Who is for growth?

This weekend, a prominent columnist delivered some brilliant advice to a presidential candidate:

...make America the launching pad where everyone everywhere should want to come to launch their own moon shot, their own start-up, their own social movement. We can’t stimulate or tax-cut our way to growth. We have to invent our way there....

...we should aspire to be the world’s best launching pad because our work force is so productive; our markets the freest and most trusted; our infrastructure and Internet bandwidth the most advanced; our openness to foreign talent second to none; our funding for basic research the most generous; our rule of law, patent protection and investment-friendly tax code the envy of the world; our education system unrivaled; our currency and interest rates the most stable; our environment the most pristine; our health care system the most efficient; and our energy supplies the most secure, clean and cost-effective.

No, we are not all those things today...

Ok, quiz time. Is this

1. Some zany free-marketer pushing the Romney campaign to give some teeth to its "pro-growth" rhetoric?
2.  Advice to Ron Paul on a speech to rouse the Republican convention?
3. Thomas Friedman, New York Times columnist extraordinaire, in its Sunday pages advising the Obama campaign?

 Amazingly, C. The preamble was

Is there an integrated set of policies, and a narrative, that could animate, inspire and tie together an Obama second term? I think there is.... Obama should aspire to make America the launching pad..

Which gives me hope. Friedman is obviously much better connected than I. If he thinks there is even a ghost of a chance that the Obama campaign would adopt such a strategy, or that the administration would follow anything vaguely like this policy, that is tremendously good news. I thought these sorts of positions, while  middle-of-the-road growth economics, were, in the political sphere, too wildly free-market to hope for from the Romney campaign.

Think of what they mean.

• "We can’t stimulate our way to growth" is a remarkable admission for anyone in the New York Times orbit. Ok, it included "or tax cut," but an "investment-friendly tax code" has to mean low marginal rates on investment, which means low marginal rates on investment income. No way around it, lower marginal rates, broaden the base.
• "Our currency and interest rates the most stable" means likewise abandoning hope that endless rounds of Fed "stimulus" or devaluation as the key to success. Both statements are a repudiation of discretionary shoot-from-the-hip macroeconomic policy.
• A "productive" work force is not composed of protected unions and government workers, on federal boondoggle contracts.  
• "Openness to foreign talent" means we have to let people in. 
• "Rule of law" means that health, energy and financial regulation cannot be run by powerful regulators and their crony-capitalist protected industries.
• All of Friedman's startups succeed by undercutting and putting out of business old ossified but politically well connected companies, yes creating net new jobs but destroying a lot of old ones in the process. 
• If you've been reading this blog at all, you know  the likelihood that the current health care law and expansion of medicare will deliver anything like "efficiency."

These are radical views indeed. Congratulations to Friedman for stating them, and I hope his friends at the campaign are listening. A Nixon-to-China moment would certainly be refreshing.

(OK, but the moon shot analogy is just weird. What does spending about 3 percent of GDP to send two guys to the moon have to do with unleashing the innovation of thousands of new entrepreneurs? )

Things That Make You Go "Hmmmm".

This headline is not original but I could not find anything more appropriate.

About 10 days back I shared a US $ chart by Chris Kimble. Today he has an update:

Now let us see how far the Dollar goes.  This is consistent with my call for major correction in the equities in the coming days.

Today SPX dived down out of the gate but someone was trying very hard to hold the line as you can see.

Will it hold on Monday?

The last chart of the day is from dshort.com which is self explanatory.

Normally the treasury yield and equities market have moved in tandem but since the beginning of 2012, they have diverged. Is this a temporary phenomenon? If not who will catch up? The red line will come up to blue? With $ 16 trillion debt, can America afford to pay more interest?  If not then the blue line has to come down to the red. The thought itself is so fascinating!

The yield today is lower than it was at the height of the financial crisis. Does the bond market know something which the equities are not aware of?  We will soon find out.

Thanks for reading http://bbfinance.blogspot.com/. I need some stimulus from you guys and as Tim says, please click on to the Ads.  Have fun and enjoy the weekend.

The Stock Market -- Where Now?

There is an old saying: "Don't fight the tape!"  -- meaning, of course, sometimes the stock market just wants to go up regardless.  That seems to be what we have been witnessing the past few weeks as the stock market has almost regained its high for the year.

Why and where next?  First, the economy.  The economy has weakened over the past few months and seems to have stalled.  GDP growth may be zero at this point.  There are some bright spots:  the energy sector is the brightest, housing has started to look better in most sections of the country. But, the trends are down everywhere else.   A slide into negative growth territory is probably ahead in the second half of the year.

What about Europe?  The steady slide into economic and political chaos continues across the Eurozone.  The only thing new is the strong possibility that Germany may join its sister states into the slide into disaster.  None of this has much to do with the Euro at this point.  The real issue is that debt market buyers seem poised to walk away from several sectors of the European sovereign debt market.  As that happens, Europe may descend into a new dark age.  Watch Greece and Spain for a preview of the future for much of Europe.  Thus far, there has been no reform and no austerity.  There have been government layoffs in Greece and Spain, but mostly because there is simply no money left to pay them.

What about the US business community?  This sector of the economy has not been this dispirited since the 1930s.  Large swaths of the American public no longer seem to believe in free markets.  That Obama still polls as high as he does is a clear indication that capitalism is in a fight for survival.  With half of all Americans now on some form of government support, the trend is ominous.  Given this atmosphere, the business community is frightened out of its wits and unlikely to provide the normal impetus to economic recovery that has appeared in every recession since the 1930s, except, of course, this one.

Without a recommittment to free markets, it is hard to see how the US situation gets any better.  The "tax the rich" themes of the Obama campaign, where "rich" is defined as someone making income of $ 200,000 per year, is hauntingly similar to Francois Hollande's call for 75 % tax rates in France.  Unemployment in France is now in double digits and rising and growth has turned negative.  Investors are looking for ways to hide income and assets, as opposed to looking for ways to deploy their assets in new businesses and ventures. 

Congressional Democrats believe that more food stamps and more unemployment compensation is the way to promote economic growth.  You wonder if they are kidding about this.  The President thinks business can grow and prosper without entrepreneurs.  He seems to believe that people should risk their capital without any hope of economic reward.  Receiving rewards for risking capital seems to be viewed as a criminal activity by the current occupant of the White House.

With this backdrop, stocks seem fully priced even though earnings reports are favorable.  Unless and until government policy becomes more tolerant of free markets, it is hard to see anything but trouble ahead for both the stock market and the American economy.  I would continue to avoid the stock market in this unfriendly environment.

Bungee Jumping.

My clan, the accountants, must be in high demand with the Fortune 500 companies who report  their earnings every quarter. Because despite a weak economy and bad quarter, companies after companies are beating the projected EPS. Even when the top line is down or costs are high or demands are slow, they will miraculously meet or exceed the EPS even if by a penny. If this is not creative accounting, what else is it? It’s a shame that an accountant never gets nor will ever get a Nobel Prize in creative imagination. They get prize for writing stories, why not a prize for the best accountant creating profit when it is not there. How did they manage to show profit in JPM after over $ 4 billion loss? If the banks had such a great quarter how come most of them are planning layoffs? Of course US Govt. gives very generous helping hand by tweaking the FASB rules or even allowing the Banks to mark securities to books or by not following IFRS.  But manipulation is now accepted fact of life and you cannot wake up who is already awake but is pretending to be asleep.

For two days in a row, while SPX has gone up, XLF , the ETF for financials has closed in red.  Normally financials lead the market. The weakness of the financials do not bode well for the market as a whole. If these TBTF guys can’t beat the market in their own game, what hope the momo chasing investor has in picking up the nickel before the steamroller? At some point of time, things go out of hand. Now it seems is the time for LIBOR to catch up. The reserve for legal trouble will not be enough but they have the Fed to bail them out.

I remember last year, around the same time, asking the same question, how low VIX can go. Here is a graph to explain what I am talking about.

(Hat Tip: NJB Deflator)

I am not so much worried about how the market will play out tomorrow or day after. The hope driven rally is showing signs of topping but the earning season is keeping it going. But very soon the ugly head of realty will rear its head. Do I think that we are coming to an all time top? Yes and no. No because there will be another attempt by the central bankers to re-inflate the balloon. When that happens will we cross the all time of high of 2007 is the question. I expect that test to happen by November. Before that a test of the fall is around the corner. To those who think that SPX will cross 1400, I have one question. Assuming that SPX does reach 1400, that is around 25 points away. After that what? But we will cross the bridge when we come to it.

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More weird behavior in high frequency markets

Today's Coke and IBM markets are jumping every hour on the hour.  Does anyone know what the heck is going on? One guess received: another case of algorithms gone wild. But whose, and on the hour, exactly? And are there no humans left to counter this sort of thing? Looking at the google finance plot (source here) this started exactly at the open today and seems to have petered out. (Thanks Giovanni Puma for sending me the pictures.)


Update (Friday AM). Bloomberg article on it. They have no idea either, beyond suspecting an algorithm has a bug in it. But why can one trader move a large market so much?

Update 2 (Friday 10 am) Better coverage and better graphs in the Wall Street Journal, suspecting " a computer algorithm known as a time-weighted algorithmic program, or a TWAP. These programs are designed to parse trades out over a set period of time, helping explain the clockwork-like consistency of the trading. “I think some large institutional buyer is using a new algorithm,” mused Eric Hunsader, chief executive of market data service Nanex.

Translation, I think: this is a "fundamental buyer" (known as "liquidity trader" or "mark") trying to parcel a big position out by spreading the trade out through the day, using an algorithm to do so, and not really watching the results. Still... a puzzle to me why people use such algorithms. Randomizing is the only way not to get front run. And a bigger puzzle that markets for coke and IBM are effectively so illiquid in the middle of the day that even big mistakes can move prices. Stay tuned....

Common sense from France

Today's WSJ has a lovely editorial from Pascal Salin, professor emeritus of economics at the Université Paris-Dauphine. It echoes many of the things I've said about the euro crisis, but with deeper political insight....and it's from France.

A few tidbits with comment

Contrary to what is claimed daily in the media by politicians and many economists, there is no "euro crisis." The single currency doesn't have to be "saved" or else explode.

The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. ... there is no logical link between these countries' fiscal situations and the functioning of the euro system.

A currency union can work just fine without fiscal union.

..the deficits now plaguing these countries were, in large part, justified only a few years ago as necessary to initiate so-called "recovery policies."  But it is always an illusion to believe that governments could increase total demand and thereby induce producers to produce more....The present state of affairs in countries that engaged in stimulus blowouts in 2008 and 2009 should serve as proof of the failure of the Keynesian model.

A letter from Europe that rejects the confusion between common currency and sovereign default, and  sees the abject failure of stimulus? There is still hope. 

I found Prof. Salin's view of the political situation most interesting:

The "euro crisis" is a pure political construction without any economic content. It could even be said that the crisis is a splendid opportunity for many politicians to impose some of their longstanding goals on everyone else. For instance, before the introduction of the euro, many politicians who called themselves Europeans considered monetary union a stepping stone to political union....

So, in Prof. Salin's view, the Euro worthies are deliberately linking sovereign default to breaking up the euro zone in a deliberate effort to scare wary voters into accepting fiscal union. 

This process has begun and continues to develop. Politicians now argue that "saving the euro" will require not only propping up Europe's irresponsible governments, but also reinforcing and centralizing decision-making. This is now the dominant opinion of politicians in Europe, France in particular.

It's really the "centralizing decision-making" that is the problem not "political union." The US at least historically had a political union without requiring the rules on provenance of prosciutto to be written by bureacrats in Brussels.

There are a few reasons why politicians in Paris might take that view. They might see themselves as being in a similar situation as Greece in the near future, so all the schemes to "save the euro" could also be helpful to them shortly....

Yeah, but the Germans may not have any money left by then!

What to do instead? Someone else likes "shock liberalization:"

The real solutions to Europe's debt problems lie in tax cuts and deregulation, and it's here that national politicians should turn their attention. Pan-European cooperation won't deliver any government from its fiscal or economic crises. Only national governments, each working independently to implement the best possible policies, can hope to achieve that.

What a breath of fresh air.

I can't wait to read Prof. Salin's next letter on France's 75% tax -- especially in the face of the UK's disastrous and quickly repealed experience with a 50% tax.  (16 billion pounds forecast revenue turned in to two.) 

Patience Is Not A Virtue, It Is A Necessity.

Well, the C of the A-B-C in SPX did make a higher high today, although marginally higher. Obviously, everyone is now convinced of the trend change and no longer need any QE or punch bowl. It seems equities have now reached escape velocity and ready to fly to far away galaxies. It does not matter that the world around is not feeling so good. GDP estimates by the Govt. is below 2% in USA and non-existent in Europe. But who cares. At least if you take a look at VIX, you would think that there are no worries in the world and the sky is as blue as it can get. For the 3rd day running, I am showing the weekly chart of VIX and now it is at the same level as it was in 2008 before the crash.

Europe is now out of the memory and many expert chart masters are now giving all clear signal. We cannot even imagine that there can be a massive and sudden correction. Last August SPX dropped 80 points in one day. Because when we are coming down, gravity makes it that much faster. I do not think now is the time to be cute or smart. Even though the cycle top has been reached and my model is calling for an immediate correction, I am willing to wait little more, because the higher it goes, the harder it falls. And it is going up on hot air.
Gold is not responding to the enthusiasm of equities. So let us see how far the shenanigan carries the market. Let me close the post by sharing a chart from Ed Matts.

Either way the end is not very far. I personally prefer the Bearish and Bearish count which fits with my calculations. So let us have some more patience and see how it all unfolds.

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