Free Markets, Free People
Further Reading: Cocktails in New Orleans Edition
An introduction to the linguistic peculiarities of the professional kitchen.
Should Larry Ellison and Oracle be running scared?
We are seeing that fewer and fewer companies are deciding to go public. Professor Bainbridge looks into why.
We keep hearing that Bank Of America can get past its legal troubles over mortgages, and it may well. However, shareholders are still pushing a $50 billion lawsuit over the purchase of Merrill Lynch.
Tales of the Cocktail has a great new site. Yes, I’ll be there again next Summer. I say we arrange a meeting at the French 75.
Albert McMurry gives us the last part of his series on his frist trip to New Orleans for Tales:
It’s said that if you look at New Orleans’ history — founded by the French, occupied briefly by the Spanish and sold to the Americans— that there’s a real sense that we’re simply the latest landlord to sit in the chair, and well after we’re gone, this city will remain New Orleans. JT rightly stated that it is the type of city where you rest when you’re tired, eat when you’re hungry and drink when you’re sober.
That was one of the things I enjoyed about Tales, all the people who had never been to New Orleans, which for some reason surprised me. Thanks for coming Albert. Hope to see you come back soon.
The bubbles in China are showing the classic signs of a top. If “Ghost Cities” are not enough, Ponzi schemes associated with investment in them should be. Even more so in that it bubbled up in the shadow banking system.
Of course, that doesn’t mean we can’t get excited at opportunities popping up. Russia is getting very cheap!
Willem De Kooning appreciated as an artist and a cultural phenomena
Calpers wonders if it can hit their return target of 7.75% long term. I am dubious without more inflation they can do so.
China may be slowing, but our economy has hit stall speed. Our economy has never slowed to this level and not gone into recession within a year:
As the chart illustrates, the latest YoY real GDP, at 1.6% (revised upward from 1.5% in last month’s GDP estimate), is below the level at the onset of all the recessions since the first quarterly GDP was calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (1.4% versus today’s 1.6%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.6% without a recession starting in same quarter. In that case the recession began three quarters later in December 2007.
In his 2011 Jackson Hole speech, Chairman Bernanke observed that “growth in the second half looks likely to improve.” Our look at YoY GDP percent change suggests that we must indeed see stronger second half growth to avoid the recession that now appears to be a definite risk. If Q3 real GDP shows a continuation of the current trend, the NBER will likely pick a month in Q2 as the beginning of a new recession.
While overseas stocks are looking cheap there is nothing to suggest that they are not risking going lower. Many countries, including the US, are at risk of recession or severe slowdowns. All are well below trend from a long and intermediate term trend following standpoint. Dow Theory says stay away and the behavior of leading stock indicators, is bad. The Shanghai is still leading on the way down and High Yield funds are breaking support.
The Dow Jones and the S&P 500 joining hands?
I am not sure how I missed it, but did you know there is a controversy at the University Wisconsin-Stout over a Firefly poster?
Albert Edwards is still maintaining his long held projected bottom of 400 on the S&P500. Now that is even lower than I have ultimately expected. But hear him out! He also has held since 1996 that ultimately the 10 year treasury would end up at 1 1/2%. That was, and until this year, had seemed even more outlandish, but here we are:
Jeremy Grantham of GMO says this is “no market for young men”. Maybe now I am over 50 it is my time! Yet my forecast of the S&P bottoming at 400 is still met with utter derision. I have been underweight global equities since the end of 1996 and overweight government bonds. Meanwhile US 10y bond yields have fallen from 7% to 1¾%, a hair’s breadth from our longstanding 1½% target. Similarly, in my very humble opinion, S&P at 400 is almost inevitable.
I suggest reading the rest (it is short) but there is good news. The long standing bear promises to be a bull when that happens.
On the other hand Cullen Roche is more optimistic:
- This is a household balance sheet recession in the USA and not a corporate balance sheet recession as was experienced in Japan. Because their corporations were so excessively indebted their equity market remained weak for many decades as companies paid down debts rather than focusing on profit maximization.
- US corporations remain incredibly diverse and their broad global footprint has allowed them to remain profitable even during this historic downturn.
- US corporations have cut costs massively and are already experiencing close to no growth in domestic revenues. Without a massive collapse in foreign revenues corporate profits are unlikely to experience a decline that would warren stock prices at the 600 level as the Japan comparison might imply.
In short, without some sort of unforeseen catastrophic event in China or Europe I find it hard to believe that stock prices in the USA will follow the Japan story down to the 600 levels…..
I tend to be in the middle of them on this, between 600 and 700 (or its inflation adjusted equivalent) sometime in the next five to seven years, but I’ll adjust my expectations as needed. Either way, the risks are high.
Josh Brown has a great interview with Jeffrey Gundlach. I especially like this:
On Stock Dividends Being “Higher than the Yield on a Ten-Year Treasury”: he says this is nonsense because there is no risk parity between a stock and a Treasury bond, he says you have to look at this comparison on a volatility-adjusted basis or not at all. For example, If the yield on the ten-year bond doubles overnight from 3 to 6%., you’ve lost about 20% of your principle – but if Microsoft’s yield doubles from 3 to 6% overnight, you’ve probably lost 50% of your principle. Apples and oranges.
We will just repeat ourselves, those using the yield versus treasury argument to tell you stocks are cheap are dangerous to your wealth.
They are still trying to ban shorting, and banks are still declining.
Tyler Cowen on leveraging the EFSF has some of the same issues as I do:
I’ll repeat this link for background. I would feel better about the idea if the context were: “We can always go back to the trough, but leveraging the fund is the easiest way for us to strike quickly and decisively.” Instead I see too much of: “We can’t get any more from our taxpayers, so we’d better stretch this one as far as we can.” That’s just inviting the speculators to set up camp against you.
Who will fund the leverage? BRICS? American investors? Ultimately other Europeans? All of those parties already can construct their own leveraged positions in Italian government debt, if they wish. So presumably the leverage will be a hidden subsidy to the financiers, one way or another, to get them to participate. Subsidizing the debt buyers, rather than guaranteeing the debt (admittedly that may be impossible and undesirable for Germany), hardly seems like the way to go. You bear the costs of the bailout without any assurance it will work.
This German-language video suggests many of the German representatives do not know what they just voted for.
“Germany voted for the EFSF extension. Greece celebrated by going on strike.”
Of course, we don’t know if Slovakia will even approve the EFSF. Yep, the grand dreams of Euro stability hinge for the moment on Slovakia.