News and politics


For me the current elections are so much different from the 2000 and 2004. I feel relaxed.

In the past, I felt like the country is attacked by the evil empire and the majority of population is cooperating with the aggressor.

This time, I have no negative feelings toward any of the candidates. They both are very decent people, deserving respect and capable to be among the leaders of this country.

What is driving my choice now, besides the obvious parallel with teh FDR, because the country is economically in the similar condition compared with 1930s and requires similar policies, is pure qualification.

What I see is that one candidate is very smart, definitively much smarter than I am. When I watch him answering questions I understand that I’m simply not capable to think that fast. He is also perfectly educated, better than I am. In him, I see what I want – a manager. A macro manager to lead the country. A micro manager to deal with every small issue, in complex or separately.

Then I see another candidate. First on all I doubt that he is smart at all. Maybe he is simply lost when he speaks to the camera, but it looks desperate. I can answer almost every question better than he does. Sometimes I feel that he has nothing to say and he simply squeezes out some meaningless word soup.

I also see how badly educated he is. His education is far inferior to mine. I don’t even compare him to another candidate’s education – that’s just a joke. I compare him to myself and I see that compared to me he is almost a high-school dropout. But I’m not running for president – he does.

I also see his judgement in action. The most important desision before elections is to pick a VP. And he chose the candidate even less qualified than himself. That is worrisome, because in order to be a successful president he must chose every single cabinet member to be at least 10x smarter than himself. And I doubt that he can.

Otherwise, he is a very nice guy and I wish him long and happy life. Somewhere away from the White House.

Please go and vote. That’s not only a duty, that’s more a privilege, one of those rare days when your opinion is worth more than zero.

Hi All! I want to share with you that I was cordially invited to start my own blog at Wall Street Examiner. You probably know this site very well as Russ Winter is contributing there as a blogger and Lee Adler is posting his excellent daily reviews for subscribers.

This is the location of my new blog, it’s titled “The yellow brick road” and I’m opening with a new installment of “Where is my recession?” serial.

Please share your feedback, do you like it, is it working well. I’ll continue to announce every post here for easy transition and I think I will keep this site for all posts that I will consider not applicable for WSE

3-month treasury bill:

Kondratieff winter IRX

Here we go, zero interest rates on the horizon. Today dealers were bidding sub-1% with treasury collateral.

Let put this in prospective:

historic 3 month treasury bill

We are below 1950s now and back to 1940s. The 1930s are on the way.

Another chart:

fedspread.png

Just to answer a post from Ron:

I went short emerging markets using a small mutual bear fund DXESX the other day. Don’t believe that the rest of the world gets a free pass if the US economy and stock market tanks plus I expect quite a bit of selling assets in the coming months to make margin calls.

I don’t know much about emerging markets but I want to post just one chart. That’s the imports and exports from ISM report:

It looks to my untrained eyes that our imports are collapsing. I hope those emerging markets are not exporting anything to us. Good for them

I know it’s painful for some neighborhoods to lose jobs to offshore locations. But I believe into creative destruction that makes the effective distribution of productive power across the globe to be imperative.

Instead we better fix on the issue of education, making our educated workforce more competitive. It’s no secret that our educational system, though quite good and superior to most Middle East and African countries, is still trailing the systems present in parts of India, China, Eastern and Western Europe as well as other civilized nations.

Though we can probably throw even more money that we borrow from China into education I think those money are going into wrong pockets. Instead I propose a solution that will be cheap, effective, but painful, because I believe that painful problems need painful solutions. We need a legislation that will mandate that:

  1. Any public school (or a class within the same school) may expel any student who is scoring below 80% of this school (class) average score
  2. Any public school (or a class within the same school) must expel any student who is scoring below 60% of this school (class) average score
  3. This rule does not apply to the lowest scoring school (class) in given district

I know that we’ll have the protests of dumb parents and their dumb children, but we know that the majority will not be affected, so those protests will be ignored. As a result we’ll have just few years until best students will bubble up to the best schools and the doors will shut close to those unfortunate who are not worth the efforts, however cruel it could sound. I don’t think we can afford to waste the best teachers time and distract good students by having few dummies in the same class.

I’m writing another article in follow-up to last week. The main developments are:

  • Subprime credit default swaps settled at impossibly low numbers, making further securitization practically impossible
  • The widespread repricing of risks is underway. Forget ABX.HE, look everywhere where risk was possible and see the retreat
  • Major investment banks are trading below 200-day line, it’s the market reaction to the dangerous games they are playing
  • Yen had jumped, people say carry trades are unwinding
  • There was the biggest jump in implied volatility VIX index ever

I think we are switching from violent corrections typical for bull markets to slow deterioration of a bear market. People will slowly understand that repricing of risks affects fundamentals, too. It’s not just a trading phenomena. What to watch next week:

  • Most important is Yen. If it grows another 3% the world markets will wet their collective pants. Even 1% will make trouble
  • Anything related to credit default swaps, that’s where the panic could be
  • Hedge funds will report Feb results – watch who’s belly up
  • March 6 is pending home sales. I expect bad surprise – watch market reaction
  • ISM report should be ok
  • Nonfarm payrolls should be non-event

I expect markets to slowly deteriorate, waiting for more bad news. This won’t be a fast correction and then move up, like last year. It will be slow and boring slide.

There is a big misunderstanding on the markets that Federal reserve can save the markets, prevent recession and bail out the faulting homeowners. Though I can’t deny enormous power that Fed possess during good times I see very little choice for them when good times are over.

The market is pricing a 100% chance of 25bp Fed cut by August. I agree that this will happen. But if anyone expects some dramatic cuts, like 0.5% by May, I’m here to warn you that this can’t happen unless Bernanke got brain damage.

1. Cutting rates now will increase long-term treasury yield

Many people think that when Feds cut the 10-year treasury rates go down. Nothing can be more wrong. Long-term rates reflect the trust in dollar to preserve its value over time having low inflation. Any sign of dowish Feds not willing to fight inflation in desire to prevent inevitable recession will destroy the trust in dollar and send the rates up. That will also increase the cost of mortgages, not something we need to face now

2. Cutting rates now will hurt the dollar and raise inflation

The fragile balance of huge outstanding carry trade positions is standing on trust in dollar stability. The rate cut during inflation above comfort zone will trigger the unwinding of carry trade. The sharp decline of the dollar will send import prices up, making everything more expensive, thus increasing inflation. I understand the Mish’ claim that inflation is a monetary phenomena, but jumping import prices do have the direct effect on what we measure, i.e. the basket of prices

3. Cutting rates now will crush the stock market

The enormous $800-billion current account deficit of United States is one of the major sources of performance of all domestic markets, including stocks and real estate. Crushing the dollar with rate cuts will reduce the desire of foreign investors to bring more money in. We will have to live for what we earn, which we didn’t do for a decade. Declining current account deficit will crush the markets

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