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What does new research say about left and right hemispheres of the brain?

10/29/2011

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Well for one, the old truism that left is for logic and right is for emotion is wrong.

I won't say more here, other than to observe that I am right brain dominated, have become increasingly so as I get older, and I have spent most of my professional life in a field dominated by left brain thinkers (and world).
This alone explains a lot to me.



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Ray Dalio and Bridgewater Associates

10/25/2011

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Bridgewater Associates has been the most successful hedgefund over the last two years. Recently its founder, Ray Dalio, was on Charlie Rose. His management style is controversial because among other things he encourages spirited debate on the facts.

Ray believes this is going to be a "lost decade" for the world economy as it deals with the consequences of overleveraging.

He has written the humbly titled "Template for Understanding How the Economic Machine Works and How it is Reflected Now".

The New Yorker  did a recent interview:

"Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”


Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going  to be another very difficult period,” he said."



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Peace for our time

10/14/2011

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Europeans politicians are once again acting like Neville Chamberlain. Returning from the Munich conference in 1938, after attempting to appease Hitler, Chamberlain addressed the nation with:

"My good friends, this is the second time there has come back from Germany to Downing Street peace with honour. I believe it is peace for our time. We thank you from the bottom of our hearts. Now I recommend you go home, and sleep quietly in your beds."

It has been this type of dithering and can kicking that is allowing the Eurozone crisis to deepen every day.

""We are determined to do the necessary to ensure the recapitalization of  Europe's banks," German Chancellor Angela Merkel following talks with French President Nicolas Sarkozy in Berlin.

A "comprehensive response" to the eurozone's debt crisis will be finalized by month's end, including a detailed plan on recapitalizing the banks, Sarkozy said at Berlin's chancellery.

"The economy needs secure financing to ensure growth. There is no prospering economy without stable banks," he said. "That is what is at stake."

However, both leaders declined to name a price tag for the new measures or  elaborate further, saying the proposal must first be discussed with other European leaders."

Yeah, somehow, I don't find those words comforting. A   day late and many dollars short -IMF estimate on Eurozone bank recapitalization  

In contrast, the governor of the Bank of Canada, in the face of the gathering storm, has evoked the spirit of Winston Churhill .

European governments need to start taking action in the next few weeks to shore up their banks or suffer a "more severely impaired" financial system, Bank of Canada governor Mark Carney says, adding that Canada will be impacted if the issues aren't
resolved.

 "You need to overwhelm the markets. You need to put on the table more than is necessary," he said, adding that a trillion euros is necessary.

The fact that a central banker from one country is advocating fiscal policy for foreign countries, placing a value and a date certain for implemtation, should be a giant red flashing signal to the extent of the potential danger. Central bankers, normally, won't even recommend domestic fiscal policy in the public forum.

Carney is doing something very unusual by firing this shot over Europe's bow.

Germany's attempts to "unify"  Europe defined the first half of the last century. Let's hope their latest efforts to achieve a unified Europe do not yet again end in tragedy.

There is much at stake and the stakes are being raised every day.
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Trade update

10/14/2011

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On several of my past posts, I have declared that the US is likely to become more trade protectionist in order to deal with its problems of  long term structural unemployment; whereas it would be better off pursuing a  development agenda as advocated by Jeffrey Sachs. 
  
This week, US policy went completely counter to my prediction, as three long outstanding trade bills were signed with Panama, Columbia, and South Korea.

So have I lost faith in my prediction? No, not all. We are still in the early innings, politically, of the issue of structural unemployment; my own estimate is that the real debate on this issue won’t begin until after the 2012 Presidential election. 

Also, the US politically, like most of us personally, is full of contradictions. Congress is simultaneously trying to pass legislation that would force China to make its currency appreciate so that it terms of trade with the US would worsen.

 Politico had this to say about the new free trade deals:

“Advocates say the deals will result in the export of billions of dollars of U.S. goods and boost hundreds of thousands of American jobs.”

 Really? In the same way free trade with China helped the US manufacturing sector lose 7 million jobs last  decade?

A new study by David Autor, Gordon Hanson, and David Dorn explains the “job creation benefits” of trade with China. 
http://econ-www.mit.edu/files/6613  (right click to download)

 Marginal Revolution summarizes the study:
“The study rated every U.S. county for their manufacturers’ exposure to competition from China, and found that regions most exposed to China tended not only to lose more manufacturing jobs, but also to see overall employment decline. Areas with higher exposure also had larger increases in workers receiving unemployment insurance, food stamps and disability
payments.
 
The authors calculate that the cost to the economy from the increased government payments amounts to one- to two-thirds of the gains from trade with China. In other words, a big portion of the ways trade with China has helped the U.S.—such as by providing inexpensive Chinese goods to consumers—has been wiped out. And that estimate doesn’t include any economic losses experienced by people who lost their jobs.”

The reaility in the US economy is that:
Unemployment for those people with a university degree in the US is 4%

Unemployment for those without a high school education is 16%. 

Ben Bernake has recently weighed in on the issue of structural unemployment:
“Bernanke noted that about 45 percent of the unemployed have been out of work for at least six months.

"This is unheard of," he said in a question-and-answer session after a speech in Cleveland. "This has never happened in the post-war period in the United States. They are losing the skills they had, they are losing their connections, their attachment to the labor force."

He added: "The unemployment situation we have, the job situation, is really a national crisis." Bernanke said the government needs to provide support to help the long-term unemployed retrain for jobs and find work. And he suggested that Congress should take more responsibility.”

Put simply, by signing these trade agreements, congress has put in place policies aimed at providing market access for US corporations allowing them to grow profits and send low skill jobs off shore - while simultaneously providing jobs for the high skilled labour market.

The trade agreements benefit the elites in US society at the expense of the most vulnerable in US society.

Jeffrey Sachs sums it up quite well in the first paragraph of his new book 'The Price of Civilization: Reawakening American Virtue and Prosperity'. 

"At the root of America’s crisis lies a moral crisis: the decline of civic virtue among America’s political and economic elite. A society of markets, laws and elections is not enough if the rich and powerful fail to behave with respect, honesty and compassion towards the rest of society and toward the world. America has developed the world’s most competitive market society but has squandered its civic virtue along the way. Without restoring an ethos of social responsibility there can be no meaningful and sustained recovery. I find myself deeply surprised and unnerved to have to write this book."

 

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More links that validate my analysis of potential Greek default

10/11/2011

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As I have noted with my students for several years, and more recently on these pages, when Argentina defaulted they paid back 40% of their debt. This amount has then formed the upper estimate of what my threshold for Greek default loan repayment.

Here is a news report that suggests the negotiations for default are coming in exactly at 40%. My thanks to a friend, Brent.  He is the source for many of the links which I cite on this blog.

On another note, I notice that Hussman is also drawing comparisons with Argentina in his analysis of how the Greek story is likely to play out.
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China

10/10/2011

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I should note that I was a stock analyst during 2001-2002, in the wake of the managed and fraudulent earnings crises brought on by the likes of Enron, Global Crossing and MCI.

While working for the Canadian Energy Research Institute, in 2007, I started to suspect that China’s growth numbers were dramatically overstated.  For one thing it struck me as ridiculous that we would be cheering the fall of communism in the late 80s, and now placing our faith in the central planning abilities of the Chinese Communist party.   

What’s more, there is a Dilbert cartoon about a random number generator that produces nine, nine, nine, nine which reminded me too much of the Chinese economic data. Last year, Jim Chanos , head of short fund Kynikos  Associates, weighed in and echoed my assessment.  It appears that more sceptics are joining the party. There are some who remain convinced that China can kick the can down the road for several more years.

There is some evidence starting to emerge that China has indeed been faking their numbers. From the WSJ: :
 
“BEIJING—China's sovereign-wealth fund stepped in Monday to buy shares of the country's battered banks, which have been caught in a selloff that analysts say reflects a broader loss of trust in the integrity of corporate earnings and government statistics."

This will be the tip of the iceberg; when so few people, control so many resources and with western investors flocking like lambs to slaughter - this cannot possibly end well. Don’t  worry your fund manager will tell you it was unforeseeable and that they had to  be there. 


Cue the Wall Street strategy analysts to start adjusting and revising their opinions. 
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Saudi Arabia continues to over promise and under deliver oil production

10/10/2011

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Saudi Arabia has been constrained for some time now, at least the last five years, in its ability to deliver excess capacity to a tight market. Five years ago they cut production as oil prices were rising. Those who subscribe to peak oil theory have viewed this as evidence that Saudi production was in permanent decline.

Their behaviour during the supply disruption caused by the Libyan civil war cast further doubt on the Saudis ability to act as the marginal supplier to the global market.

What’s more, the house of Saud announced a 100 billion dollar investment in renewable energy so that it could increase oil production.

The Saudis promised investments that would raise production to 15 million barrels. Recently, they have recanted on these promises citing the supply coming from Brazil and Iraq as sufficient to satisfy global demand.  

All of this behaviour is very strange for the country with the supposed largest oil reserves in the world and the lowest cost of production. By  their actions one should begin to question the truth of either of these two assertions.

 The implication of Saudi Arabia being an “emperor who has no clothes” is that the cost of extraction of unconventional oil coming from sources like Brazil and Canada are much more likely to drive oil prices than marginal costs have in the past. Unconventional projects take a long time to  complete, so we are unlikely to see the oversupply response we have seen in response to past price spikes.

The volatility in oil markets is going to increase, as unconventional production delivers an ever increasing share of the world’s production. Political crises and production disruptions will lead to immediate and severe price spikes in the absence of a moderating supply source. 

Only a stable Iraq, with a significant investment in its field,  could possibly replace Saudi Arabia as the “go to country” for incremental oil  production in times of global disruptions. Imagine that. 

Editorial note Jan. 07/12 : My refined thinking has it that oil demand continues to drive prices given the relative tightness between supply and demand. I wrote an article for the Geopoliitcs of Eenrgy which primary thesis was that oil demnad would be more volatile than suppy over the next 10-25 years.


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A day late and many dollars short -IMF estimate on Eurozone bank recapitalization

10/9/2011

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Picked up this line from the newswire:
"The IMF has said banks across the continent might need up to €200 billion  ($267 billion) in new capital."
 
Greece owes €340 billion, mainly to French and German banks. So I think the IMF's guess might just cover the tab for the amount Greece will default on its debt - if one is optimistic.

My estimate is that Greece will pay no more than 40% of its existing debt. That's what Argentina paid 10 years ago, and I see no reason to place Greece in a superior economic and repayment position.

Tthere seems to be no failure of optimism at the IMF. I guess all the other countries in the Eurozone will just be fine, fine, fine.

Oh yeah, Sarkozy and Merkel reached a deal on French and German bank recapitalization - but they can't tell us about it until they run it by Finland and Austria.

The German and French tax payer should start singing along to Alanis Morissette's "Hand in my Pocket" because their governments most certainly will be robbing them soon. The IMF,Merkel and Sarkozy can sing the chorus.

French and German Taxpayer sings:
I'm broke but I'm happy
I'm poor but I'm kind
I'm short but I'm healthy,  yeah
I'm high but I'm grounded
I'm sane but I'm overwhelmed
I'm lost but I'm hopeful baby

The IMF,  Merkel and Sarkozy sings:
And what  it all comes down to Is that I haven't got it all figured out just yet
'cause I've got one hand in my pocket And the other one is giving the peace sign

I feel better already. Music soothes the soul.
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BBC Interviews Trader on Eurozone and Market Risk

10/6/2011

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The BBC recently interviewed a trader who believes the Eurozone crisis is not being dealt with properly and that the "smart money" is already betting on a market collapse as a result. He argues that investors should be pursing capital preservation strategies.

See my posts: I  guess I  am overdue for a Eurozone  post, 09/30/2011, and We  are all hedge  fund managers now , 09/11/2011, for my perspective on these matters.
 
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I "Heart" HBO-A generalist that delivers quaility -just like me!

10/3/2011

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Art at its highest level provides us with the tools to examine and understand our personal experience. For me and millions of other viewers, HBO has been at the vanguard of artistic television that provokes, challenges, and inspires us to see our world differently.

 As someone who became a teenager in the early eighties, I am used to thinking of music in broad categories: Rock, Metal, Country, Punk,  Alternative, Jazz, Techno, etc. Mature markets tend to fragment; for example Wikipedia lists 19 genres of heavy metal music and 11 subgenres. The advent of cable channels has similarly fragmented television. Now you have channels  dedicated to cooking, comedy, travel, outdoor adventuring, comedy, documentaries, news, music, arts, etc. HBO however, has bucked this trend of specialization in a specific genre but has instead chosen to focus on the quality of storytelling. In so doing, HBO’s rising boat, has raised the tide of television quality for all networks and inaugurated the golden age of television. HBO did not find its groove immediately but took some time to change its programing focus. A recent article on HBO identifies “The Larry Sanders Show” as the beginning of the HBO quality revolution. By coincidence, I have been watching this series again and it has held up well; I believe that Larry Sanders paved the way for 30 Rock. 

From the article:

“How different things are today. At the beginning of the 21st  century, there is nothing sharper in the cultural firmament than American television writing. You don’t have to brave the multiplex or pay exorbitant theatre ticket prices to watch the most compelling drama, the most scabrous satire, the most committed actors. From the sassy 23-minute sitcom to the magisterially drawn-out series, TV as an art form has grown up. It is changing our habits, and our scale of values. The ultimate act of cultural immersion used to involve going to see a Polish mime troupe in a downtown warehouse that couldn’t afford its heating bills. Today, it is to sink into a DVD box set for an evening of home-comfort transcendence.

 This near-miraculous transformation is almost entirely down to one company. This year, for the 10th successive year, HBO, the pay-TV network,  received more prime-time Emmy awards than any other network. HBO shows and artists challenged for 104 awards in last weekend’s ceremony. They included 21 nominations for the mini-series Mildred Pierce, 18 for the prohibition-era epic Boardwalk Empire, 13 for the fantasy series Game of Thrones, and 11 for the financial meltdown movie Too Big to Fail. HBO won a total of 19 awards, the most successful network.”


As an Economist, I am fascinated by “The Wire”, a series created 10 years ago was a shot over the bow to the systematic and nearly intractable problems in governance, media, education and the decaying middle class in America. Deadwood is meditation on how informal institutions arise in the absence of formal legal structures, and the community that forms around them. 

And then there are "The Sopranos", "Six Feet Under", "Rome", "Entourage", "True Blood", "Boardwalk Empire" and "Game of Thrones" to name a few. All palettes are covered.

 And then there are documentaries like “Public Speaking” or “Too Big to Fail”.

 And then there are the miniseries like “Mildred Pierce” or “Band of Brothers”.

 And then there is Bill Maher, the progressive firebrand renewed last season for 32 episodes this year.
 
Thank-you HBO. I salute you. You play to all my biases. You are a generalist that delivers quality storytelling.

I am a generalist that delivers quality economic research. As I have said in several posts, society needs to welcome the return of the educated generalist.

HBO is doing just that; it is showning you can be a generalist and still be excellent and relevant.

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