Kyle Bass and Hugh Hendry on shorting Japan

Two good interviews here with these fund managers.

EDIT: The Bloomberg interview of Kyle Bass is no longer playing, and I can’t find it on youtube, so I’ll just post a couple of other links:
All I could find was this on his new fund:
http://dealbreaker.com/2011/04/want-to-invest-in-japan-kyle-bass-has-a-fund-for-that/
Here he is talking inflation last October:
http://www.youtube.com/watch?v=bCYIBf4_GMw

Hugh Hendry on the rationale for shorting Japanese corporate credit (extremely low yields, overexpansion, China crash & contagion)

FYI, I think talk of inflation is still premature, since there is still too much credit to be liquidated before currency creation overwealms credit destruction. Significant inflation is more likely to appear towards 2020 than 2012, and we could easily see another episode of deflation in the next year or two.

DSK is Tom Wolfe’s “Great White Defendant” from Bonfire of the Vanities

We are talking about the proper handling of guns and human cages, so any less than a presumption of innocence is reckless.

Regular readers know that I despise everything that DSK stands for politically – he’s a member of the French Socialist Party and has orchestrated a series of sovereign bailouts while head of the IMF. I am nonetheless disgusted with the public discourse around his case.

There is no presumption of innocence, as if accusers of sex crimes never turn out to be liars. Typical of this attitude is mayor Bloomberg’s quip, “if you don’t want to do the ‘perp walk’, don’t do the crime.”

There are any number of possibilities for what really happened in that hotel suite, but only one seems to be seriously considered in the US press: that this plump, 5’7″, 62-year-old overpowered a 5’11”, 32-year-old African woman with such force or martial efficiency as to not leave either of them significantly bruised and scratched. The story seems to be that she was so intimidated by his strength that she went along and performed oral sex without harming him. Maybe I just lack DSK’s skill, but my wife is 5’10”, and I’m a young and fit 6′, and I’d end up in the emergency room if I tried something like this! I bet Diallo could have beaten DSK to a pulp if she’d wanted. How can feminists have such a low regard for women that they assume they would all just comply with demands from random, unarmed old men?

The above is a possibility, but without evidence it is no more, if not less probable than that he offered her money or favors in exchange for sex but she found him to be a “rutting chimpanzee” and abusive jerk, spurring her to cry rape in revenge. He had stayed in the hotel at least 6 times in the last year, so maybe this wasn’t even their first encounter but a spat – we just don’t know. Of course, we can’t discount conspiracy, as if such things never happen in politics. Such a set-up would of course be likely to take advantage of the man’s known vices. All she would have to do is flirt with him, and the old horndog would come on to her. Easy to cry rape in exchange for a few hundred grand, and easy to keep silent when sufficiently intimidated.

In my perusal of the French discourse on this subject (via the Google Translate Chrome plugin), I find it much more deliberative than the US take on the affair. Is it possible that Americans are even more politically correct than the French, at least when it comes to sex? It also may be that the French are cooly cynical about the workings of power, having tossed out several governments in the last two centuries. A poll on Wednesday showed that 57% thought DSK is the victim of some kind of set-up. It is perfectly respectable to question such things as the official versions of current and historical events (certain German activities in WWII notwithstanding – that may land you in prison). They are also much better dinner companions and conversationalists than most Americans, and don’t observe the same taboos.

The Great White Defendant refers to these rare cases where prosecutors get to target a member of the privileged class, and as a consequence of their guilt from having put away so many poor people, they pursue him like Ahab after the white whale. Of course, journalists love these cases because they fit their own preconceptions of oppressors and oppressed, and the media attention makes prosecutors stars and helps their political careers. The last such major case was the prosecution of several white Duke lacrosse players on the word of a black stripper who turned out to have made the whole thing up. The lead prosecutor in that case ended up being convicted of contempt and disbarred for his criminal disregard of the truth. Nifong served one day in jail, and neither the accuser nor the currupt police have been prosecuted for their actions. BTW, the accuser, Crystal Mangum, is facing a first degree murder charge for the stabbing of her boyfriend last month, but the New York Times is strangely silent on that story.

I hope Tom Wolfe is watching this case closely (and I suspect he is, as he lives in NYC) and gives us a write-up or two by the time it’s over. No matter what actually happened and what verdict is reached (jurors are selected for gullibility, so the verdict will not necessarily reflect the truth), the affair may refect poorly on journalism and the court system.

The rigor with which journalists and prosecutors pursue the truth is critical for a civilized society, since the legal system has a monopoly on the use of force. The burden of proof is on the accuser, whether a policeman or alleged victim. We are talking about the proper handling of guns and iron cages, so any less than a presumption of innocence is reckless.

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Here’s the Bonfire of the Vanities on Amazon
I strongly recommend it (and not the movie with Hanks & Willis), along with everything Wolfe has written – he’s the best novelist/journalist of our time.

Ron Paul starting strong in first debate

The first Republican debate of the 2012 US presidential election was held last night in South Carolina. I found this video of Ron Paul’s responses. Looks like he got a lot of time, unlike in the 2008 debates:

He also raised a million dollars online yesterday in the first of probably many moneybombs. He has never expected to win, but runs because the election is the best way to spread his message. The appearance of fellow libertarian Republican Gary Johnson this year is probably a direct result of Paul’s trailblazing.

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BTW, I post a lot on twitter under this account – some on the resources sector, some on the markets in general and whatever else I feel like: http://twitter.com/miningalmanac

Keynes vs. Hayek, Round 2

I like how at the end Keynes is pulled up to his feet and declared the victor (no matter how obvious a failure, the corrupt system keeps applying his theories). Then the Washington mandarins, Wall Street bigwigs and press all gather around him while the nerds come to congratulate Hayek. The press often implies that the Wall Street crowd loves Hayek and laissez-faire (“unrestrained markets” and all that), when in reality the moneyed political players support intervention since they are successful rent seekers and bailout recipients.

The key point that well-intentioned supporters of government (like most everyone in Europe) often miss is summed up in this phrase from Hayek:

“With political incentives, discretion’s a joke.
Those dials they’re twisting, just mirrors and smoke.”

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For those who haven’t seen it, this is the first video:

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And the real Hayek on Keynes:

2011 Dividend tax increase cuts real value of S&P500 by 30%.

The S&P 500 is currently yielding about $25.50 per share annually, about 2.3% at today’s level. Sub-3% yields are a characteristic of the bubble years. Before the 1990s an index yield under 3% was very skimpy, hardly justifying the risk of capital loss. Reduced marginal taxation of 15% (with 0% and 5% rates for low-earners) on qualified dividends (meaning on shares held more than 1 year) helped somewhat to justify lower yields, though in the rapid-turnover casino environment after 1995 dividends have hardly mattered to a stock’s performance.

Presuming that the aftermath of the credit bubble has brought a secular value restoration phase (Jim Grant’s term) and growth is missing or anemic, dividends should take greater precedence in investors’ minds. The aging of the developed world should also play a role as retirees opt for safety and income. In this environment, the denominator in the yield equation, share prices, would be expected to adjust downward regardless of any change in tax policy.

To make matters worse, when dividends are subjected again in 2011 to 39.6% federal taxation, prices would have to fall by roughly 30% to offer the same yield, assuming constant dividends. The S&P’s $25.50 yield nets $21.67 this year for a real yield of 2.0%, but to get the same net yield next year either the payout would have to increase to a record $36 or the index would have to fall to 780 (the after-tax net on $25.50 is $15.40 at 39.6%). Although forgotten lately, the stock market’s fundamental value is derived from expected income, so taxation cuts right to the bottom of any valuation estimate.

Dividend payouts remain at the same depressed levels of late 2008 and early 2009, even as earnings have regained lost ground. If and when sales take another turn downward, perhaps aided by cuts in state and local government wages and further layoffs by small businesses, margins and dividends may again come under pressure. With the 10-year treasury bond yielding over 3.25%, where’s the margin of safety in stocks? The 5-year note even yields as about much as stocks, and unlike stock dividends, treasury yields aren’t subject to state-level taxation in the US.

As of today, there are actually some remarkably good yields available from blue-chip stocks such as utilities, consumer staples and tobacco companies. Here’s a list, updated frequently. I’d keep an eye on a few of these. If stocks fall to a level where the after-tax yield looks attractive, I’d be interested in picking up a basket of these for the long-haul. At that point in the cycle the ones with low debt will be among the safest financial instruments you could ever find, since there are productive assets backing that equity — even better if you spread out the political risk across the world.

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Editorial here: Why raise these taxes (or have them at all), when the revenue derived from them is a tiny portion of the federal ledger and their imposition in all liklihood costs the government (let alone the well-being of the nation) multiples more than they generate, due to lost investment. The government blows the money — it goes down the welfare/warfare rat hole, subsidizing the worst elements at home and abroad.

So why do it? Because the people who make such decisions are either ignorant and idealogically driven (a few, such as Ivy-indoctrinated DC functionaries and academics) or just don’t give a damn about the welfare of the country (the majority). They believe that punitive taxation helps them keep office (it just sounds good to tax the “rich”), and as the balance of the western workforce shifts more and more from production to leaching as government and society age, this is ever more the case.

Iranian central bank dumps euros for gold and dollars.

Remember when Iran started pricing its oil in euros instead of dollars? It was April 2008, a few months after supermodel Gisele Bunchen refused payment in dollars. The euro touched $1.60 that month and had nowhere to go but down:

Yahoo! Finance

Having missed out on the dollar’s spectacular comeback, the expert timers in Iran are switching again:

The Central Bank of Iran (CBI) intends on converting about €45 million of its reserves into dollars and gold, Tehran’s media reported.

According to reports, the new monetary policy will be carried out in three phases, with the first phase – converting euro reserves into dollars – already underway.

CBI Chief Mohammad Bahmani hinted of the move in April, saying the Islamic Republic will turn to dollars in view of the euro’s poor performance.

Iran has been converting its currency reserve into euros since 2006 – a move meant to meet both Iranian President Mahmoud Ahmadinejad’s anti-US policies, and the American currency’s weakness.

The recent change stems from the financial crisis which hit the eurozone bloc following Greece’s financial struggles.

The euro-dollar rates have devalued by 20% since the beginning of 2010. Iran’s foreign currency reserves, which are estimated at $100 billion – half of which are in euros – had to sustain the loss.

I’m bullish on the euro, CHF and pound in the short term, but long-term bullish on the dollar. Here’s a nearly 30-year historical chart of the dollar index, showing that it has miles of room to run:

bigcharts.com

Beck, Woods & Maltsev on Hayek

Beck is an opportunist and only half libertarian, but if you can stand him this is a pretty good show, especially once the Mises Institute economists Tom Woods and Yuri Maltsev appear (hat tip Lew Rockwell):

Cops retiring as millionaires

A Forbes blogger does the math:

It is said that government workers now make, on average, 30% more than private sector workers. Put that fantasy aside. It far underestimates the real figures. By my calculations, government workers make more than twice as much. Government workers are America’s fastest-growing millionaires.

Doubt it? Then ask yourself: What is the net present value of an $80,000 annual pension payout with additional full health benefits? Working backward, the total NPV would depend on expected returns of a basket of safe investments–blue chip stocks, dividends and U.S. Treasury bonds.

Investment pros like my friend Barry Glassman say 4% is a reasonable return today. That’s a pitiful yield, isn’t it? It is sure to disappoint the scores of millions of baby boomers who will soon enter retirement with nothing more than their desiccated 401(k)s, down 30% on average from 30 months ago, and a bit of Social Security.

Based on this small but unfortunately realistic 4% return, an $80,000 annual pension payout implies a rather large pot of money behind it–$2 million, to be precise.

That’s a lot. One might guess that a $2 million stash would be in the 95th percentile for the 77 million baby boomers who will soon face retirement.

Cops have a better racket these days than during prohibition. It’s not just cops, either — millions of teachers, firefighters, administrators, transit workers, janitors and all kinds of unionized government employees are effectively millionaires.

David Einhorn: Scrap the official ratings agencies (Moodies, S&P, Fitch)

From Bloomberg:

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Einhorn has shorted S&P and Moodies. Some take-aways:

Rating agencies are a “public bad,” not a public good.

We need a systemic change to reject the idea of centralized official ratings.

The market would adjust if we didn’t have them.

On Buffett: “He still made a very nice investment for himself.”

“The brands are ruined.”

The companies may lose their equity in (much-deserved) lawsuits.

Margins during boom reflected compromised objectivity, competing for market share.

Without official ratings the market would adjust to risks itself. Official ratings create an arbitrage opportunity: real credit risk is often higher than ratings imply (look at BP: downgraded by just “1/2 notch or something like that.” Ratings allow sharpies to front-run downgrades or prepare to take advantage of depressed prices following downgrades.

Agencies add little value. Market spreads are a much better indicator of risk.

A good day at the US polls: Specter out, Rand Paul in.

Arlan Specter, a creature of the Senate for three decades, has lost his bid for Democratic nomination. It is exceedingly rare for a sitting congressman or senator to not even be nominated by his own party, but such is the anger towards incumbants. I’m glad to see this guy go, since he is a politician of the worst type, most remembered for leading the coverup of the John Kennedy murder and pushing the preposterous single bullet theory (wikipedia):

According to the single-bullet theory, a three-centimeter-long copper-jacketed lead-core 6.5-millimeter rifle bullet fired from the sixth floor of the Texas School Book Depository passed through President Kennedy’s neck and Governor Connally’s chest and wrist and embedded itself in the Governor’s thigh. If so, this bullet traversed 15 layers of clothing, 7 layers of skin, and approximately 15 inches of tissue, struck a necktie knot, removed 4 inches of rib, and shattered a radius bone. The bullet was found on a gurney in the corridor at the Parkland Memorial Hospital, inDallas, after the assassination. The Warren Commission found that this gurney was the one that had borne Governor Connally. This bullet became a key Commission exhibit, identified as CE 399. Its copper jacket was completely intact. While the bullet’s nose appeared normal, the tail was compressed laterally on one side.

In its conclusion, the Warren Commission found “persuasive evidence from the experts” that a single bullet caused the President’s neck wound and all the wounds in Governor Connally.

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Rand Paul, Ron Paul’s son, has won the Republican nomination for Jim Bunning’s Senate seat in Kentucky, defeating his cookie-cutter opponent in a landslide. Rand’s positions are mostly libertarian like his father’s, especially on regulation, taxation, banking and other domestic issues, but he has made some disconcertingly hawkish noises when it comes to foreign policy.

This could be an interesting election year. It would be great to see a lot more bums tossed out — not that it should make any significant difference to policy, since there are only a handful of people running for national office who would consistently take anti-state positions, but it’s just nice to see karma at work.