Category Archives: USA / Canada

Twas the Night Before Taper: A Wall Street Holiday Poem

After several months of silence, Mustafa Mond, whom we last heard from in April, has resurfaced. Today, Mr. Mond offers us this holiday poem:

TWAS THE NIGHT BEFORE TAPER

By Mustafa Mond

Twas the night before Taper, when all through the Street
Not a whale was stirring, not even a veep.
The earnings were prepped by accountants with care,
In hopes that bonuses would be much more than fair.

The bankers were settled all smug in their spreads,
While Fed interventions entranced all their heads.
And Barack with his selfie, and Michelle with hers too,
Readjusted their cameras to spy just on you.

When out in the markets there arose such a cry,
Barry sprang from West Wing to see what was nigh.
To the news wires he flew like a bat of hell,
Knowing hestill had the masses to quell.

Markets were speeding, out of control,
The VIX off the charts—who spiked the punch bowl?
When, what to his wondering eyes should appear,
But a great big helicopter with pallets in the rear!

With an exhausted driver, tired of dollar-yen,
And a new co-pilot, it must be St. Ben.
Faster than a flash crash his beneficiaries came,
And he whistled, and shouted, and called them by name!

“Now Blankfein! Now Dimon! Wells Fargo and Citi!
On Gorman! On Moynihan! NYSE and BONY!
To the highest of highs! ‘Til market bears have fled!
After all, in the long run, we’ll all be dead!”

The yield-hungry traders scrambled for carry,
Locking in profits before the curves vary.
And up to the market-top prices arose,
While Barack’s disapproval relentlessly grows.

And then, with the microphones set to full blast,
The media watched carefully for any contrast.
Trading floors went silent, as they are apt to do,
As Fed chairman testimony makes sense to so few.

He spoke all in jargon, acronyms and indices,
Durables and deficits and payrolls and factories.
A big pile of assets he still wants to backstop:
A mortgage, a bankruptcy, a credit default swap.

His data—how thorough! Statistics—such authority!
And his protégé, this Yellen, confirmed with a majority!
His post-Fed retirement expectantly awaits,
No doubt duly hedged for much higher interest rates.

Europe and China, oil exporters like Canada,
The Saudis and Russia, and fiefdoms like Panama,
Listened closely for signs of any new shocks,
But at least they have product–unlike tech stocks!

He was measured, cogent, lacking Greenspan’s grandiloquence,
But the reaction, as always, was irrational exuberance,
As he made quite clear that ZIRP would continue,
And Wall Street rejoiced–“to the discount window!”

Thus ended St. Ben’s last public report
As chairman of the lender of last resort:
Tapering delayed, until 2014,
When St. Ben will no doubt be far from the scene.

He sprang to his chopper, having completed his duties,
Leaving risks to be rated by S&P, Fitch and Moody’s.
And on his way out, they asked, “what of safety nets?”
He cried, “Happy Holidays! And good luck with your debts!”

MustafaMond.signature

Markets irrational longer than you remain solvent, exhibit #274

2013.12.Irrational markets

Source: Russell Investments

There’s an article out on Seeking Alpha yesterday, called “Manufacturing Growth and Capital are Moving from China to Mexico“, nominally about the Mexico-China relationship to the US, but also more broadly (in my interpretation) about how we react to and measure growth in developing economies.

The key thesis here has to do with the spillover effects of China’s decelerating growth and who will pick up the slack. This may not necessarily be an exact zero-sum game, but it is to a certain extent, at least as long as Americans are still gaming, eating, drinking, driving and whatever else they demand to do, and as long as China and Mexico remain the second and third biggest trading partners of the US.

That Mexico will pick up some of this slack is a foregone conclusion. But just how much it benefits is what remains to be seen, and at least among its boosters, is what drives all this excitement we’ve been seeing about Mexico ever since the current administration was elected. Specific to this article, which was written by an equity analyst out of California called Erik Gholtoghian, the currency deficit between Mexico and China is particularly telling:

“…the Mexican peso has weakened dramatically against the dollar since 1990, almost 80%, and the peso is down 2.44% against the dollar over the past year. In other words, the Chinese yuan has strengthened 34% against the dollar since the revaluation began in 2006, but over the same time, the peso has weakened 20% against the dollar. This means the yuan is 54% stronger against the peso just over the past seven years. The result will be greatly decreasing exports from China to Mexico and increased exports from Mexico to China.”

All fine and good, but there’s something missing here and after discussing this with some folks I know around Mexico City, it strikes me that this is partly about Mexico but also about how to approach investment prospects for many emerging and frontier market countries.

I’ll begin with a basic metaphor to illustrate what I’m thinking of here. When you jump up in the air, how can you remain airborne as long as you do? Gravity should theoretically pull you back to earth, and in fact it eventually does. But there is a brief moment when you can defy the theory of gravity, due to the relationship between your body’s mass, your muscle strength and the actual gravitational force of the earth.

In the case of Mexico, economic reality has been suspended in this theory-defying space for a few years now and it’s a matter of time before indicators on the ground (no pun intended) reflect a closing of this gap. Think of it as the reverse situation of the dotcom bubble or the real estate bubble. This is the basis for value investing (as opposed to speculative investing) and at a bird’s eye level is no different from the approach Warren Buffet uses in evaluating stocks. Company ABC has low costs, stable contracts with a diversified customer base, competitive quality products and whatever, they should be making X profits per year but they’re only making a fraction of that…therefore, buy.

Here’s another comparable situation: Billy Beane, he of Moneyball fame, used the same approach when he was managing the Oakland A’s baseball team in the early 2000s. He saw underpaid players who may not hit home runs and may even have crappy batting averages, but also never seem to strike out and wind up finding their way across home plate one way or another. He exploited this for as long as he could, until the rest of baseball caught on, copied it, and eliminated his advantage. By this metaphor, Mexico’s economy is slowly being recognized by the Billy Beanes of the investing world. The difference is that Billy Beane kept his mouth shut because he knew he was on to something. Meanwhile, these investing gurus can’t stop praising Mexico as the next big thing, partly because everyone else jumping on the bandwagon makes it a self-fulfilling prophecy (which is where the baseball comparison stops) and partly because the nature of today’s evolving media universe sort of demands everyone to stake his claim as an “expert” in something.

Another difference with the Mexico situation is that there are a lot more variables that could prevent the benefits of this growth from reaching ordinary Mexicans (corruption, red tape, narco, etc) and the persistent failure of commentators on Mexico to recognize the unpredictability and range of these other variables can appear very misleading. Sometimes this failure seems to be because the commentator in question is clueless/stupid/ignorant/etc. Sometimes it’s because they have a vested interest in a positive outcome and are therefore disinclined to (publicly) focus on downside risks (here’s one recent example of this).

There is also the perennial issue of timing, which is the great bugbear of economics and investing in general. Going back to the gravity metaphor, we can predict with decent accuracy how long you can stay airborne as a result of the very specific estimate of Earth’s gravitational force being 9.81 meters per second squared. One of the main reasons for this specificity is that Earth’s gravitational force is independent of human behavior. Mexico’s economy does not enjoy the same luxury for all of the previously mentioned reasons and more.

As John Keynes is supposed to have said, “Markets can remain irrational longer than you and I can remain solvent.”

Personally, I don’t believe anything – good or bad – until I see it.

Irrational exuberance continues plaguing Bitcoin

2013.12.IgnoranceBank of America has now initiated coverage of bitcoin and puts a fair value price target at US$1,300, which depending on your view, either validates or discredits the digital currency. Personally, I have no skin in this game, I appreciate and am fascinated by the theoretical construct, but am put off by the breathlessly brainless hype surrounding it and one doesn’t have to look far to see bitcoin’s limitations.

With that said now, the BoA report link is here, and as far as I’m concerned, the most important stuff comes in at page 6, in the section entitled, “How to assess Bitcoin’s fair value?”

I admit up front I have yet to come up with a viable answer to this question, but if I may say so, I am expert at recognizing bullshit when I see it. And BoA analysts make what even they concede are very big assumptions here, but if you know the assumptions are “big” (read: unrealistic), then why bother going on about it in the first place?

Anyway, taking this piece by piece, some of the outlandish assumptions that lead to a “fair value” price of $1,300, as far as bitcoin’s value as a medium of exchange:

Given the assumption that Bitcoin will grow to account for the payment of 10% of all on-line shopping, this would suggest that US households would want to have a balance of $1bn worth of Bitcoins.

…given bitcoin’s famous finite supply cap at 21 million units, the math here isn’t quite doing it for me.

What about for the whole world? US GDP is about 20% of World GDP. If we were to assume the same degrees of penetration of e-commerce for the rest of the world and that spending by households outside the US has the same velocity, we get to $5bn worth of Bitcoins for the total desired cash/noncash balance of global on-line shopping.

…sure, but both of those assumptions are not just wrong but shockingly ignorant about how the world outside the United States operates. I don’t need to spell this one out further, do I?

In addition to its role as a mean for payment for on-line commerce, Bitcoin can be used for transfer of money (e.g. immigrant worker in the US sending remittances back home).

…the average immigrant worker in the US sending remittances back home is a) Latin American, and b) traditionally very distrustful of all financial mechanisms or intermediaries that are not cash; further, this average immigrant worker would require a level of facility with the internet that various studies simply do not bear out.

Western Union, MoneyGram, and Euronet are the three top players in the money transfer industry (with about 20% of the total market share). Let’s assume that Bitcoin becomes one of the top three players in this industry.

…actually, let’s not, for all kinds of practical reasons. See previous two rebuttals to begin with.

A thought just occurred to me: maybe this is a practical joke — like the Onion!

As far as bitcoin somehow serving as a store of value, the entire discussion here appears LSD-induced, with the following statement perhaps being the biggest whopper:

If we were to assume that Bitcoin were to eventually acquire the reputation of silver (which is an extremely ambitious assumption), this suggests that Bitcoin market capitalization for its role as a store of value could reach $5bn.

WHAT?

This is the metaphorical equivalent of saying that assuming gravity were one-tenth its current force, I could leap tall buildings in a single bound…and then going on to design a workout routine that does indeed involve me leaping tall buildings in a single bound.

Someone’s living in unreality and I’m pretty sure it’s not me. 

More evidence of a Bitcoin bubble

If this isn’t proof enough of a Bitcoin bubble, I don’t know what is:

2013 December Bitcoin

Actually you know what? I think there is better proof: THIS.

Ode to Janet Yellen: A Fed Prayer

Yellen PrayerSo Janet Yellen is officially the new Chairperson of the US Federal Reserve Board of Governors. Thanks to whatever anonymous reader just sent me this:

Dearly Beloved,

Let us pray.

Our Fed
Who art in Washington
Yellen be thy name
Thy printing come
Thy will be done by Ben as it is with Janet
And as it was before by Greenspan.
Give us this day our daily 3 billion
And increase us our debts
As we bail out our debtors
And lead us not into inflation
But deliver us from down markets
For thine is the printing, the bubble and the euphoria
Forever till taper
Amen

— Anonymous

Fed tapering, Emerging Markets, Banxico

Thanks to Brent Donnelly from Nomura for this chart showing USDMXN vs 10-year US Treasuries since “tapering” became a new market watchword:

2013.09.20.USDMXN 10 year UST

So what? Here’s so what: For anyone who ever thought Videgaray, Carstens or whoever else had any sway, when push comes to shove, dollar-peso moves almost in lockstep with Fed expectations. Put another way, whenever Bernanke & Co. decide easy money is over and raise interest rates, expect the peso to go back above 13.0+ and stay there (possibly even 14). And if Carstens or whoever replaces him is smart, they’ll keep their hands off. Draw your own conclusions about what that means for Mexican inflation, TIIE, etc.

Chart of the Day: China Mobile Users Surpass US

From Mary Meeker’s recent presentation on the state of the web (slide 67):

Chinese mobile users surpass Americans

The Cost of VIP Status, Super Bowl Edition

Vince Lombardi super-bowl-trophyNorthern winter is finally over, which means it’s time to start thinking about — what else? — next year’s Super Bowl, which will be the first in the New York area and the first in outdoor cold weather (as well as a number of other firsts which I leave to the archive-obsessed).

Some telling data points on the cost of the “experience” have come across my radar recently which I thought it appropriate to share here. The full extent of what I was sent actually covered a range of major US sporting events in the coming year and is likely more than what would be of interest to most people. To give you an idea, the second most extravagant on the list — the VIP package for the Masters Tournament at Augusta National — came in at not even 1/10 the cost of the Super Bowl package. Anyway, on to the dollar signs…

Bearing in mind the cost to air a 30-second television ad during this past January was $4 million and that the starting price of resale tickets to average fans was somewhere above $3,000, the following was sent to me as a solicitation for a “Luxury Suite Donor Program Investment” for the 2014 Super Bowl:

The total cost is $540,000. This includes the following:

• Private Luxury Suite – 30 people
• Taste of NFL Event tickets – 8 people
• Commissioner’s Lunch tickets – 4 people
• Donor Cocktail Party with NFL Owners – 4 people
• Golf Outing with NFL Owners – 4 people

As well as the following bells and whistles:

• Premium in-stadium venue (open 3 hours pregame and reopens for 90 minutes postgame)
• Full premium menu and top shelf open bar (pregame)
• Select menu items, beer, wine, and soft drinks (postgame)
• Player and cheerleader appearances
• Interactive entertainment elements and more
• Super Bowl XLVII Gift Bag
• Exclusive Stadium Collection Game Program Voucher
• Super Bowl XLVII Lanyard with Ticket Sleeve
• Dedicated security entrance to the stadium on Super Bowl Sunday
• Preferred on location stadium parking (parking fees not included)
• Exclusive Postgame Field Access – once in a lifetime chance to experience the Super Bowl the way the players do: from the field

The following firms have apparently already ponied up $1 million each for the above package: Bank Of America, BlackRock, BNYMellon, Bud Light, JP Morgan Chase, Citibank, Competitor Group, Dassault Falcon, Goldman Sachs, S.A.C. Capital Advisors, Honeywell, Hertz, Hess, Jeffries Group, Tiffany & Co, Morgan Stanley, NCR, NYSE Euronext, New York Times, Pepsi, PSE&G, Price Waterhouse, R.R. Donnelly, Starr Companies, Paul Tudor Jones and Verizon.

I suppose I should I feel grateful to have access to a 46% discount to the $1 million these other institutions paid?

I don’t have the data at the ready, but my understanding is that comparable VIP treatment for World Cup or Formula One events don’t quite reach this level.

Oh well. As my grandfather was fond of saying, “Every price has a reason.” Maybe some day I’ll be in business with someone who will benefit by footing the bill for these things.

Or maybe not.

Map Of The Day: Mexico Drug War Update

The Washington Post published this the other day:

Mexico Drug War Cartel Map

Accompanying it is a rather lengthy article (here), not to be missed, detailing the evolving intelligence challenges since Enrique Peña Nieto took office.

Also not to be missed is David Agren reporting in USA Today on the Peña Nieto Administration’s apparent new strategy which can be essentially summed as: “If we stop talking about the murders, that must mean they’re not happening anymore.”

Do not be fooled.

 

Chart of the Day: Mexicans More Efficient Than Americans In Gun Murders

Business Insider, which I generally consider to be the equivalent of People Magazine for business, actually has an interesting presentation on gun ownership in the US. I haven’t had a chance, nor will I, to verify the many claims this presentation makes, but I thought the following chart was striking. If true, this implies Mexico has more murders per capita than the US with just 20% as many guns:

Gun deaths versus gun ownership

Full presentation begins here.

Taxation With Representation, By Mustafa Mond

I am pleased to present a new guest contributor today, who goes by the tag of Mustafa Mond, presumably inspired by Aldous Huxley’s Brave New World.

In recognition of today as that annual rite of American citizenship–Tax Day–Mr. Mond has graciously offered us a piece of his mind.

Ladies and Gentlemen, Mustafa Mond: 

Democracy-Taxation-With-Representation-Mustafa-Mond

The first person to correctly identify all the references here will receive a prize to be determined at a future date.

What Central Bank FX Reserves Really Tell Us

The New York Fed has just published what is absolutely mandatory reading for anyone with a stake in the foreign exchange market. It’s a 10-page pdf entitled, “Do Industrialized Countries Hold the Right Foreign Exchange Reserves?” and is one of those rare documents whose entire text is quotable, making excerpting rather difficult, but I’ll try to keep it short. The abstract provides a pretty good summary:

That central banks should hold foreign currency reserves is a key tenet of the post–Bretton Woods international financial order. But recent growth in the reserve balances of industrialized countries raises questions about what level and composition of reserves are “right” for these countries. A look at the rationale for reserves and the reserve practices of select countries suggests that large balances may not be needed to maintain an effective exchange rate policy over the medium and long term. Moreover, countries may incur an opportunity cost by holding funds in currency and asset portfolios that, while highly liquid, produce relatively low rates of return.

And this, from the opening paragraph, is also worth drawing attention to:

To date, the foreign exchange reserves of major industrialized economies have received relatively little attention in public policy circles, with few questions posed regarding their optimal size, composition, and use. Instead, discussion of foreign exchange reserves tends to center on the large holdings of emerging market countries—including China, whose reserves reached about $3 trillion in mid-2012. Foreign currency reserves are also overshadowed in public discussion by the much larger external imbalances that countries amass in the form of trade deficits and surpluses.

The key element here is that this paper only looks at the US, the UK, Switzerland, Japan, Canada, and the euro area, and rightly so as these are the big fish of the global FX market. The brief mention of emerging market countries’ holdings highlights what’s implied in the debate but rarely stated explicitly, so allow me to do so now:

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Chart Of The Day: Food & Agriculture Demand And Supply

What this screams is the urgency of leveraging Africa’s arable land potential. I wonder how Africa would stack up against the righthand chart:

2013.04.03.Food-Agriculture demand supply

From @CamboRobert.

Plain English: Some Thoughts On Bernanke’s LSE Speech

2013.03.26.Bernanke Plain English-helicopter benBernanke gave a speech at the London School of Economics yesterday which is grabbing a lot of attention. Those who have heard or read some of his other non-Fed public lectures over the past few years will recognize that he spent about half of it reviewing some of his favorite historical lessons, mostly sourced from his pre-Fed academic work. But there were some new statements to add to this mix. My interpretation of some of the key themes:

  • The current financial crisis is in fact a classic panic: a systemwide run of “hot money” away from assets whose values suddenly became uncertain.
  • That said, there were some different bells and whistles this time, notably the introduction of new financial instruments, more varied actors beyond just banks and (in my opinion) most vitally, a scale and complexity altogether new.
  • Currency war, which Bernanke chooses to refer to as, “competitive depreciation of exchange rates”, is similarly not new.
  • The accommodative monetary policies central banks around the world have been implementing (read: zero interest rate policy) to support growth do not constitute competitive devaluations, currency wars or whatever term you prefer. The primary reason for this is that domestic demand counts for a lot more than exchange rate meddling and in any event when competitive economies both devalue their currencies, whatever effects result from these devaluations effectively cancel each other out.

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A Dissection Of Market Manipulation In The Diamond Industry

Priceonomics put up a stunning take last week on the market mechanics of diamonds which spurred a lot of reactions. Worth reading in full, and here are some excerpts to give you an idea:

“Americans exchange diamond rings as part of the engagement process, because in 1938 De Beers decided that they would like us to. Prior to a stunningly successful marketing campaign 1938, Americans occasionally exchanged engagement rings, but wasn’t a pervasive occurrence. Not only is the demand for diamonds a marketing invention, but diamonds aren’t actually that rare. Only by carefully restricting the supply has De Beers kept the price of a diamond high.”

And this:

“In finance, there is concept called intrinsic value. An asset’s value is essentially driven by the (discounted) value of the future cash that asset will generate…A diamond is a depreciating asset masquerading as an investment. There is a common misconception that jewelry and precious metals are assets that can store value, appreciate, and hedge against inflation. That’s not wholly untrue.

Gold and silver are commodities that can be purchased on financial markets. They can appreciate and hold value in times of inflation. You can even hoard gold under your bed and buy gold coins and bullion (albeit at a ~10% premium to market rates). If you want to hoard gold jewelry however, there is typically a 100-400% retail markup so that’s probably not a wise investment.

But with that caveat in mind, the market for gold is fairly liquid and gold is fungible – you can trade one large piece of gold for ten smalls ones like you can a ten dollar bill for a ten one dollar bills. These characteristics make it a feasible potential investment.

Diamonds, however, are not an investment. The market for them is neither liquid nor are they fungible.”

And this:

“We covet diamonds in America for a simple reason: the company that stands to profit from diamond sales decided that we should. De Beers’ marketing campaign single handedly made diamond rings the measure of one’s success in America. Despite its complete lack of inherent value, the company manufactured an image of diamonds as a status symbol. And to keep the price of diamonds high, despite the abundance of new diamond finds, De Beers executed the most effective monopoly of the 20th century.”

Read the rest here.

Chart of the Day: World Gold Production in 2012

World gold production last year, sourced from here. Kind of speaks for itself I think.

2013.02.26.world-gold-production

Drop Everything, Read This Now: Too Big to Jail, Too Big for Trial

Two items of highly recommended reading when you have a chance—one is the cover story from the current issue of the Atlantic Monthly, “What’s Inside America’s Banks?” by Frank Partnoy and ProPublica’s Jesse Eisinger; and the second is Matt Taibbi’s latest, “Gangster Bankers” in Rolling Stone.

Excerpting really won’t do either of these justice, so just put aside a few minutes while on the commute home or while waiting for the kids to finish ballet or during a flight delay or whatever other spare minutes you find yourself with and just read these. Both of them.

There will be a quiz on Friday.

And while you’re reading them consider this: isn’t strange that some of the very same investors who seem to have no problems buying in to the opacity of the US and European banking systems get cold feet when you bring them an openly high risk-high reward investment proposition in a less conventional market?

Sort of reminds me about some of these studies that show how psychopathic tendencies are linked to an inability to process fear.

Anyway forget about what the ratings agencies say. There’s risk everywhere. I guess the difference is that people prefer risks closer to home, even if they don’t understand them. Though by Partnoy’s and Eisinger’s accounting, it appears the tables are turning on this front too…

Here’s the link again to the Atlantic article and here’s the link again to the Rolling Stone article. You know, in case you didn’t believe me the first time. Or thought I wasn’t serious. I could not be more serious. Seriously.

Also, I am officially in love with Elizabeth Warren:

Chart of the Day: Obama, Stock-Picker Extraordinaire

This is kind of hilarious actually:

2013.02.14.ObamaSP500

Sourced from the Atlantic.

Super Bowl XLVII, Hangover Edition

There was a lot to admire and a lot to mock in last night’s noise riot in fairly equal parts. But amid all the spectacular excess that this annual contest has become, one element of it stood above everything and absolutely blew me away, and it was an advertisement of all things: Dodge’s farmer ad. I swear I am not being paid to pitch this, but I really have not been left so speechless in a very long time. The ad was apparently refashioned from a 1978 speech by the late radio broadcaster Paul Harvey, and it is poetry. Below, the ad that ran last night, followed by a previous visualization attributed to farms.com, and a transcript of the original speech.

Wow.

The transcript of the original speech:

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Intelligence, Super Bowl XLVII Edition

Considering that some three-quarters of the regular readership for Diverging Markets is physically somewhere outside the United States, I thought I’d put a few things on the table today, being the last business day before that annual rite of proud American consumerist gorging otherwise known as the Super Bowl.

Let’s get the game day stuff out of the way first. Deadspin the other day put up a very impressive map which I suppose it retrieved from Facebook showing the geographic clusters of teams’ fans throughout the United States broken down by county.

For the non-Americans among you, consider that it’s a matter of time before Facebook figures out how to do the same thing worldwide for European football, cricket, rugby, Formula One, Aussie rules, hurling, curling and all that other great stuff I never would have learned to appreciate if not for spending half of my post-college life somewhere abroad.

Now then, the map:

2013.02.01.Facebook NFL Map

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