demand for amazon is inelastic even in light of a 25% price hike.

Other

More on why we shouldn’t expect the UK to participate in sanctioning Russia: London’s real estate market, wherein London, and its current real estate bubble, currently represents 22% of the UK’s GDP and hence probably much of the UK’s “recovery.” NYT article here.

Is NSA trying to infect your computer with Malware? Yes.

What happens when drones replace soldiers? War, repression, and neo-feudalism all become cheaper. (Note while the conclusions are interesting, as history nerd the “history” cited in this article is lazy, eye-roll worthy stuff at best.)

Nick Brown Smelled Bull, long but very entertaining article about uncovering bullshit; highly recommend. (Alan Sokal is also a hero of mine.)

President Obama and Secretary Kerry have frozen President Putin’s Netflix account.

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