Weekender: Swan Spotting

November 7, 2010

My favorite piece of research this week: A power-point presentation called China — The Mother of All Grey Swans by Vitaliy Katsenelson.

Over the course of 50+ well-researched slides, Katsenelson makes a powerful argument as to why China (and secondarily Japan) is an artificially supported, government orchestrated, large-scale disaster just waiting to happen.

Does this mean it’s time to run out and short China in size? By no means. Patience is a virtue, especially when the bulls are getting high on their own supply.

With Citigroup talking about a “Super-Goldilocks” E.M. environment, and “death of the dollar” prognosticators straining to pat themselves on the back, there is no clear impetus, at least for now, to stop riding the prevailing bullish trends (let alone step in front of them).

But “right now” is still a very good time, with much of Wall Street celebrating, to be on the lookout for “gray swans” (to use the U.S. spelling) that could powerfully reverse today’s course…

To quickly recap, the concept of the “black swan,” popularized by Nassim Taleb, refers to a “high impact, hard to predict and rare event.” A gray swan, then, is a high impact, hard to predict event that is nevertheless somewhat forecastable — in eventuality if not calendar date — because a build-up of tell-tale signs allows one to “see it coming.”

At moment we have multiple gray swans to choose from, among them China, Japan, Europe / PIIGS redux, and the prospect of a U.S. housing double dip.

Maintaining a vigilant eye for gray swan developments, even when the horizon appears clear, is more than just good defense. It is also good offense. The best opportunities do not always announce themselves — often they creep in quietly, like a thief when no one is watching…

To the links!
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Gray Swan Watch

  • China – The Mother of All Grey Swans (Scribd). “Government intervention, corruption, political capital-allocation decisions take things to a new level of financial insanity…”
  • ECB Rejects Request for Greek Swap Files, Citing ‘Acute’ Risks (BB). “The European Central Bank refused to disclose internal documents showing how Greece used derivatives to hide its government debt because of the “acute” risk of roiling markets, President Jean-Claude Trichet said.”
  • Spain’s Recovery Stalls Amid Austerity Push (WSJ). “Spain’s timid economic recovery stalled in the third quarter as the result of government austerity measures, but should soon pick up again, the Bank of Spain said Friday.”
  • Ireland Leads Surge in Sovereign Risk to Record on Budget Woes (BB). “Ireland led a surge in the cost of insuring sovereign debt to a record as the government struggles to convince investors it can avert a European Union-led bailout.”
  • Bank of England must use QE to buy ‘bad mortgages’, warns Fathom Consulting (Telegraph). “Britain is in danger of creating a generation of “zombie households” that plunge the economy into a Japan-style lost decade unless policymakers take radical action to fix the banking system properly, a leading economic think tank has warned.”

QE2 Unveiled

  • Fed to Spend $600 Billion to Speed Up Recovery (NYT). “The Federal Reserve, getting ahead of the battles that will dominate national politics over the next two years, moved Wednesday to jolt the economy into recovery with a bold but risky plan to pump $600 billion into the banking system.”
  • Ben Bernanke: What the Fed Did and Why (WaPo). “The Federal Reserve’s objectives – its dual mandate, set by Congress – are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak…”
  • Bernanke says low rates won’t stoke inflation (Reuters). “Federal Reserve Chairman Ben Bernanke, fresh from announcing new measures to support the U.S. economy, said the central bank’s aggressive monetary policy will not spark unwanted inflation in the future.”

The Bernanke Backlash

  • Backlash against Fed’s $600bn easing (FT). “The US Federal Reserve’s decision to pump an extra $600bn into the economy has galvanized emerging market central banks into preparing defensive measures and sparked criticism from leading global economies.“
  • Saxo Bank Joins Chorus Of Voices Calling For End Of The Federal Reserve (ZRH). “There won’t be a second hundred years. The final countdown starts now.”
  • Doubts grow over wisdom of Ben Bernanke ‘super-put’  (Telegraph). “It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke’s openly-declared policy of generating inflation for much longer.”
  • Bernanke answers Fed’s global critics (Reuters). “I think it’s important to emphasize … that a strong U.S. economy, a recovering economy, is critical, not just for Americans, but it’s also critical for the global recovery,” Bernanke said.”

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Dollar Fight

  • Bill Gross: Fed easing may mean 20 percent dollar drop (Reuters). “The dollar is in danger of losing 20 percent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world’s largest mutual fund, said on Monday.”
  • U.S. dollar printing is huge risk — China central bank adviser (Reuters). “Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.”
  • Brazil ready to retaliate for US move in ‘currency war’ (FT). “Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.”
  • Hong Kong faces heat on dollar peg (FT). “Pressure on Hong Kong to revalue its currency – firmly pegged to the US dollar since 1983 – is mounting. There is also a growing consensus that the current level of the Hong Kong dollar and interest rates are far too low given the city’s strong economic performance.”

Emerge! Emerge!

  • Emerging Stocks Rise on Prospect of ‘Super-Goldilocks’ Economy (BB). “Emerging-market stocks climbed for a seventh day as Citigroup Inc. predicted a “super-Goldilocks” economy will send shares to record highs next year and investor Mark Mobius said the rally faces no risks any time soon.”

  • HSBC Says Recovery in Emerging Markets Is Weakening (NYT). “HSBC, Europe’s biggest bank by market capitalization, said Friday that its earnings rose in the third quarter but warned that the economic recovery in emerging markets was losing some steam.”
  • Thailand thrives in currency squalls (FT). “Thailand’s baht is up by 11.4 per cent against the dollar this year but in spite of a reliance on exports for 65 per cent of gross domestic product, the economy is booming.”
  • Wealthy and Worried, India Is Rich Arms Market (NYT). “India, flush with new wealth but worried about its national security, is rapidly turning into one of the world’s most lucrative arms markets.”
  • Indonesia warns volcano ‘could erupt for months’ (Breitbart). “Indonesia warned Tuesday its most active volcano could continue erupting for months as 50,000 remained in temporary shelters and airlines cancelled flights over the disaster-hit nation.”

Of Debt and Default

  • The Stealth Stimulus of Defaulters Living for Free (WSJ). “The mortgage-foreclosure mess could prove expensive for banks and investors. But in some states, it will also prolong an unintended economic stimulus: free housing for millions of defaulters.”
  • Millions of homeowners keep paying on underwater mortgages (LAT). “The payments absorb billions of dollars that might be used for other forms of consumer spending, creating a drag on the overall economy.”
  • In U.S., 14% Rely on Food Stamps (WSJ). “A huge number of American households are still relying on government assistance to buy food as the recession continues to batter families.”

Banks Behaving Badly

  • Year’s Total Bank Failures Top All of 2009  (WSJ). “The number of bank failures in 2010 eclipsed the total bank failures seen last year as U.S. regulators announced the closure of four more banks amid continued weakness in the U.S. economy.”
  • Don’t Look Now, But Here Come the New, New Bank Fees (WSJ). “Some are raising minimum payments on certain customers’ accounts in order to increase late penalties. Others are ramping up credit-protection insurance programs and charging customers for coverage without permission. Still others are pushing aggressively into high-fee prepaid cards, which are exempt from most of the new rules.”
  • Debt Collectors Face a Hazard: Writer’s Cramp (NYT). “When Michael Gazzarato took a job that required him to sign hundreds of affidavits in a single day, he had one demand for his employer: a much better pen.”
  • Wall Street is like a heist movie (MW). “Take the Great Bond Caper taking place right under your nose, right now. Most people don’t even know it’s going on.”

Predictable Subprime

  • The Man Who Called the Financial Crisis—70 Years Early  (WSJ). “Decades before anybody had ever heard of a mortgage derivative, an economist named Melchior Palyi predicted key causes of the 2008-2009 financial crisis with precision that makes a modern reader’s hair stand on end.”
  • Dimon Beset by Bad Loans as JPMorgan Pushes Overseas (BB). “JPMorgan is now saddled with $74.8 billion in nonperforming home loans inherited from WaMu, a third of the $230.7 billion in mortgages on its books.”
  • SEC Investigating Deal Between JPMorgan and Hedge Fund Magnetar (ProPublica). “The Securities and Exchange Commission is investigating whether JPMorgan Chase allowed a hedge fund to improperly select assets for a $1.1 billion deal backed by subprime mortgages, according to people familiar with the probe.”

Hedgie Highlights

  • A Hedge-Fund Manager’s New Groove  (WSJ). “William von Mueffling surprised clients and competitors last June by announcing he would close his hedge funds and return $3.5 billion to investors.”
  • Goldman’s Pay Pool Shrinks Fastest as Traders’ Fortunes Dwindle  (BB). “Wall Street traders, who typically receive the fattest year-end bonuses among bank employees, are poised to suffer the biggest pay cuts as revenue at their divisions dropped an average of 12 percent so far this year.”
  • Bridgewater founder to hedge funds: Be more than index funds (Fortune). “Some harsh words of advice for the hedge fund industry from one of its own: it’s not all about making money.”
  • Druckenmiller Alumni Said to Start $5 Billion Hedge-Fund Firm  (BB). “Stan Druckenmiller’s former colleagues at Duquesne Capital Management LLC are opening a new firm with $5 billion in assets… the second-largest hedge-fund startup ever.”

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Oil on the Boil

  • Oil hits two year high as analysts predict $100 a barrel in 2011 (Telegraph). “Oil prices rose to a two-year high in New York on Friday, raising fears of a return to $100 per barrel crude and consumer goods inflation.”
  • Shell Presses for Drilling in Arctic (NYT). “Shell’s plan to drill in Alaska’s Beaufort and Chukchi seas has been snarled in regulatory delays and lawsuits for four years.”
  • Hedge Funds Increase Oil Bets to Six-Month High (BB). “Hedge funds raised bullish bets on oil to the highest level in more than six months as supplies of gasoline fell, French refinery strikes ended and plants in the U.S. and Europe returned to service.”
  • Mystery ‘Other’ Traders Become a Growing Force in Oil Futures (WSJ). “Traders classified as “other reportables” by regulators have increased their position in crude futures traded on the New York Mercantile Exchange twice as fast as the market as a whole this year.”
  • Oil Inventories Rise to Highest Level of the Year (BIG). “Oil Inventories rose nearly 2 million barrels [last] week, which was ahead of expectations for an increase of 1.5 million barrels.  With the increase, crude oil inventories are now at their highest levels of the year. “

Hot Softs

  • Food Inflation Rising as Cooking Oil to Catch Grain (BB). “Cooking oils, left behind in this year’s surge in agriculture prices, are poised to catch up with grains as record demand cuts stockpiles by the most in 17 years.”
  • Food Sellers Grit Teeth, Raise Prices (WSJ). “An inflationary tide is beginning to ripple through America’s supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades.”
  • Cotton Clothing Price Tags to Rise (NYT). “Unusually high cotton prices have apparel makers scrambling to keep down costs, but consumers be warned: cotton clothing will be getting more expensive.”
  • Canada Blocks BHP’s $40 Billion Bid for Potash Corp. (BB). “Canada blocked BHP Billiton Ltd.’s $40 billion hostile bid for Potash Corp. of Saskatchewan Inc., saying a sale of the world’s largest fertilizer company wouldn’t provide a “net benefit” to the country.”

Pedal to the Metals

  • Iraqi Gold’s Glitter Dims for Dealers Under Siege (NYT). “More than 40 people have been killed in jewelry store robberies across Iraq in the past six months.”
  • A Gold Bull and His Prediction: $10,000 an Ounce (WSJ). “There are gold bulls. And then there is Shayne McGuire.”
  • David Lowell, Octogenerian Treasure Hunter (BB). “In a career spanning six decades and 44 countries, Lowell has made 14 major discoveries, including the world’s largest copper deposit in Chile. He found treasures where others detected nothing worth mining.”
  • Uranium Climbs as Monthly Transactions Hit Record High (BB). “Uranium rose $1.50 to $53.50 a pound in the week through [Nov 1st], with transactions during October at a record 41, UxC Consulting Co. said in a report.”
  • Fear Darkens Czech Uranium Mining Town (NYT). “For investors, the lure is the rising value of uranium, as fast-growing countries like China, India and the United Arab Emirates build fleets of reactors.”

Blah Blah Social Media Internet

  • Proclaimed Dead, Web Is Showing New Life (NYT). “The total number of Internet users worldwide, about two billion, is growing by 100 million to 200 million a year.”
  • Start-Up Blekko Tries to Take On Google (WSJ). “Blekko, while using a Google-style search algorithm, relies on users to select which websites should appear in results for certain queries.”
  • Why Twitter’s C.E.O. Demoted Himself (NYT). “…for all its astonishing growth, Twitter has succeeded in spite of itself — the enviable product of a great idea and lightning-in-a-bottle viral success rather than a disciplined approach to how it’s managed.”
  • Facebook Under Pressure to Be Greener (NYT). “Facebook, the giant social networking site, is under fire from Greenpeace International, the environmental campaigner, over its construction of a data center in Prineville, Oregon, that will be powered by PacifiCorp, a company that gets 58 percent of its energy from burning coal.”

Government Motors

  • Washington Played a Big Part in G.M. Turnaround (NYT). “While the government’s $50 billion bailout last year saved G.M. from liquidation, the Obama administration has taken great pains to distance itself from any appearance of running the company.”
  • Japan’s Auto Parts Makers Try to Anticipate Shift to Electric Cars (NYT). “No more engines. No call for exhaust pipes. Spark plugs? Gone with the electric-car wind.”

Glory Days (Get Drunk and Remember Badly)

  • Study: Alcohol more lethal than heroin, cocaine (WaPo). “…overall, alcohol outranked all other substances, followed by heroin and crack cocaine.”
  • After Good or Bad Events, People Forget How They Thought They’d Feel (ScienceDaily). “…afterwards, they “misremember” what they predicted, revising their prognostications after the fact to match how they actually feel…”
  • Tiger Woods’s 281-Week Run as No. 1 Ends, Westwood Takes Over (BB). “Tiger Woods’s record five-year reign as the world’s top-ranked golfer is over, marking another low point in a torrid 12 months for the 14-time major champion.”
  • Life aboard the International Space Station (Guardian). “It’s 10 years since the first crew entered the International Space Station 220 miles above the Earth. But what is it like aboard a big tin can travelling at 17,500mph?”
  • Why your desk job is slowly killing you (MSNBC). “Even if you exercise, the more hours a day you sit, the greater your risk of early death.”
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