Tuesday, November 30, 2010
Monday, November 8, 2010
The old adage says that if you throw a frog in boiling water he will quickly jump out. But if you place the frog in cold water and raise the heat ever so slightly to boiling, he will lay still and cook to death. Replace the frog with “the American taxpayer” and make the water temperature the “level of prices” and you have a metaphor for the current US monetary policy. It would most certainly not be in the best interests of politicians, or central bankers alike, to turn the inflation switch on overnight. That would result in nothing short of riots. In light of that, it is becoming increasingly obvious that the only way out from under the mountainous pile of government debt is through moderate price inflation and erosion of purchasing power over time. The other alternatives would result in a US government default or debt restructuring and we can be sure that no President, Democrat or Republican, would concede to that under his or her watch.
Some economists will contest claims of higher price levels and lower purchasing power with the sagging level of the Consumer Price Index (CPI) relative to historical inflationary periods. Contrary to some beliefs, one can argue that CPI is a manufactured index that is used as a benchmark for keeping wages, benefits, and cost of living indices in check, and fails to depict an accurate basket of goods. While deflationists are constantly pointing toward the multitude of retail discounts and dollar menu offerings they come across during trips to the mall, they fail to mention rising prices in things like beverages, clothing, pharmaceutical drugs, utilities, transportation, college tuition, and most importantly, inputs like metals (hard commodities) and agriculture (soft commodities).
There appears to be a disconnect between where actual commodity prices are going, and where consumers expect the prices of goods made from these commodities are going. Is it reasonable to think that the things we need to buy (food, clothes, cars, etc.) will miraculously become cheaper even though the inputs used to produce them are skyrocketing? NO! Some simple facts: corn is up 43% this year, soybeans are up 30%, wheat is up 34%, coffee is up 52%, cotton is up 100%. Food and clothes will become more expensive unless the labor to make these items becomes much cheaper. Fortunately, East Asia is already under pressure to improve working conditions so do not expect labor to become less costly. On the metal front: copper is up 18% year-to-date, silver is up 62%, platinum is up 20%, palladium is up 77%, and gold is up 28%. ‘Nuff said?
The laymen frequently combat these statistics with the “wealth” they are accumulating in their stock portfolios and retirement accounts. “If the stock market is up, my portfolio rises, and I am getting richer,” they quip. It appears as if American taxpayers forget that they will lose if the dollar wins the race to zero. After applauding the recent strong performance in the stock market, most Americans show no angst from the 13% decline in the dollar over the past 4 months. “So we won’t go to Europe for vacation this year!” some might crack. Unfortunately it is not that simple. The US operates at a trade deficit and we consume many goods from other countries so cutting out vacations abroad will only alleviate part of the pain caused by the weaker purchasing power of the dollar.
To my fellow frogs I fear we must be realistic and face the facts that life will become more expensive. It could get a lot pricier should the Government and the Fed not perfectly thread the needle of igniting an economic recovery while giving our foreign lenders some semblance of confidence in the dollar. We should prepare for higher prices domestically or find a way to denominate our assets in other stores of value to avoid getting cooked (buy some land or some Chinese yuan…or take my grandpa’s advice and buy 4 boxes of cereal before the price goes up!).
Sunday, November 7, 2010
Vegas is hilarious to me. I think it is pretty awesome that people come from all over the world to experience all of the different things Vegas has to offer. I was in Vegas last weekend visiting friends and doing some due diligence on a few casino stocks I own (hat tip J and Z) and I noticed some items worth sharing:
1.) Cab drivers are giving stock tips again? I was surprised to be questioned by my cab driver why I owned WYNN (traded on Nasdaq) when the better play, in his expert opinion, was the WYNN Macau stock that trades in Hong Kong (ticker: 1128.hk). When cab drivers are giving away investment tips I tend to get nervous.
2.) Vegas is still hurting. Steve Wynn said things will not get much worse but you can tell they are reaching to squeeze every ounce from the public. I was annoyed to find out that I could not get Wi-Fi in my room unless I paid the resort fee of $30 a day. That was not as bad as the $1.50 extra charge for bleu cheese olives in my martini. Lastly, table service at the club must be down a good amount. I got far too many cordial texts from the VIP guy at the WYNN asking me when will I arrive at the club. Back in the bull market, they used to drop your reservation if you did not show by midnight. Now they text you until 2 a.m. begging for your business.
3.) People are really serious about risks from the 'Death Ray' at the new Vdara hotel. If you are not familiar, the sun's reflection off the south face of the hotel is so strong that "if you're at the hotel's swimming pool at the wrong time of day -- it can singe your hair and melt your plastic drink cups and shopping bags." Check out one artist's rendering of the giant sized "ant and the microscope" catastrophe at the Vdara below. This is pure genius:
4.) The slot machine industry is mocking its own customers by putting new ridiculous games on casino floors. I came across a slot machine at the Palazzo that I had to take a quick snap of. Below, I compare a traditional slot machine (on the left) to one of the new "win on multiple lines" games (on the right). Are you kidding me? It is bad enough that people don't have to use the hand crank anymore but now they get to follow not 1 or 2 more lines....but 100 lines!
Here's to the people that plug into slot machines until they have to be woken by security...without you gentle folks, the casino's would be forced to charge Angelo Mozilo and the other sunbathers extra, when exposing them to magnified gamma rays like those at the Vdara.
Tuesday, November 2, 2010
Preceding this week’s highly anticipated midterm elections and two-day Federal Reserve meeting, PIMCO'S Bill Gross published his monthly investment outlook containing some shift in sentiment toward the very system that he advocated just over a year ago. Gross, PIMCO'S longtime Co-chief investment officer, has long been lauded as the “Bond King” and stands at the rarified investment pulpit with the likes of Warren Buffett, Jack Bogle, and Benjamin Graham. His investment outlooks are considered must-reads for anyone in financial services, as they provide insight into what the investment elite are pondering. In this piece entitled “Run, Turkey, Run,” (LINK) Gross predicts that the upcoming Fed meeting: “will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.”
Is Gross crafting PIMCO'S own obituary with a statement like this or does this signify PIMCO’s entrance into the equity world as he surrenders to fewer return opportunities in the bond market? Or is the “Oracle of Orange County” taking the first step in a monetary walk of shame, conceding that policies which made sense before have become runaway fiat freight trains that he jubilantly rode?
While Gross has always appeared to have an anti-big-government bend to his commentaries, he was not afraid to partner with the government and even imitate the Fed in 2009 when the United States was peering into the economic abyss. In his January 2009 outlook he wrote, “PIMCO’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond...For now, our Ponzi-style economy and its policy remedies encourage bond investors to mimic Uncle Sam and its global compatriots. Buy what they buy, but get there first.” (LINK) At the time, it was perfectly acceptable to run the printing press in support of our great nation as managers were desperately seeking refuge from the crisis of 2008. (In other words, "it seemed like a good idea at the time but i do remember having a few too many drinks.")
In his February 2009 outlook, Gross congratulated the Fed and showed optimism towards the unprecedented efforts at a time when markets were particularly fragile. He applauded the Commercial Paper Funding Facility and the Fed’s purchase program for agency backed mortgages opining that these two programs “have been the major policy successes to date…because they have supported and increased asset prices whose decline has been the major deflationary thrust behind the real economy. Stop asset prices from going down and with a 12-month lag, unemployment will stop going up, and President Obama’s targeted three million new jobs will have a fighting chance of being achieved” (LINK).
Today, Gross feels that the Fed and government which he admittedly partnered with in 2009 have gone too far. In his most recent note he says, “Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme…Now, however, it seems the Fed has taken Charles Ponzi one step further.” Even though the idea that developed nation’s public debt being a Ponzi scheme is not new, Gross has reached his own proverbial tipping point (in other words Gross has been sleeping with the enemy).
So why the sudden change of heart? When did we transform from the collective supporting of asset prices to what he now calls a “Sammy Scheme” (Uncle Sam’s version of a Ponzi scheme that has been orchestrated by politicians and subsequently enabled by the voters that elected them)? Maybe this is the way it always was and no one wanted to admit it? Gross is coming to grips with the reality that the Federal Reserve, despite its alleged independence, is a highly politicized tool used not only to support asset prices and provide liquidity, but fuel deficits, and rather large ones at that. I would not want to wake up and rollover to that realization either.