Notes From Underground

It has been a great privilege to share my thoughts and market insights and allow me to occupy some of the highly prized real estate on your electronic devices. I can unequivocally say that I learn much from my readers and derive great benefit from synthesizing my thoughts and putting them into trades. The basis of NOTES is to make sense of the global political and financial fabric and then try to succeed where I believe the econometric and financial markets fail. It’s never easy to review one’s ideas and see where the failure to act has taken place.

It’s this constant endeavor to analyze the theoretical and put it into action–thus the operative phrase for all the effort is PRAXIS. Theory without practice is mere philosophy. As a trader, the continued desire to achieve the discipline to admit I’m wrong, limit my losses and proceed to the next idea is the motive that continues to sustain me. We are all inundated with news and noise pollution at hyper-speed, thus we’ll continue filtering out the flotsam in NOTES FROM UNDERGROUND. Thank you, my thoughtful readers, for sharing your insights, especially for the constructive criticism. Again, all the best for the New Year.

I thought hard about doing a top 10 list of prognostications for 2011, but I believe that’s a fool’s paradise. Analyzing the markets in a DYNAMIC fashion is my value and I fervently strive to move the STATIC from my thinking. The European situation will continue to deteriorate but how and when it culminates … well, that is where we’re going to focus.

January brings a multitude of BOND offerings from the EUROPEAN PERIPHERALS so it will be interesting to see what interest rates the SOVEREIGNS will be forced to pay. My readers know that the NEGATIVE FEEDBACK LOOP IS THE ALBATROSS AROUND THE NECKS OF GREECE, IRELAND, PORTUGAL, SPAIN AND MAYBE ITALY. The higher interest rates rise in the PIIGS, the worse the budget deficit and the need for more AUSTERITY. Will the German Polity decide that staying with the EURO is of greater value to Germany? Or will forcing out the PROFLIGATES be the answer? Will German Nationalism take precedence and cause Frau Merkel and others to wish all her WESTERN and SOUTHERN neighbors GOD‘s speed because maintaining the EU is far too expensive of an experiment?

In the Unites States, the big question will be the FED‘s response to a continued high unemployment rate. Will Bernanke maintain QE2 as the stock market has bailed out the anger directed at the FED CHAIRMAN? Based on the Jackson Hole speech and the importance of the portfolio balance channel, Mr. Bernanke can claim a great success for the FED policy. I, however, am not applauding for as I sit in the watchtower I must ask, if “THERE IS SOME WAY OUT OF HERE, SAID THE JOKER TO THE THIEF”

The answer to that question is what continues to propel the SWISS FRANC and PRECIOUS METALS HIGHER. I will unequivocally say that I will turn BEARISH GOLD and other havens when the FED begins flattening the YIELD CURVE by raising rates. And I don’t mean in one-quarter-of-a-point increments. Bernanke and the Obama administration have found some momentary respite from the state and municipal budget mess because a 13 percent year-over-year increase in U.S. equities has momentarily helped public pension shortfalls. The underfunded liabilities of public pensions is an overhanging problem that will lead to state and local governments being very slow to hire new workers.

My summer intern [and my daughter], Alex Harris, investigated the shortfall in the Illinois Teachers’ Retirement System. It is worth reading to attain an understanding of  just how much risk public pensions have accumulated to meet its shortfalls that have developed during the last decade. The understanding of underfunded liabilities explains why the FED is the promoter of bubbles and financial games.

As traders and investors, it is important to know the fault lines in the financial system and be prepared for them, especially as the POLICY MAKERS maintain that it is all clear. Remember, a year ago the European Elites were telling the world that Greece was just a minor problem and DEBT problems would be alleviated with the Chinese aid. Then, Greek 10-year rates were 5.5 percent. Now, they’re more than 12 percent.

Asia and the EMERGING markets will be a major focus for the world. We’ll be watching to see if China attempts to orchestrate a real slowdown or continues to take small steps to slow its inflationary fears. If China slows, will India pick up the baton as the most populated nations try to maintain the economic growth that has kept the global economy from slipping into a depression? The major look at the emerging nations will be the decoupling effect as the illusion of unified growth is uncovered. Just because China is vibrant doesn’t mean that Indonesia is exploding and vice versa. Remember that a nation’s politics and economics has more to do with its vibrancy then just a solid growth story.

Brazil will be watched closely as the new president takes office. South Africa is plagued with all types of political uncertainties and, of course, Russia–to quote Churchill–“is a riddle,wrapped in a mystery inside an enigma–until it comes to its self–interest.” So do I play the role of soothsayer? No I will leave that for others and merely go about the role of analyzing the GLOBAL MACRO events through the constant use of PRAXIS. As Art Cashen would say, “LET’S  MARINATE SOME ICE CUBES” and TOAST A WORLD WHERE 2+2=5.

Tags: Bond, Brazil, China, Euro, Fed, Gold, negative feedback loop, Notes From Underground, PIIGS, Praxis, QE2, Russia, South Africa, Swiss Franc, yield curve

This entry was posted on December 30, 2010 at 8:52 pm and is filed under Europe, Federal Reserve, Pension Funds, Sovereign Debt. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.