Fiat Economics

Source: Bloomberg

As a fan of beer, technology, and business I may have stumbled upon the perfect article this morning on Bloomberg to write a quick weekend note.  Apparently, a nuclear scientist–who looks like he would feel quite at home in any brewery–crafted a beer mug designed with the same technology used to store liquid nitrogen.  The effect beer, that will stay ‘frosty’ for days once placed inside the mug.  The problem , the stein doesn’t come cheap, currently they are being sold for $375 (the gallon size).  However, considering I recently purchased a $400 vacuum as a gift for someone, the high price point for a magic beer stein doesn’t seem so bad!

Apparently, Phil Broughton–the creator–presently an employee of UC Berkeley, came up with the idea while on forced furlough in September due to California’s state budget problems.  Prior to working at Berkeley, Phil had positions at the Lawerence Livermore Lab and the Amundsen-Scott South Pole Station (suffice to say he is a bright guy).  It was reported that while working at the South Pole station he twilighted as a bartender and would increase the alcohol content of drinks by removing excess water with liquid nitrogen.  I am beginning to think if there was a Nobel Prize for the art of drinking, then this guy would be a serious contender.  The steins can be purchased here, but look to be presently sold out.   I do not receive any commission, or any advertising revenue for the link, but nevertheless if you have the money I think you should buy this.

And in case you missed it you can buy this miracle stein here:  http://www.etsy.com/view_listing.php?listing_id=43362684

As a side note, to see my most recent column on Bloomberg please click here (I wish the topic was as interesting!)

Recently I have found plenty of enjoyment looking through old Popular Science magazines online.  Today I came across an article from 1981 in which the author was very serious about a new service rolling out that would deliver data directly to your TV via phone lines or antennas (traffic, scores, weather, etc…).  I am assuming back in 1981 this technology was eventually superseded by computers and the internet, but comparing it to the functions of today’s Tivos, digital cable boxes, and other TV hardware, this article couldn’t have rang more true if penned in 2001 (20 years after it was originally published).  Better late than never I suppose.  The article goes into detail about the pros and cons of three competing services that will all be vying for your business.  But, in any case enjoy some screen shots:

Take a look at the interface…  (Looks like the Giants still couldn’t catch a break):

There’s more:  (Fresh Direct 1.0?):

Sources: http://www.popsci.com/archive-viewer

Fiscal Deficit

Source: Bloomberg

Debt to GDP

Source: Bloomberg

 GDP Growth

Source: Bloomberg

Debt Coming Due % of GDP

Source: Bloomberg

Intellectual property, mobile internet technology and national censorship make an incendiary mix for global business and consumerism. This was brought to center stage recently with the escalating disagreement between Google and the Chinese government over privacy rights for online content. The clash of swords has most recently become a truly intergovernmental affair as well with U.S. Secretary of State Hillary Clinton’s policy speech on global internet rights and the just announced cooperation between Google and the National Security Agency in the search for the hackers behind the intrusion into some customers’ personal emails. Once Google felt its property rights had been impinged, its first headline-making reaction was to immediately provide unfiltered search results to its individual Chinese customers, reversing the policy of acquiescence to China’s political and cultural internet censorship by which it had abided since entering the country.

Yet, l’Affaire Google could have even wider implications for a burgeoning technology taking the world by storm: the eReader. These devices have the ability to carry libraries of books and other information inconspicuously across borders, an issue that no government has apparently considered a discrete policy matter to date.

In China’s case, the threat to the censorship regime could be too big for the government to ignore, both in terms of the potential quantity of subversive material and the ease of dispersing it. As one traveler’s first-hand commentary puts it, “You’ll be fine, as long as it’s not a suitcase full of books and then it’d kinda start looking like you’re smuggling in anti-Chinese propaganda.” Well, the eReader is a suitcase full of books that can be loaded onto the internet and sent via email without requiring any access to the Chinese firewall.

The next question for the broader global business community is whether they will face governments that refuse to honor their asserted intellectual property rights if they do not bind themselves to national censorship requirements. Nor can this be viewed as a purely China vs. World conflict. Western countries including Germany, Canada, and France, for instance, qualify free speech rights in relation to some material regarded as derogatory or anti-social. The implications, like the communication capacities of the devices, are likely to grow virally. Will China be manufacturing components for the key weapons in breaking down its own firewall? And would consumers start requesting confiscation refunds as part of their eReader warranties?

I finally caved and opened a Twitter account for Fiat Economics:  https://twitter.com/FiatEconomics

I plan on using this to post short timely financial/economic musings that pop into my head throughout the day.  The expect some days will have many while others will be rather slow.

“Unless further measures are taken to reduce the [U.S.] budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating,” -Moodys

This quote came from a note Moody’s released on Wednesday that went largely unnoticed by investors.

You can find the FT Article Here

In order for the U.S. to shift course we will need to see major reductions in spending coupled with an increase in taxes, that will probably resemble that of the 1970’s, where the highest tax bracket went north of 70%.  Today’s growth is coming at a price, which will eventually need to be paid.

I should note that before the financial crisis  rating agencies were releasing reports reaffirming sub-prime assets AAA credit ratings, however, with a caveat.  The caveat was that this rating would be secure so long as there was no decline in home prices.   But, at this point in time you would have been hard pressed to find an economist on Wall Street–even the optimistic ones I was working with–who were not calling for a decline in home prices.  The rating agencies realized the consequences of downgrading these assets, and likely did not want to be known as the spark that caused the biggest financial crisis since the great depression.  Instead they waited until it became completely apparent to everyone that these assets were in no way investment grade (as they subtly alluded to with their caveat) and waited to downgrade until the damage was already done.  It looks like they do not want to repeat this mistake.

Hearing about GM’s new battery plant I started reminiscing about an article I wrote back in July of 2008.  Will this movement in the U.S. have the same impact it had on Japan?  We will have to wait and see.

Today I wanted to quickly highlight the performance of my equity based trading strategies around my global macro economic investment thesis.

Emerging markets: I continue to believe that emerging-market growth and equity performance — especially in countries with a strong consumer base — will continue to outpace developed nations in 2010. Therefore, you should still consider long positions in iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI).

Risks in Brazil include an eventual uptick in the central bank’s Selic rate, which could stymie the country’s growth. In China, early inflationary warnings could eventually lead to tightening actions by the government that could hamper growth. Still, I believe upside potential outweighs the risks over the short term. For more details on this trade idea, please see my piece published on Oct. 9 titled “Easy Money is a Big Driver.”

Steel: The continuing global economic recovery combined with relatively conservative steel demand estimates for 2010 should help propel steel prices in the year ahead. In addition, the potential consolidation of inefficient Chinese steel mills may lead to reduced output, placing excess demand in a favorable pricing environment on South Korea’s Posco (PKX ) and Japan’s JFE Holdings. Strong demand in other emerging markets should help to support Gerdau (GGB). Risks to these investments include a weaker-than-anticipated global recovery or an oversupply of steel weighing on prices. See my column from Oct 16, “Coal Seeing Recovery in Foreign Demand,” for more thoughts on this theme.

Japan: Not much has changed on my bearish view toward the yen since I published a piece called simply, “How to Play Japan” back on Nov. 13. In fact, I would argue that support for any further yen appreciation has dissolved, creating a good entry point for a short position via puts on ProShares Ultra Yen (YCL) or a straight long position in ProShares UltraShort Yen (YCS). This trade depends heavily on timing, and I anticipate that the yen should move back above 100 per U.S. dollar over the coming months.Japan’s woes have recently been noticed by Moody’s, where a senior vice president was recently quoted by Bloomberg as saying, “Things we are most concerned about are the lack of well-articulated long-term fiscal consolidation and a debt reduction plan.”

Rail: Warren Buffett’s purchase of Burlington Northern Santa Fe (BNI) provided a strong boost for railroads and provided Buffett with a bet not only on long-term U.S. recovery, but also on coal. I recommended CSX (CSX), Union Pacific (UNP) and Norfolk Southern (NSC) based on what I assumed to be Buffett’s investment thesis. These positions may not have the same short-term upside potential as some of my other ideas, but they should provide some longer-term value in your portfolio. My piece from Nov. 13, “Coal in Your Stocking: Hypocrisy, Senility or Common Sense?” has more information about this trading idea.

Agriculture: Ag products will see more demand as developing nations begin to eat more like developed countries. Ag stocks also provide investors with a good real-time hedge against inflation and thus far have lagged pricing increments seen in other commodities. I maintain my constructive long-term view on wheat, corn, sugar, soybean, cocoa and hogs. One way you might play these positions is through exchange-traded fund PowerShares DB Agriculture (DBA), which is unique in that it invests in actual commodities futures vs. agricultural companies. For more information on trades in the ag sector, please see my piece published on Nov. 20 called, “Talking Turkey on Agriculture Trends.”

China energy: Very little has changed since I first published my thesis on Chinese energy companies last week, “Three Ways to Play China Oil & Gas for 2010.” I still believe that PetroChina (PTR), Sinopec (SNP), and CNOOC (CEO) are all well positioned to take advantage of China’s growing energy and natural gas market in the year ahead.

Source: Bloomberg

As the invisible hand of the market continues wrestling the imprudent hand of governments; consequences will be felt across the globe as one hand hits the table…

Government stimulus and monetary policy has undoubtedly led us out of one of the worst recessions since the Great Depression, but what impact will these policies have on the future?  Many economists agree that the current growth period has been significantly bolstered by fiscal stimulus, which has failed to substantially address a lack in final demand and create what many would consider to be a sustained recovery.  Let’s take a look at this chart published by Goldman Sach’s chief economist Jan Hatzius depicting his firm’s view on the medium term impact of the fiscal stimulus package on GDP:

Source: Goldman Sachs

Not pretty, especially considering there are no indications that final demand is prepared to take the lead as this recoveries growth engine.  Given the nature of politics and the election cycle it makes sense for some politicians to be more concerned over short-term outcomes versus long-term consequences, at least if they want to retain their jobs.  And who wants to be unemployed right now?

Funds for the government’s stimulus package do not just appear; they were borrowed.  Not only were they borrowed, but they were borrowed at teaser rates subprime Vegas home buyers would have been happy with several years ago.  It is my belief over the long-term the government’s soaring debt load combined with an eventual increment in rates will lead to substantially higher taxes in the US and lower growth prospects for the country.  What we have done is borrow from future growth for the gains we are realizing today.

Turning to the central bank, copious amounts of liquidity have been poured into the financial system to help stave off deflation and support asset prices.  These funds have not yet triggered significant inflationary concerns, because they have simply made up for a slowdown in the velocity of money.  What I mean is the fed’s injections counteracted an essential halt in lending markets; making up for borrowed money that would have existed to prop prices.  But, this also means that as banks turn back on the lending spicket excess liquidity in the system can quickly turn into fuel for inflation.  This will force the Fed to react by withdrawing liquidity from the system, and hiking the target rate.  The big question will if the fed can remove excess  liquidity faster than inflation can take root, and if so will unemployment still be at uncomfortably high levels?  Probably.

All of these questions will be answered in time, but I have no doubt we will be paying for today’s growth well into the future.  Will it be worth the price? We can only hope.

Here is an excerpt from my Real Money column being published this morning:

In 1909 the completion of the Metropolitan Life Building—the world’s tallest building—coincided with the beginning of a two year recession in the US.  Between 1929 and 1931 40 Wall Street, the Empire State Building, and the Chrysler Building were all erected in a bid to build the world’s tallest building; the Empire State Building eventually won this title, but again the construction of these grandiose buildings coincided with the onset of economic strife, in this case the Great Depression.  I think you see where I am going, but I should add the construction of the Sears Tower, the World Trade Center’s twin towers, and Malaysia’s Petronas Towers—all vying for the title of world’s tallest building—culminated in similar economic turmoil.

Coincidence or not the Burj Dubai, the tallest man-made structure ever constructed, is preparing for occupancy in Dubai.  With that said credit markets around the globe were shaken this week on news from Dubai.  Dubai World, a state-owned enterprise and primary investment vehicle, asked banks to allow the organization to suspend debt repayments for six months; the terms are still unclear, but could potentially be considered a default.  According to Standard and Poor’s, “In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity.”

…

Maybe I am too optimistic, but I believe this situation should lead to some good buying opportunities over the short-term, depending on where markets trade today.  Already investors immediate rush to safety, out of what are perceived to be high risk currencies into safe haven currencies, have created an excellent entry point into a trade I pointed out a couple of weeks ago—shorting the Yen.  The JPY appreciated to a 14 year high against the USD yesterday, increasing speculation that the Japanese government may be forced to intervene in the market, potentially creating a floor for the currency.  I still hold a bearish medium term view on the Yen—please see my piece on how to play Japan—and will likely increase my position in The Yen Ultrashort (YCS) or purchase puts in Long Yen ETF (YCL) depending on how the market opens this morning.