Month: January 2014

Select excerpts from this month’s client letter by IceCap Asset Management

The World is Booming

If one were only to look at the stock market and the buzz within New York, London, San Francisco, Sydney or Toronto; they would conclude that the world is indeed booming.

After all, people say the stock market is a leading indicator and that is telling us that the world is bursting at the seams with accelerating growth. In addition, business in restaurants, shops and real estate in these major cities are also off the charts. And of course, the leading financial news stations are tripping over themselves with gushes of great news.

Now, we don’t mean to be the party pooper; however one must understand what is really happening to truly appreciate the still, slow moving and delicate economic pickle the world has been stuck with. For starters, these major cities are always booming. When is the traffic not flowing, when are the restaurants not chalk full, and when are the brownstones not expensive? Instead, for a better picture of economic life, feel free to visit St. Louis, Winnipeg, or Marseilles and we’re sure you’ll have no problems at all securing that dinner reservation.

Peeling away the top layer of fabulous news resulting from the stock market, we cannot help but see that the deep structural issues associated with the 2008-09 crisis remain. The mountains of bad debt have simply shifted away from specific investors, to governments and their tax payers.

From a global perspective, this transfer of bad debt from specific investors to tax payers is THE most important issue to understand. In simpler terms, and unknown to many, the bad debt has been spread around the world for everyone to share. Yes, socialism has arrived and few in our capitalistic world have noticed.

Now, if we said “Okay the bad debt has been spread around, let’s everyone take losses and then we’ll be on our way,” then that would have been a good thing. On with the show.

However, major governments and central banks have decided that no one will take losses, and everything will be okay over time. To prevent (actually “delay” is a better term) these losses, the following occurred:

1 – 0% interest paid on savings
2 – bailouts to big banks
3 – money printing
4 – currency manipulations
5 – long-term interest rate manipulations

Of course, these extreme policy responses have resulted in:

1 – extreme sluggish growth
2 – extreme unemployment
3 – and perhaps the most terrifying of all extremely unhappy masses

And when we say masses, we mean the average person not working on Wall, Bay or Threadneedle Streets. This is where change will occur.

And, it is the unhappy masses that will shape the world in 2014 and beyond. Although this is very clear to some people, the world is on the verge of experiencing even more draconian responses from our world leaders.

First up is the 10% wealth tax which will occur in the Eurozone countries. In our last global market outlook, we provided the details behind this IMF issued and endorsed recommendation. The thinking is that if everyone contributed 10% of their wealth to the governments then that would be enough to restore debt levels to pre-2008 levels. The key words are “tax on your wealth” not a tax on your income – two completely different animals. Europe actually believes their citizens will be quite fine with having 10% lopped off of their bank and investment accounts – we disagree.

Next, the Eurozone is likely to see negative interest rates. Apparently paying little old ladies 0% on their savings wasn’t evil enough. Now, to further improve morale amongst the savers, the ECB is increasingly becoming comfortable with banks charging people for having their savings on deposit. Europe actually believes that if there is a penalty for keeping money on deposit, people and companies will instead spend their lifelong savings which will help with the recovery.

Instead, we see the opposite happening: People and companies will simply withdraw or hoard their money instead.

Why is there such a positive outlook by European governments for Europe? Simply put, the Eurozone governments believe they will not experience any reputational damage from taxing the rich and stealing from the poor.

Now, at various times many emerging market countries experienced catastrophic money problems as well. In the end, just as every rational human being would do – foreign money fled along with local private money. The result was a complete collapse of the local currency, moon high interest rates as well as zero access to international capital markets.

Yet in Europe, the espresso-sipping and champagne-gurgling powers-that-be, actually believe the continent will have no reputation damage whatsoever. Foreign money will stay put, locals will stay put. All the wealth will stay put.

We completely disagree, and unless all 18 Eurozone countries agree to form one government, create one tax code and consolidate all debt the world will be facing the largest debt default in the history of mankind.

* * *

Read the full letter below (pdf)

 

via Zero Hedge http://ift.tt/1mZWrCE Tyler Durden

Select excerpts from this month’s client letter by IceCap Asset Management

The World is Booming

If one were only to look at the stock market and the buzz within New York, London, San Francisco, Sydney or Toronto; they would conclude that the world is indeed booming.

After all, people say the stock market is a leading indicator and that is telling us that the world is bursting at the seams with accelerating growth. In addition, business in restaurants, shops and real estate in these major cities are also off the charts. And of course, the leading financial news stations are tripping over themselves with gushes of great news.

Now, we don’t mean to be the party pooper; however one must understand what is really happening to truly appreciate the still, slow moving and delicate economic pickle the world has been stuck with. For starters, these major cities are always booming. When is the traffic not flowing, when are the restaurants not chalk full, and when are the brownstones not expensive? Instead, for a better picture of economic life, feel free to visit St. Louis, Winnipeg, or Marseilles and we’re sure you’ll have no problems at all securing that dinner reservation.

Peeling away the top layer of fabulous news resulting from the stock market, we cannot help but see that the deep structural issues associated with the 2008-09 crisis remain. The mountains of bad debt have simply shifted away from specific investors, to governments and their tax payers.

From a global perspective, this transfer of bad debt from specific investors to tax payers is THE most important issue to understand. In simpler terms, and unknown to many, the bad debt has been spread around the world for everyone to share. Yes, socialism has arrived and few in our capitalistic world have noticed.

Now, if we said “Okay the bad debt has been spread around, let’s everyone take losses and then we’ll be on our way,” then that would have been a good thing. On with the show.

However, major governments and central banks have decided that no one will take losses, and everything will be okay over time. To prevent (actually “delay” is a better term) these losses, the following occurred:

1 – 0% interest paid on savings
2 – bailouts to big banks
3 – money printing
4 – currency manipulations
5 – long-term interest rate manipulations

Of course, these extreme policy responses have resulted in:

1 – extreme sluggish growth
2 – extreme unemployment
3 – and perhaps the most terrifying of all extremely unhappy masses

And when we say masses, we mean the average person not working on Wall, Bay or Threadneedle Streets. This is where change will occur.

And, it is the unhappy masses that will shape the world in 2014 and beyond. Although this is very clear to some people, the world is on the verge of experiencing even more draconian responses from our world leaders.

First up is the 10% wealth tax which will occur in the Eurozone countries. In our last global market outlook, we provided the details behind this IMF issued and endorsed recommendation. The thinking is that if everyone contributed 10% of their wealth to the governments then that would be enough to restore debt levels to pre-2008 levels. The key words are “tax on your wealth” not a tax on your income – two completely different animals. Europe actually believes their citizens will be quite fine with having 10% lopped off of their bank and investment accounts – we disagree.

Next, the Eurozone is likely to see negative interest rates. Apparently paying little old ladies 0% on their savings wasn’t evil enough. Now, to further improve morale amongst the savers, the ECB is increasingly becoming comfortable with banks charging people for having their savings on deposit. Europe actually believes that if there is a penalty for keeping money on deposit, people and companies will instead spend their lifelong savings which will help with the recovery.

Instead, we see the opposite happening: People and companies will simply withdraw or hoard their money instead.

Why is there such a positive outlook by European governments for Europe? Simply put, the Eurozone governments believe they will not experience any reputational damage from taxing the rich and stealing from the poor.

Now, at various times many emerging market countries experienced catastrophic money problems as well. In the end, just as every rational human being would do – foreign money fled along with local private money. The result was a complete collapse of the local currency, moon high interest rates as well as zero access to international capital markets.

Yet in Europe, the espresso-sipping and champagne-gurgling powers-that-be, actually believe the continent will have no reputation damage whatsoever. Foreign money will stay put, locals will stay put. All the wealth will stay put.

We completely disagree, and unless all 18 Eurozone countries agree to form one government, create one tax code and consolidate all debt the world will be facing the largest debt default in the history of mankind.

* * *

Read the full letter below (pdf)

 

via Zero Hedge http://ift.tt/1mZWrCE Tyler Durden

Authored by Marek Dabrowski, originally posted at Project Syndicate,

The global economy’s glory days are surely over. Yet policymakers continue to focus on short-term demand management in the hope of resurrecting the heady growth rates enjoyed before the 2008-09 financial crisis. This is a mistake. When one analyzes the neo-classical growth factors – labor, capital, and total factor productivity – it is doubtful whether stimulating demand can be sustainable over the longer term, or even serve as an effective short-term policy.

Consider each of those growth factors. Over the next 15 years, demographic changes will reverse, or at least slow, labor-supply growth everywhere except Africa, the Middle East, and South Central Asia. Europe, Japan, the United States, and eventually China and East Asia will face labor shortages.

Although large-scale migration from labor-surplus regions to deficit regions would benefit recipient economies, it would almost certainly trigger popular resistance, especially in Europe and East Asia, making it difficult to support. Increasing the labor-force participation rate, especially among women and the elderly, might ease tight labor markets, but this alone would be insufficient to counter the decline in working-age populations.

The world economy cannot count on higher investment levels either. The global investment/GDP ratio, especially in advanced economies, has been gradually declining over the past 30 years, and there is no obvious reason why it would pick up again in the medium to long-term. Until recently, falling investment in the developed world had been offset by rapid increases in investment in emerging markets, mostly in Asia. But high rates of investment there are also unsustainable. As in Japan, China’s investment rate (running at almost 50% of GDP since 2009) will decline as its per capita income rises.

The third engine of growth, total factor productivity, will also be unable to maintain the relentless gains witnessed from the late 1990’s to the mid-2000’s. During this time, the global economy benefited from the confluence of several unique developments: an information and communications revolution; a “peace dividend” resulting from the end of the Cold War; and the implementation of market reforms in many former communist and other developing economies. Moreover, global growth received a further boost from the completion of the Uruguay Round of free-trade negotiations in 1994 and the overall liberalization of capital flows.

It is difficult to point to any growth impetus of similar magnitude – whether innovation or public policy – in today’s economy. No new technological revolution appears to be on the horizon. The World Trade Organization produced only a limited agreement in Bali in December, despite 12 years of negotiations, while numerous bilateral and regional free-trade agreements might even reduce world trade overall.

Worse, in the wake of the 2008 financial crisis, sluggish growth and high unemployment in developed countries have fueled demands for more protectionism. Thus, the financial liberalization of the 1990’s and early 2000’s is also under threat.

The far-reaching macroeconomic and political reforms of the post-Cold War era also seem to have run their course. The easy gains have already been banked; any further structural change will take longer to agree and be tougher to implement.

Thus, with supply-side factors no longer driving global growth, we must reassess our expectations of what monetary and fiscal policies can achieve. If actual growth is already close to potential growth, then continuing the current fiscal and monetary stimulus will only create more bubbles, exacerbate sovereign-debt problems, and, by reducing the pool of global savings available to finance private investment, undercut long-term growth prospects.

Instead, policymakers should focus on removing their economies’ structural and institutional bottlenecks. In advanced markets, these stem largely from a declining and aging population, labor-market rigidities, an unaffordable welfare state, high and distorting taxes, and government indebtedness.

The list of growth obstacles in emerging markets is even longer: corruption and weak rule of law, state capture, organized crime, poor infrastructure, an unskilled workforce, limited access to finance, and too much state ownership. In addition, markets of all sizes and levels of development continue to suffer from protectionism, restrictions on foreign capital flows, rising economic populism, and profligate or poorly targeted welfare programs.

If these problems can be addressed, both globally and at the national level, we can end the dangerous fiscal and monetary expansionism on which the world economy has come to rely and allow growth to be sustained over the long term – though at lower rates than in recent years.

via Zero Hedge http://ift.tt/1jLgQxY Tyler Durden

Authored by Marek Dabrowski, originally posted at Project Syndicate,

The global economy’s glory days are surely over. Yet policymakers continue to focus on short-term demand management in the hope of resurrecting the heady growth rates enjoyed before the 2008-09 financial crisis. This is a mistake. When one analyzes the neo-classical growth factors – labor, capital, and total factor productivity – it is doubtful whether stimulating demand can be sustainable over the longer term, or even serve as an effective short-term policy.

Consider each of those growth factors. Over the next 15 years, demographic changes will reverse, or at least slow, labor-supply growth everywhere except Africa, the Middle East, and South Central Asia. Europe, Japan, the United States, and eventually China and East Asia will face labor shortages.

Although large-scale migration from labor-surplus regions to deficit regions would benefit recipient economies, it would almost certainly trigger popular resistance, especially in Europe and East Asia, making it difficult to support. Increasing the labor-force participation rate, especially among women and the elderly, might ease tight labor markets, but this alone would be insufficient to counter the decline in working-age populations.

The world economy cannot count on higher investment levels either. The global investment/GDP ratio, especially in advanced economies, has been gradually declining over the past 30 years, and there is no obvious reason why it would pick up again in the medium to long-term. Until recently, falling investment in the developed world had been offset by rapid increases in investment in emerging markets, mostly in Asia. But high rates of investment there are also unsustainable. As in Japan, China’s investment rate (running at almost 50% of GDP since 2009) will decline as its per capita income rises.

The third engine of growth, total factor productivity, will also be unable to maintain the relentless gains witnessed from the late 1990’s to the mid-2000’s. During this time, the global economy benefited from the confluence of several unique developments: an information and communications revolution; a “peace dividend” resulting from the end of the Cold War; and the implementation of market reforms in many former communist and other developing economies. Moreover, global growth received a further boost from the completion of the Uruguay Round of free-trade negotiations in 1994 and the overall liberalization of capital flows.

It is difficult to point to any growth impetus of similar magnitude – whether innovation or public policy – in today’s economy. No new technological revolution appears to be on the horizon. The World Trade Organization produced only a limited agreement in Bali in December, despite 12 years of negotiations, while numerous bilateral and regional free-trade agreements might even reduce world trade overall.

Worse, in the wake of the 2008 financial crisis, sluggish growth and high unemployment in developed countries have fueled demands for more protectionism. Thus, the financial liberalization of the 1990’s and early 2000’s is also under threat.

The far-reaching macroeconomic and political reforms of the post-Cold War era also seem to have run their course. The easy gains have already been banked; any further structural change will take longer to agree and be tougher to implement.

Thus, with supply-side factors no longer driving global growth, we must reassess our expectations of what monetary and fiscal policies can achieve. If actual growth is already close to potential growth, then continuing the current fiscal and monetary stimulus will only create more bubbles, exacerbate sovereign-debt problems, and, by reducing the pool of global savings available to finance private investment, undercut long-term growth prospects.

Instead, policymakers should focus on removing their economies’ structural and institutional bottlenecks. In advanced markets, these stem largely from a declining and aging population, labor-market rigidities, an unaffordable welfare state, high and distorting taxes, and government indebtedness.

The list of growth obstacles in emerging markets is even longer: corruption and weak rule of law, state capture, organized crime, poor infrastructure, an unskilled workforce, limited access to finance, and too much state ownership. In addition, markets of all sizes and levels of development continue to suffer from protectionism, restrictions on foreign capital flows, rising economic populism, and profligate or poorly targeted welfare programs.

If these problems can be addressed, both globally and at the national level, we can end the dangerous fiscal and monetary expansionism on which the world economy has come to rely and allow growth to be sustained over the long term – though at lower rates than in recent years.

via Zero Hedge http://ift.tt/1jLgQxY Tyler Durden

“Those who give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”
– Ben Franklin

The Founding Fathers valued privacy over safety. Indeed, the Revolutionary War was largely started to stop the use of spying by the British. Background here. In other words, the Founding Fathers gave up their safe life with little freedom to strive for real freedom.

The American people got spooked after 9/11, even though 9/11 was entirely foreseeable, and even the chair of the 9/11 Commission said that the attack was preventable.

But we are now remembering that liberty is more important than some mythical concept of complete safety.

A new AP-GfK poll released yesterday finds:

Americans are increasingly placing personal privacy ahead of being kept safe from terrorists, according to a new Associated Press-GfK poll. More than 60 percent of respondents said they value privacy over anti-terror protections.

It’s about time.

In Related News:

Forget Metadata … The NSA Is Spying On EVERYTHING

 

via Zero Hedge http://ift.tt/1a2qt8m George Washington

Sometimes, in cables amongst themselves, politicians tend to forget that “real people” will eventually get to read their words (either that or they realize but just don’t give a damn), and they drop the facade and talk in real terms. As Grant Williams explores in the following excellent discussion, the phrase “propitiate public opinion” among Spanish and UK minsters arguing over Gibraltar sums up perfectly the world in which we live. Propitiate – to make (someone) pleased or less angry by giving or saying something desired. Behold, politics.

 

In a confidential dispatch from Madrid to Geoffrey Howe, the then Foreign Secretary, Ambassador Parsons wrote:

“The King emphasised, as he had done with me before, that that requirement was to take some step over Gibraltar which would keep public opinion quiet for the time being.

 

“It should be clearly understood in private by both governments that in fact Spain did not really seek an early solution to the sovereignty problem.

 

“If [Spain] recovered Gibraltar, King Hassan of Morocco would immediately activate his claim to Ceuta and Melilla.

 

“The two foreign ministers should reach a private understanding between each other, differentiating between their actual aim and the methods used to propitiate public opinion on both sides.”

Did you spot it? No?

Well here it is again in slow motion:

“T h e  t w o  f o r e i g n  m i n i s t e r s  s h o u l d  r e a c h  a  p r i v a t e
 u n d e r s t a n d i n g  b e t w e e n  e a c h  o t h e r,  d i f f e r e n t i a t i n g
 b e t w e e n  t h e i r  a c t u a l  a i m  a n d  t h e  m e t h o d s  u s e d  t o
 p r o p i t i a t e  p u b l i c  o p i n i o n  o n  b o t h  s i d e s.”

… and here’s the super-slo-mo close-up frame (if you have 3D glasses, put them on now):

“… P R O P I T I A T E   P U B L I C   O P I N I O N …”

Let’s go to the dictionary:

pro·pi·ti·ate transitive verb pr?-pi-sh?-?t : to make (someone) pleased or less angry by giving or saying something desired

Behold, politics.

Sometimes, in cables amongst themselves, politicians tend to forget that “real people” will eventually get to read their words (either that or they realize but just don’t give a damn), and they drop the facade and talk in real terms.

Sir Richard Parsons’ words, translated, are telling:

The two foreign ministers should work out what needs to be said to keep the public happy whilst they simultaneously pursue a completely different agenda — one which they feel best benefits the political ambitions of each side.

Now, I’m not telling many of you something you didn’t already know — although there may be a few amongst you who still believe that all elected officials are there for the good of the people — but to see how things look when the mask slips and the monster behind is revealed is important in what I suspect could be a seriously turbulent year politically.

Mark the dates May 22nd to 25th in your diaries, folks.

That is the time frame during which elections to the EU Parliament must be conducted this year, and the potential for the politicians and bureaucrats who creep backwards and forwards to Brussels (on expenses) to receive a major wake-up call increases by the day.

Historically, turnout at EU parliamentary elections has been abysmal fairly poor and has declined consistently to the point where, in 2009, the percentage of eligible voters who turned out to select representatives to the body that would go on making ever more decisions about how they would be allowed to live their lives was just 43%.

The result?

Well, the people of Europe got the parliament they deserved.

Buy perhaps things will change this time?

As Grant Williams writes in this week’s Things That Make You Go Hmmm… the EU Parliament looks like this:

By the time May 26th dawns on Europe, this picture could well be completely redrawn, as a group of previously irrelevant political parties look to capitalize on the growing disaffection with the EU project and its common currency, and are prepared to seize as much power as the citizens of Europe will grant them.

The problem is, these parties are nearly all extremist in nature; but whether right- or left-wing, they unite beneath an anti-Europe banner, and that may be enough to sweep them to relevance and give them a strong hand at the negotiating table. 

 

Full Grant Williams Letter below…

TTMYGH_27_Jan_2014

via Zero Hedge http://ift.tt/1d8QfCQ Tyler Durden

Sometimes, in cables amongst themselves, politicians tend to forget that “real people” will eventually get to read their words (either that or they realize but just don’t give a damn), and they drop the facade and talk in real terms. As Grant Williams explores in the following excellent discussion, the phrase “propitiate public opinion” among Spanish and UK minsters arguing over Gibraltar sums up perfectly the world in which we live. Propitiate – to make (someone) pleased or less angry by giving or saying something desired. Behold, politics.

 

In a confidential dispatch from Madrid to Geoffrey Howe, the then Foreign Secretary, Ambassador Parsons wrote:

“The King emphasised, as he had done with me before, that that requirement was to take some step over Gibraltar which would keep public opinion quiet for the time being.

 

“It should be clearly understood in private by both governments that in fact Spain did not really seek an early solution to the sovereignty problem.

 

“If [Spain] recovered Gibraltar, King Hassan of Morocco would immediately activate his claim to Ceuta and Melilla.

 

“The two foreign ministers should reach a private understanding between each other, differentiating between their actual aim and the methods used to propitiate public opinion on both sides.”

Did you spot it? No?

Well here it is again in slow motion:

“T h e  t w o  f o r e i g n  m i n i s t e r s  s h o u l d  r e a c h  a  p r i v a t e
 u n d e r s t a n d i n g  b e t w e e n  e a c h  o t h e r,  d i f f e r e n t i a t i n g
 b e t w e e n  t h e i r  a c t u a l  a i m  a n d  t h e  m e t h o d s  u s e d  t o
 p r o p i t i a t e  p u b l i c  o p i n i o n  o n  b o t h  s i d e s.”

… and here’s the super-slo-mo close-up frame (if you have 3D glasses, put them on now):

“… P R O P I T I A T E   P U B L I C   O P I N I O N …”

Let’s go to the dictionary:

pro·pi·ti·ate transitive verb pr?-pi-sh?-?t : to make (someone) pleased or less angry by giving or saying something desired

Behold, politics.

Sometimes, in cables amongst themselves, politicians tend to forget that “real people” will eventually get to read their words (either that or they realize but just don’t give a damn), and they drop the facade and talk in real terms.

Sir Richard Parsons’ words, translated, are telling:

The two foreign ministers should work out what needs to be said to keep the public happy whilst they simultaneously pursue a completely different agenda — one which they feel best benefits the political ambitions of each side.

Now, I’m not telling many of you something you didn’t already know — although there may be a few amongst you who still believe that all elected officials are there for the good of the people — but to see how things look when the mask slips and the monster behind is revealed is important in what I suspect could be a seriously turbulent year politically.

Mark the dates May 22nd to 25th in your diaries, folks.

That is the time frame during which elections to the EU Parliament must be conducted this year, and the potential for the politicians and bureaucrats who creep backwards and forwards to Brussels (on expenses) to receive a major wake-up call increases by the day.

Historically, turnout at EU parliamentary elections has been abysmal fairly poor and has declined consistently to the point where, in 2009, the percentage of eligible voters who turned out to select representatives to the body that would go on making ever more decisions about how they would be allowed to live their lives was just 43%.

The result?

Well, the people of Europe got the parliament they deserved.

Buy perhaps things will change this time?

As Grant Williams writes in this week’s Things That Make You Go Hmmm… the EU Parliament looks like this:

By the time May 26th dawns on Europe, this picture could well be completely redrawn, as a group of previously irrelevant political parties look to capitalize on the growing disaffection with the EU project and its common currency, and are prepared to seize as much power as the citizens of Europe will grant them.

The problem is, these parties are nearly all extremist in nature; but whether right- or left-wing, they unite beneath an anti-Europe banner, and that may be enough to sweep them to relevance and give them a strong hand at the negotiating table. 

 

Full Grant Williams Letter below…

TTMYGH_27_Jan_2014

via Zero Hedge http://ift.tt/1d8QfCQ Tyler Durden