bmichaud

I am not singling you out, I think all of those millions and billions are bigots too. Interesting. Infertile women are allowed to marry. Eric, Perhaps I missed a previous explanation, and perhaps this question is ignorant....but how could the human race expand had it begun with either two dudes or two women? Yes using the example of an infertile woman is a neat little trick, but in all seriousness, how is homosexuality inherently natural if said act cannot inherently reproduce? An infertile woman was inherently created to reproduce....

5% Inflation would solve some of that debt trap. Not the structural imbalances tough. BeerBaron A fiscal union that creates a transfer union like we have in the US would be the ideal way to go, as a central authority would spend Euros into the PIGS to offset the trade deficit while taxing Euros out of the Northern countries. Simplistic of course, but generally how it could work.

Is there a concise description/article on monetary and fiscal policy during the great depression anywhere? http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings--ray-dalio-bridgewater.pdf

Soros' article is the epitome of MMT - Europe needs a fiscal union, and as Soros points out in the article, while the ECB's recent move ensures the Euro stays intact, it does NOTHING to solve the debt trap that a fiscal union and deficits would provide. Congrats Europe - continue to follow the Great Depression template for how not to deal with deflation!

Moore, I am a bit confused by you connecting productivity and debt. As I see it, you could for example increase productivity by adding debt and reducing labor. Perhaps you are talking about household debt? Could you please elaborate? Consider the incentives to be unproductive when the government gets involved. For example, the first stimulus money made available to my state was directed to the university system so that the professors and other staff didn't have to forgo scheduled raises or face layoffs. This meant that the producers in the private sector in a small way had to suffer cutbacks disproportionately. That 's one little cut to the productive part of GDP. Add up a thousand cuts, and the economy is dragged down in a meaningful way. Multiply even more those cuts in productive enterprise squeezed out by subsidized non productive activity, and you have got the whole economy like a government work crew where one man digs a ditch while five other men paid directly or indirectly by the government sit around smoking cigarettes and criticize the guy doing all the work. Government debt works the same way for as long as investors will buy it. It subsidizes all the unproductive things the government does. However, the essential functions of government such as protection against people or gangs bashing their neighbors and stealing their property, are not only conducive for prosperity, but essential. :) How is the private sector forced to cut back disproportionately? If teachers receiving stimulus money turn around and spend that money into the private sector, thus benefiting the private sector, doesn't that then mean the private sector doesn't need to cut back as much as it otherwise would? Either way the deficit puts money into the private sector in aggregate - I'd much rather see the deficit in the form of a lower tax rate for me versus stimulus money for lazy state workers, BUT, either way the state worker or myself turns around and spends that money, thus preventing the private sector from needing to cut back as much as it would otherwise through higher revenue.... I'm not against the teaching profession. A number of close relatives are or have been teachers. Education engaging motivated students and good teachers can be a highly productive investment for the future. The point is that government largess will insulate the recipients at the nonproductive margins from entering or moving to other occupations that could be productive. An extreme example of this was the poverty and very low productivity of the disfunctional soviet bloc countries two or three decades ago. The saying there was, " They pretend to pay us, and we pretend to work." The fewer people there are in a society doing substantial, productive work, the poorer that society will become, compared to what it might become, ceteris paribus. However, necessary functions of government such as police to serve and protect us from bashing our neighbors to steal their property and rape their women are not only productive, but essential for prosperity. I was asking specifically why stimulus crowded out the private sector, not specifically RE the efficacy of propping up teachers versus policemen... Trust me I get how bad it is to have a bloated, unproductive govt payroll....I just don't get how getting money to states in order to keep their payrolls up crowds out the private sector when those on state payrolls turn around and spend on private sector goods. If those on state payrolls are unemployed, the local grocery and hardware stores lose revenue, reduce their own payroll, reduce investment in the local economy etc...etc.... If we want to return the country to normalcy, we should be writing down private sector debt instead of bailing out the banks....private sector demand would return bc the private sector would not be wallowing under a crushing debt load, then deficits would naturally correct through reduced uneploy,net and higher tax collection. Just my opinion.

I'm not entirely sure why A) supporting deficits in a deleveraging environment is indicative of being a democrat (which I'm not...and FWIW, Bush ran deficits while Cinton ran a surplus.....PRESIDENTS DO NOT MATTER!!!) and B) why being a democrat would be indicative of my age.... It doesnt take more than second grade math to figure out that austerity (i.e. balanced budgets) in a depression is the worst possible medicine, AS EVIDENCED by what Europe is currently experiencing (anyone wonder why Spain's stock market hasn't done anything since March 2009 lows?). Those advocating deficit reduction here and abroad live in la la land - had we not been running massive deficits and printing money since March 2009, you think the stock market would be where it is right now? You think unemployment would be at 8%? You think voters would think Obama had done the right thing by running balanced budgets while the middle class balance sheet was obliterated? This line of thinking has nothing to do with political party affiliation, but a simple understanding that every dollar of public sector deficit is, to the penny, private sector surplus, and that both the public and private sectors CANNOT run surpluses at the same time (again as evidenced by Europe). I've posted Dalio's stuff several times, which is by far the best construct for how to deal with depressions.

Moore, I am a bit confused by you connecting productivity and debt. As I see it, you could for example increase productivity by adding debt and reducing labor. Perhaps you are talking about household debt? Could you please elaborate? Consider the incentives to be unproductive when the government gets involved. For example, the first stimulus money made available to my state was directed to the university system so that the professors and other staff didn't have to forgo scheduled raises or face layoffs. This meant that the producers in the private sector in a small way had to suffer cutbacks disproportionately. That 's one little cut to the productive part of GDP. Add up a thousand cuts, and the economy is dragged down in a meaningful way. Multiply even more those cuts in productive enterprise squeezed out by subsidized non productive activity, and you have got the whole economy like a government work crew where one man digs a ditch while five other men paid directly or indirectly by the government sit around smoking cigarettes and criticize the guy doing all the work. Government debt works the same way for as long as investors will buy it. It subsidizes all the unproductive things the government does. How is the private sector forced to cut back disproportionately? If teachers receiving stimulus money turn around and spend that money into the private sector, thus benefiting the private sector, doesn't that then mean the private sector doesn't need to cut back as much as it otherwise would? Either way the deficit puts money into the private sector in aggregate - I'd much rather see the deficit in the form of a lower tax rate for me versus stimulus money for lazy state workers, BUT, either way the state worker or myself turns around and spends that money, thus preventing the private sector from needing to cut back as much as it would otherwise through higher revenue....

Are you assuming that interest rates will hold their current levels? The debt serving costs of the government have dropped significantly during the past four years, what happens when inflation does start to come through? This is my concern. Greek/Europe style debt crisis is not applicable to the US because of its control of the money supply. After all who has been one of the largest buyers of the US debt over the past 24 -36 months as yields have fallen? The larger concern is stabilizing the debt growth to historical levels of GDP and moving towards a balanced budget. My opinion is that Romney has more and better managerial experience and credibility to appoint the necessary people into the positions of power that can make progress and turn the wheels of government in the right direction. Obama's appointments is where he has not succeeded as a manager/commander of the government. RE interest rates, all I'm saying is they do not reflect the US being a credit risk, which is OBVIOUS as you point out... If inflation starts to feed through, A) that would raise nominal GDP, thus stabilizing our debt ratios (though, frankly who cares....Japan has spent years well above our debt ratio) and B) it will likely be the result of higher real growth, which will again stabilizes the debt ratio but also brings the deficit down as a result of higher taxes and lower emergency spending (i.e. Unemployment benefits). Over time yes we need to bring down the deficit, as 10% deficits are massive stimulus and once the economy actually picks up, that would be hugely inflationary. But balancing too soon just contracts the economy and makes the perceived debt problem even worse.

Moore, With all due respect to you, Mr. Ryan and anyone else who believes America us on the path toward a Greek-style debt crisis, or hyperinflation, why is the market currently pricing our 10 year debt at 1.65% and 30 year debt at 2.8%? If we were at risk of default, yields would be more along the lines of Italy or Spain, and if hyperinflation was near, yields would be similar to what they were in the 1970's and 1980's. Answer: we are in a deflationary, deleveraging environment not unlike the Great Depression. We should be thanking our lucky stars for both the massive deficits and Bernanke's 2008-2009 monetary operations. I would encourage anyone to read the following Irving Fischer paper, which helps explain how vital of a role the government played to keep us from an all out depression. Put it this way - had Jim Grant been in charge of the Fed during the crisis, there would have been no great market bottom in March 2009.... http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf Note the erie similarity between the March 1933 bottoming process due to FDR exiting the gold standard and the March 2009 bottoming process due to QE1....

http://theshortsideoflong.blogspot.com/2012/08/one-more-bear-market-please.html

"At 5 times cashflow, do you really need a good idea of what the business looks like in ten years?" That is precisely how an investor falls into a "value trap", and is why Buffett got out of buying crappy businesses. If Dell's earning power is cut in half in ten years, and it's fairly valued at 10x those earnings at the end of year 9, then it is slightly overvalued here. Not saying it will happen...just saying how important the terminal value is - Sanjeev's conclusion that Dell will trade significantly higher in two or three years implicitly assumes long-run earning power is not going to erode from here, which further assumes that Dell will be able to offset price erosion on its service contracts with cost cutting (or maybe Dell has pricing power?).

I think Einhorn says it best (paraphrasing), that gold is a hedge against inflation AND deflation...i.e. central bank stupidity and economic uncertainty.

The elites (politicians, journalists, commentators and so-called intellectuals) in Europe (predominantly leftist) will never admit that America did something right. ::) Here in Germany as in the rest of continental Europe, there is a strong underlying Anti-American racism. It's not the fault of the average joe, but that of our media, so-called intellectuals and our political elites. Our media is overwhelmingly controlled by the left (Spiegel, Süddeutsche Zeitung, Frankfurter Rundschau, Taz, Tagesspiegel, Focus, Stern), the opinion pages are predominately filled with the ideologies of the left. Our state Tv stations (Tagesschau (ARD), heute (ZDF) are dominated by the left. There isn't a week where America is not constantly critized, either on print or TV. If there is a crime happening in the US, our media will put it on the front pages. If a similar crime happens in Germany, it will only get low coverage. Young children learn this resentment from their parents, then from their teachers and then from their professors in college. Everyone allied with the USA will get the same treatment. Different opinions are barely allowed. Very interesting. I had no idea the extent of the anti-American resentment. I actually scan the business section of Spegiel for debt crisis news maybe once a day and haven't really picked up on that. Will have to pay more attention!

Well said Cardboard. Global recession, secular bear combined with a massive debt overhang and the market at over 20X normal earnings?? Fantasy land IMO. EVERYONE is expecting QE3 and EVERYONE is expecting it to buoy the market - classic set up to sell the news? I seriously question the benefit of the ECB's conditional bond buying program as Europe continues to grind itself into depression. LTRO effect lasted for what? 90 days? Real sustainable. I honestly cannot believe what Europe is actually doing. It's fascinating to watch quite frankly. The US did such a good job arresting itself from a deflationary trap via TARP and massive deficits (QE was merely coincidental) - how can Europe not follow our model? Fascinating!!

CBI's propose purchase of Shaw Group is a pretty interesting arb right now - http://www.reuters.com/finance/stocks/CBI/key-developments. Over a 9% gross spread and the deal closes in early 2013. Two key risks I've seen explaining the spread is CBI itself getting taken over and an activist buying a stake in CBI (~$4B cap) and working to block the deal. The activist risk is plausible to me given the huge premium CBI is paying for Shaw and the likelihood of shareholder discontent. Though why would CBI do the deal without consulting with its shareholder base? If you can handicap those two risks within the next week you may have a good proposal. Good luck!

Some good commentary here on the market: http://www.ritholtz.com/blog/2012/08/bearish-on-stocks/ http://theshortsideoflong.blogspot.com/2012/08/global-business-cycle-in-charts.html http://theshortsideoflong.blogspot.com/2012/08/copper-leads-global-growth.html The author of the latter two links is good, as he correctly turned bullish at the bottom last year for example. And Zeal put out another note on how gold could perform in a coming bear: http://www.zealllc.com/2012/goldstbr.htm

You guys had some serious effing 'nads putting that much unto a leveraged bet, let alone one that could potentially expire worthless due to bad timing. As intriguing and fun as it is to learn about those situations, it is extremely dangerous to extrapolate for most here. Just reading about the situation here led me to look at the BAC 2014's (I typically do not use options)....I would vomit if I put 50% of anything in the $10 calls selling for $.87 or the $15 calls for $.21. It would be a phenomenal return just to get back to break-even over that time let alone generate the return necessary to justify that risk. With FFH you had a relatively defined catalyst holding the stock down - i.e. a coordinated short attack - whereas BAC is simply depressed due to a horrendous operating environment. Perhaps Parsad's theory of TBV by FYE 2012 due to litigation risk retrenchment is a form of catalyst, and he's probably right, but still who knows... I remember reading Berkowitz's BAC thesis in mid-2010 about $2 of core earning power and his expectation for a veritable investor's wet dream with a virtually 100% payout ratio consisting primarily of buybacks driving the EPS figure ever higher in a virtuous cycle....fortunately I didn't buy in for whatever reason, but my point is that one could have made a highly credible case for a FFH-type scenario back then and 50% of one's net worth would have gone up in smoke by now, two years later. Sorry to keep rambling, but the Freddie PFD's are another example of something fun to think about, but a highly improbable favorable outcome - that one dude's thesis was phenomenal, and the position was his LARGEST!!!! I guess my overall point is to caution those considering making a sizable bet on something that can go POOF, as tempting as it is upon hearing stories such as Eric's.

http://pragcap.com/the-2012-earnings-outlook

I'm sure it's been discussed somewhere on the board, but I really like Montier's work on profit margins.... Montier_March_2012.pdf

Interesting commentary on the preferreds here: http://www.distressed-debt-investing.com/2012/08/portfolio-management-convex-versus.html

I haven't seen the factors, but sentiment is often times mentioned in response to bearish theses. What's interesting about sentiment now is that while individuals are pervasively negative and bearish econ data is in our face on a daily basis, the market remains overvalued - IMO, this is due to ZIRP forcing investors into higher yielding securities, but more likely due to very high profit margins giving the illusion stocks are in fact "cheap" here. Lastly RE sentiment - I'll have to dig up the stat, but if you look at how investors are actually allocating their cash, they are far more bullishly positioned than would be implied by sentiment.

I hear ya - I actually forgot Buffett said that.

The actual years of a cycle are merely secondary coincident - what counts is the valuation cycle the market moves in, and with the market at 20x median Schiller we are at levels that typically precede a secular bear. Again ironically, Buffett shut down his hedge fund just several years before a secular bear started with the market near current valuation levels. Yes Buffett's rational is simple, but he is far more complex than he let's on - as are you Sanjeev...didn't you go 50pc cash right at the top this year based on your Spain analysis? ;)

Ironically I like how simple and straight forward their analysis is - the market moves in secular bull and bear cycles, and the current secular bear that began in 2000 isn't finished, particularly considering where general valuations are at the moment. Historically, these valuations are where secular bears BEGIN, let alone are 12 years deep.....

Moore pointed out various times at the low last year that Zeal LLC made some phenomenal calls on the general market - - http://www.zealllc.com/2011/hypsold.htm - http://www.zealllc.com/2011/fearmgr.htm - http://www.zealllc.com/2011/bulltech.htm) - so I thought it would be only appropriate to point out when they do in fact turn, which they now have. See here: http://www.zealllc.com/2012/bearloom.htm If in fact Zeal's call is correct, it will be very interesting to see what in fact holds up in such a decline. Will it be a broad-based sell-off such as 2008/2009 or will it be isolated to a particular segment of the market ala 2001/2002 when all the equity capital in the world got sucked into mega caps and tech, leaving small caps drastically undervalued? I would posit that large-cap banks have the potential to be the "small caps" of the next bear market, in so far as they are so egregiously undervalued relative to most other sectors (perhaps nat gas and coal are close?) that investors will almost view them as "safe havens". Perhaps not. Something about holding bank stocks in a bear market doesn't give me a warm and fuzzy feeling.....we shall see.