Malcolm Gladwell: Small Change Why the revolution will not be tweeted

A bit out of the realm of finance, but I think both interesting and important, Malcolm Gladwell (of The Tipping Point fame) has written a fascinating article exploring some of the limits of social networking/media in promoting change.

The world, we are told, is in the midst of a revolution. The new tools of social media have reinvented social activism. With Facebook and Twitter and the like, the traditional relationship between political authority and popular will has been upended, making it easier for the powerless to collaborate, coördinate, and give voice to their concerns. When ten thousand protesters took to the streets in Moldova in the spring of 2009 to protest against their country’s Communist government, the action was dubbed the Twitter Revolution, because of the means by which the demonstrators had been brought together. A few months after that, when student protests rocked Tehran, the State Department took the unusual step of asking Twitter to suspend scheduled maintenance of its Web site, because the Administration didn’t want such a critical organizing tool out of service at the height of the demonstrations. “Without Twitter the people of Iran would not have felt empowered and confident to stand up for freedom and democracy,” Mark Pfeifle, a former national-security adviser, later wrote, calling for Twitter to be nominated for the Nobel Peace Prize. Where activists were once defined by their causes, they are now defined by their tools. Facebook warriors go online to push for change. “You are the best hope for us all,” James K. Glassman, a former senior State Department official, told a crowd of cyber activists at a recent conference sponsored by Facebook, A. T. & T., Howcast, MTV, and Google. Sites like Facebook, Glassman said, “give the U.S. a significant competitive advantage over terrorists. Some time ago, I said that Al Qaeda was ‘eating our lunch on the Internet.’ That is no longer the case. Al Qaeda is stuck in Web 1.0. The Internet is now about interactivity and conversation.”

These are strong, and puzzling, claims. Why does it matter who is eating whose lunch on the Internet? Are people who log on to their Facebook page really the best hope for us all? As for Moldova’s so-called Twitter Revolution, Evgeny Morozov, a scholar at Stanford who has been the most persistent of digital evangelism’s critics, points out that Twitter had scant internal significance in Moldova, a country where very few Twitter accounts exist. Nor does it seem to have been a revolution, not least because the protests—as Anne Applebaum suggested in the Washington Post—may well have been a bit of stagecraft cooked up by the government. (In a country paranoid about Romanian revanchism, the protesters flew a Romanian flag over the Parliament building.) In the Iranian case, meanwhile, the people tweeting about the demonstrations were almost all in the West. “It is time to get Twitter’s role in the events in Iran right,” Golnaz Esfandiari wrote, this past summer, in Foreign Policy. “Simply put: There was no Twitter Revolution inside Iran.” The cadre of prominent bloggers, like Andrew Sullivan, who championed the role of social media in Iran, Esfandiari continued, misunderstood the situation. “Western journalists who couldn’t reach—or didn’t bother reaching?—people on the ground in Iran simply scrolled through the English-language tweets post with tag #iranelection,” she wrote. “Through it all, no one seemed to wonder why people trying to coordinate protests in Iran would be writing in any language other than Farsi.”

While the entire article is stimulating, one piece stood out for me:

More on Stuxnet

This is a must watch video for people interested in cyberwar.

“So much news”, or, “Are we living through a modern war?”

Confirmation bias is a tricky thing: how do you know if you’re picking up on news because of your confirmation bias or because there actually is a confirmation of your beliefs? That’s what I’m facing today. After yesterdays post discussing continued deflation in assets, the coming inflation in goods, and the end game – economic war (starting) and maybe (not a prediction) physical war, I was struck by the different news coming out today:

1. Starbucks is raising prices on some of its more complicated drinks (not the regular ‘ol coffee – for now). Again, inflation in coffee is starting to flow down the chain. This was a mild story, so I didn’t even link to it.
2. Then I saw this from the FT.com: The Great Race (to the bottom) – OK, a definite case of confirmation bias.
3. But then I also saw this in the FT.com: Ireland’s subordinated bond ATTACK! What struck me was not the content, which is old news (Ireland may default, CDS spreads rising, etc.) but the choice of language (“ATTACK!”). OK, so it’s probably still my bias looking for confirmation.
4. How about China blocking rare earth shipments to Japan? Is that still just my bias? Read about it here. Politically, it might be China testing the limits and ultimately might prove to be a disastrous move as now the world will look for alternative sources of rare earths. By the way, rare earths are available in other parts of the world, they’re just difficult (read: expensive) to isolate, but they’re available. China just made it more political and more strained.
5. Maybe it’s no longer my bias, but I (along with many, many others) discussed the possibility of German growth stalling with the recently stronger euro. Lo and behold German Economic Contraction Begins As Both Mfg And Services PMI Prints Miss Expectations. Now it’s starting to fall into place.
6. Then, here’s the clincher. Yahoo News discusses Stuxnet – new cyber security threat designed to make the crossover from malware to physical destruction.

I hope I’m wrong and that all these stories will turn out to be unrelated and of little significance, but if nothing else, investors should at least price in the possibility that I’m right and that the economic damage will continue and eventually show up in the repricing of risk and in turn, asset classes globally.

Deflation in assets, Inflation in goods

I didn’t know what to title this post as it will contain links to a number of articles and charts that are meant to tie together some themes we’ve been exploring together and trying to get at the “end game”. The question on every investor’s mind right now is where are we heading with our current policy path? The question is not isolated to what should baby boomers do, nor China’s currency, nor movements in the corn market. It is all of it. So let’s attempt to put it together (albeit messy)…

Let’s begin with the most obvious crack – deflation in assets. In the entire G8, and certainly in the US, real estate is the single biggest asset for most households. In the wake of easy monetary policy this asset rose, then fell. We all know the story, so I won’t go too deep into it. (For reference IYR went from 92 to 24 in less than 3 years.) Easy monetary policy continued, and I was quite sure that inflation pressures would begin, but we didn’t see them. In fact, real estate hasn’t stabilized and luxury is under pressure from every corner.

In late 2009, as the world was pronouncing the death of the USD, I went long and shorted the euro and yen believing that there was no way the rest of the developed world would not be affected. I was right on the euro and wrong on the yen. What has been interesting this year is that the euro continues to face structural difficulties from its member-nations, yet investors have started believing that it still represents a safer haven than the USD.

The yen too “should” be crying uncle, and yet, even a commitment from the BoJ to defend the USD!!! has not forced any significant sell-off of the yen. What is going on here?

Bernanke must be happy to get a little USD weakness, but the rest of the world is starting to worry that their efforts at weakening their respective currencies aren’t working. I expect Germany to come out with slower economic numbers in the next two quarters and thereby face fresh calls for increasing efforts to weaken the euro.

Investors are aware that this is no longer zero-zum, but rather a negative sum game. Brazil is issuing debt to buy USD! This is competitive devaluation at its worst. Keynes must at least be enjoying the experiment, especially since he won’t have to pay for its fallout.

On the other side of the currency world are the commodities. Again, we’ve discussed corn and wheat and MOO ad nauseum. But it’s so important, not just for understanding input prices. After currency intervention, access to raw materials and food stuff is the next prong of the economic war being waged. China’s dependence on world gran has gone from 0% 10 years ago to 15% currently. Countries from Russia to Malaysia are putting limits on exports of certain goods and its only a matter of time before each government is forced in to increasing protectionist regulations. Commodity prices are up and I suspect they will correct, but the structural changes are in place to provide a base of support and a springboard for some commodity prices to soar. I’m on the lookout for talk of “strategic reserves”, “national security”, and s”trategically important industry” to increase across the world.

Throughout, competitive devaluation will continue. People will spend money on goods – generic foods, household necessities, etc. but they won’t spend money to bid up assets. Agricultural real estate will win, but commercial real estate will not recover in the near to medium term.

As promised, some links:

• This is a must read from Albert Edwards at SocGen.

…[T]he biggest threat is that this most recent invocation of the nuclear option is coming at a time when the world is least prepared to handle it – social imbalances are at unprecedented levels, and if, as many predict, the price of key food products is about to surge (courtesy precisely of these failed central bank policies) to a point where the great unwashed end up on the wrong side of hungry, from there, to armed conflict, the line is very, very thin.

From John Murphy Intermarket Analysis (1991):

Consider the sequence of events going into the fall or 1987.  CRB prices had turned sharply higher, fueling fears of renewed inflation.  At the same time interest rates began to soar to double digits.  The USD which was attempting to end its 2yr bear market, suddenly went into a freefall of its own (fuelding even more inflation fears).  Is it any wonder, then, that the stock market finally ran into trouble?  Given all of the bearish activity in the surrounding markets, its amazing the stock market held up as well as it did for so long.  There were plenty of reasons why stocks should have sold off in late 1987.  Most of those reasons, however, were visible in the action of the surrounding markets and not necessarily in the stock market itself.

I’m not suggesting things are the same as 1987, by the way. But Murphy touches on one of the most important issues we discuss in our newsletter – different markets that might seem far-flung are interconnected and investors need to understand or at least explore the relationships between them. To that end, commodity prices are telling a different story than bond prices. Commodities are telling us that CB’s may succeed in stimulating inflation, but it can come faster than they can control. (YTD CORN is up 30% – just one example.)

Throughout, the CB’s will probably continue to print money in a race to the bottom. Make no mistake – this is economic warfare, with national strategies (witness the Chinese buying JGB’s to force the BOJ’s hand), egos (witness “Helicopter Ben” needing to prove his theories right), and sacrificial pawns (witness 43 million Americans living below the poverty line).

Throughout it all, I continue to scream from the rooftops that the market is underpricing geopolitical risk. Chinese ship movement toward the Indian Ocean, Iran, North Korea, and the random sociopath (plenty of those out there) are just a few of the current “knowns”, not to mention the “unknowns” that will be coming out of the woodwork as social instability and civil unrest rise.

I started this post as an exploration, but realize now that it is incredibly depressing and negative. I’ll end on a positive note: Zynga, the biggest social gaming company in the world, moves 1 petabyte of data EACH DAY! and adds as many as 1,000 servers each week! They site is producing more information in a day than was available in the entire world just a few decades ago. Pretty astounding. And for those who WANT to end on a depressing note, read this in relation to the information on Zynga (I’ll give you a hint: Fahrenheit 451 and 1984 as dystopian novels are eery predictions of social gaming and reality TV.)

Dangers of Indexing – This is important for money managers

There has been a lot of debate recently about the death of stock pickers, usually in conjunction with some discussion on high correlation, lower factor predictive abilities, etc. and at the same time, there has been an obvious growth in the use of index investing styles. I have tried to show different reasons why notifications of our death are premature, but a recent paper from the NBER has made me more optimistic about stock-pickers chances of success than I have recently been. For starters, a simple comparison of RSP (equal-weighted index) and SPY (market-cap-weighted index) shows that the average stock in the S&P 500 tends to outperform the index, leaving room for stock pickers over the index. For a quick chart, click here.

If that doesn’t satisfy you – because it didn’t satisfy me either – here’s a more thorough and interesting report (from FT.com):

A new paper from the National Bureau of Economic Research by Jeffrey Wurgler, Nomura professor of finance at New York University, discusses the potentially overlooked perils of indexing…

In terms of the effects, he finds:

On average, stocks that have been added to the S&P between 1990 and 2005 have increased almost nine percent around the event, with the effect generally growing over time with Index fund assets. 6 Stocks deleted from the Index have tumbled by even more. Given that mechanical indexers must trade 8.7% of shares outstanding in short order, and an even higher percentage in terms of the free float, not to mention the significant buying associated with benchmarked active management—this price jump is easy to understand and, perhaps, impressively modest.

——

If a one-time inclusion effect of a few percentage points were the end of the story, then the overall impact of indexing on prices would be modest. But the inclusion effect is just the beginning. The return pattern of the newly-included S&P 500 member changes magically and quickly. It begins to move more closely with its 499 new neighbors and less closely with the rest of the market. It is as if it has joined a new school of fish.

Figure 2 (right) illustrates the phenomenon. It is worth repeating that this pattern is occurring in some of the largest and most liquid stocks in the world.7

In essence, he argues that the liquidity and market capitalisation of the stock becomes increasingly irrelevant once it becomes a member of a major index…

As he explains:

The net flows into index-linked products are both large and not perfectly correlated with other investors’ trades. Indexers and index-product users are by definition pursuing different strategies from those of the more active investor. They are less interested in keeping close track of the relative valuations of index and non-index shares. Some are index arbitrageurs or basis traders who care only about price parity between index derivatives and the underlying stock portfolio. The upshot is that over time, the index members can slowly drift away from the rest of the market, a phenomenon I will call “detachment.”

Consequently, Wurgler says this detachment may lead to a significant price premium for S&P 500 Index members.

He also cites a paper by Morck and Yang from 2001 which matched stocks within indices as closely as possible to a stock outside the index, with compatability defined in terms of size and industry.

The comparative valuations showed that S&P membership drove up a price premium in the order of 40 per cent.

Which leads him to conclude:

…the evidence is that stock prices are increasingly a function not just of fundamentals but also of the happenstance of index membership. This drives many of the negative consequences noted below.

As for those negative consequences, those are:

1) Bubbles and crashes.

The S&P 500 Index’s visibility and the easy access to ETFs and Index funds facilitate a high sensitivity of flows to returns.

—

Index membership also affects high-frequency risks, and may encourage trading activity that exacerbates those risks. Dramatic examples include the crash of October 19, 1987 and the intraday “flash crash” of May 6, 2010. SEC investigations have centered on S&P 500 derivatives in both cases.

2) A confused risk-return relationship.

Whereas the basic proposition of asset pricing theory is the positive relationship between risk and expected return, he says in stock markets, the proposition is incorrect:

High risk stocks have, on average, delivered lower returns than low risk stocks in both U.S. markets and those around the world.

—-

A $1 investment in a low beta portfolio in 1968 grows to $60.46 by 2008, while the same investment in a high beta portfolio yields $3.77. The high beta portfolio actually has a negative real return; the 2008 portfolio adjusted for inflation is worth 64 cents. Restricting to larger cap stocks doesn’t significantly change the qualitative picture.

And this he says is because the basic problem is that managers benchmarked against a simple index will tend to favour high beta stocks – because the index is actually already outperforming versus the fundamentals.

In other words, for a manager benchmarked against the market portfolio, a stock with an alpha of 2% can be a candidate for underweighting. A similar argument shows that such a manager is also incentivized to overweight a low or negative alpha, high beta stock, unless the alpha is extremely negative.

For the full article, click here.

This should come as good news for stock pickers, but also might provide some interesting fodder for new tests, particularly low-latency equity long-short strategies.

For a look at how the economy is really doing – CAG

While everyone was waiting and watching an incredibly boring session pre-Fed, then a 30 minute interlude of head fakes, the real story today was ConAgra.

CAG cut their fiscal year outlook due to consumers buying less of the high margin products and higher cost inflation. This is a continuation in the theme we’ve discussed where luxury at every level is going to get discounted. Premium milk brands at DF were our focus a few weeks back, but it’s happening at every level. On the flip side, generics should be relative beneficiaries and companies positioned as low-price brands.

This also made me come back to the restaurant business, which one of (in not THE) largest employer in the country. Consumers cutting back spending – not good for restaurants. Higher price inflation in everything from corn to cheese – not good for restaurants. In the meantime, investors in YUM don’t seem to notice, but I think they soon will. Restaurants might be like retail in 2007-2008 – when investors start heading for the exits, there will be a lot of spilled milk.

So while the Fed continues to be the focus of attention, I think the real story today is CAG. At its heart, the news from the company confirms what most people already know – this isn’t a recovery by any standards and everyday costs are rising while assets (homes being our collective largest investments) are declining.

For the record, at the time of this writing I have no position in any of the stocks mentioned, but that is subject to change. This is not investment advice in any way, shape, or form, and readers are encouraged to do their own research.

Fed – deflation fears dominate

First, click here if you want to see the statement in its entirety.

Second, note that Hoenig was a lone dissenter.

Third, the Fed is confirming slow growth and fearing deflationary pressures and stands ready to inject further liquidity.

Fourth, predictions of an imminent announcement of QEII were premature, although Fed bond purchases continue without such announcement and rates are incredibly low. Could they go lower? For sure, but again, I don’t think 10 year rates will fall below 2 (I don’t even think they’ll get to 2 – but it’s an easy round number to point to).

Euro is going to 1.32 as we speak.

Yen is stronger as well at 85.2.

Gold went from down to up in 10 minutes.

And the market is up over 50 points as I write this.

More to come…

Poverty – today, here (as opposed to some other time, some other place)

As the market hails talk out of the NBER that the recession ended in the middle of 2009, I am astounded that anyone can reconcile it with last weeks report that the country is facing the highest poverty rates in history. In that light, I was searching for something that would adequately describe my confusion when I came across the following posting:

Pity the Poor Couple Who Make $450,000 Per Year (Yet Another Failure of Our ‘Elite’ Educational System)

I swear every time I go on vacation, there’s an outbreak of stupidity. One symptom is a ridiculous plaint by law professor Todd Henderson, who whines about barely getting by on $450,000 per year.

No, really, I’m not kidding. I suppose the rest of us should just eat a bullet or something (and bullets are cheap!). Thankfully, Michael O’Hare and Brad DeLong (aka ‘Mr. Deling’) tear down this staggering display of narcissism. I would only add that when one has $500,000 of student debt, you probably shouldn’t buy a million dollar house. Or maybe, you’ll have to forgo part of the $100,000 annual donation to your retirement funds. Because personal responsibility should not be the sole purview of single minority mothers. Perhaps Henderson’s outburst should be chalked up to the influence of degenerate white culture or our finishing school ‘elite’ educational system. But I digress.

Like I said, the narcissism is utterly staggering and indicates a bewildering lack of empathy with most people–the median household income in the U.S. is around $50,000, which means half of all households make less than $50,000.

But I’m here to help (we like helping!). First, Ian Welsh:

When I was poor and working in lousy jobs I used to look in the mirror and see myself at 50, or 60. I expected to still be working at grindingly hard jobs, being treated badly by bosses (because there is no rule more iron than that the worse you are paid the worse your employer will treat you), and still being paid little more than minimum wage. That was the future I saw for myself.And when I was on welfare, after having failed to find a job for 6 months, and even being turned down by McDonalds (in the middle of the early nineties recession) I wondered if I’d even ever have a shitty job again. I ate cheap starchy food, turned pasty and put on weight. My clothes ran down. When my glasses broke beyond the point where tape would keep them together I literally had to beg the optometrist to make me his cheapest pair and I’d pay him later. (I eventually did.) My life was a daily grind of humiliation.

And that’s what I expected my life to be….

Living without that safety net, knowing that if something goes wrong, that’s just too bad, changes you. Living without any real hope of the future, knowing that the shitty job you’ve got now is probably about as good a job you’re ever going to have, changes you.

And it changes your sense of what hard work is, of what it means to be deserving….

And they know that they’re one bad break away from losing even the little they have–one illness, one plant closure, one argument with their boss.

They don’t have a lot of hope for the future, except that it won’t get worse. The life they live now is the best it’s probably gonna get.

Living like that changes you. It makes you see people differently. You understand that there are a lot of bad jobs out there, and that someone’s going to be stuck with them. You know that most of those jobs are either hard or humiliating, and often both. You know that for too many people, a shitty job where they’re abused by their boss is as good as it gets.

John Scalzi (and read the whole thing):

Being poor is having to keep buying $800 cars because they’re what you can afford, and then having the cars break down on you, because there’s not an $800 car in America that’s worth a damn.Being poor is hoping the toothache goes away.

Being poor is knowing your kid goes to friends’ houses but never has friends over to yours.

Being poor is going to the restroom before you get in the school lunch line so your friends will be ahead of you and won’t hear you say “I get free lunch” when you get to the cashier….

Being poor is feeling the glued soles tear off your supermarket shoes when you run around the playground.

Being poor is your kid’s school being the one with the 15-year-old textbooks and no air conditioning.

Being poor is thinking $8 an hour is a really good deal.

Being poor is relying on people who don’t give a damn about you.

Being poor is an overnight shift under florescent lights…

Being poor is not talking to that girl because she’ll probably just laugh at your clothes.

Being poor is hoping you’ll be invited for dinner.

Being poor is a sidewalk with lots of brown glass on it.

Being poor is people thinking they know something about you by the way you talk.

Being poor is needing that 35-cent raise.

Being poor is your kid’s teacher assuming you don’t have any books in your home.

Being poor is six dollars short on the utility bill and no way to close the gap.

Being poor is crying when you drop the mac and cheese on the floor.

Henderson graduated from Princeton, and, presumably his spouse, who is a doctor, is also well educated. That he can not responsibly get by on ~$450,000 per year and that he does not understand how ridiculous he sounds complaining about his ‘hardship’ can only be viewed as a massive ethical failure of our ‘elite’ educational system.

And next time I hear someone talk about the irresponsibility of the poor, I’ll be sure to point them to this asshole.

I highly encourage everyone to read the comments from the “Being Poor” piece here. Let’s put things in perspective.

Competitive devaluation will not end well…

Just a link this time: http://www.businessinsider.com/brazil-currency-intervention-2010-9

Euro is remarkably stable – Ireland anyone?

If a currency falls in the forest …

According to the Irish Independent the Labour Party, Eamon Gilmore, came very close to suggesting that Ireland is considering defaulting on its debts “when he talked about the Government “negotiating” with bondholders in Anglo Irish Bank.” Additionally, the same newspaper also reported that Ireland is on the verge of calling in the IMF for a bailout, citing “a report from Barclays, one of Europe’s largest banks, said Ireland may yet need financial help from the IMF or the EU if conditions got any worse.

Read the article from zerohedge here.

Currency markets are not reacting to anything, but gold is. Gold hitting new highs. Silver up as well. This is 1987 sort of stuff – currency market turmoil, some politician says something irrelevant which awakens the markets to underlying risks, and WHAM!

Is the “wham!” coming next week? I don’t know, but it certainly feels like the calm before the storm, because the news has been bigger than the reactions suggest.

Around the world in 6 charts or fewer…

We haven’t done this in a few weeks, but it seems pertinent now, especially since today was surprising by the sheer inaction of virtually all markets except a one time move in JPY – other than that, ho hum, which is incredibly scary to me.

So the BoJ comes out to weaken the yen and all it could do was make a 3% move? I showed the chart earlier, so I don’t want to waste 1 out of 6 charts here, but come on! I’m not just saying that because I’ve been short the yen for almost a year. I’m saying it because the world has obviously gone bonkers. JPY should NOW be the ideal funding currency for any type of carry trade. Short the yen buy anything with yield, like BRL, AUD or anything else. The BoJ will limit any currency fluctuations against you. Now, the real question is who in their right mind would want to take the other side of that trade and short yield to buy yen? I just don’t get it.

On to our first chart: Silver – the poor man’s gold

Silver sure looks strong and I like it more than gold, but quite honestly, I spoke months ago about building a metals portfolio in gold, silver, palladium, platinum, miners, etc. and I continue to view them as a basket rather than trading them against each other.

On the other end of the commodity spectrum, energy has been holding up, even rising a little since we last checked in. Since I tend to prefer companies to the commodities, I’ve been looking at the oil space and not loving it here, except that I’m pretty sure the markets are underpricing geo-political risk and a nuclear Iran. The only solution I currently see at a reasonable price is nuclear. I mentioned it a few months ago and initiated a position in NLR:

It’s about where I bought it, but it’s a long term play, so the daily fluctuations will not influence my position. If anything, we might look to build individual company exposure as opposed to the ETF, but for now, it works.

I can’t look at metals and energy, without also talking about grains and agricultural related companies. CORN is all over the news, but once again, I don’t love trading commodities if I can invest in the companies. I’ll highlight MOO here, but I have no position in it:

It might pull back, but I expect it to outperform the equity markets in general and act as an inflation hedge if it comes to it.

We’ve covered some ground, but the real interesting plays in the market have been the relative movers. I’m going to highlight 3; they’re related to each other, but important:

DBA: GOLD

Could ags have bottomed against gold and are they starting to be THE safe haven?

SPX:GLD

Could both charts taken together provide support for a top (at least a short term top) for gold?

Lastly, here 10 year treasury yields vs. 30 year treasury yields (these are yields, not prices):

Could this have bottomed as well, implying 30 year bonds are about to go down faster than 10 year bonds? I think so. Bu then again, I’m still short long bonds and was early on that, so take it with a grain of salt – the direction is inevitable; it’s the timing that’s tricky.

Yaron Sadan on The Wall Street Shuffle

Yesterday, I was interviewed on The Wall Street Shuffle where we focused on munis, treasuries, and yields – for the full interview, click here. One thing that came out towards the end was a brief comment on the Japanese yen – I usually like taking the other side of the trade of governments and CB’s, except for times when the governments are actively trying to devalue their own currencies. It turns out that CB’s are pretty effective at printing. It certainly doesn’t help when one of the main source of buyers for JGB’s, namely, the Japanese savers, are retiring and now need to draw on those assets. We remain short the yen – we were very very early (since the end of 2009), but the end game is nigh.

As for muni, treasuries, and rates – it’s the same story: we’re probably very early, but at some point, those prices will break and yields will go up.

More on the yen – read this

For all I know, Keynesians might be even right in thinking policy makers can fiscally jolt economies back to life, allowing them to recover back to their ‘default mode.’ But their assumption is that ‘default mode’ is positive growth. But what if it isn’t? What if the ‘default mode’ is falling output because the population is declining? Japan might just have spent the best part of twenty years trying to fiscally stimulate its way out of a demographic compression. If this is correct, and population decline has blown the hole in Japan’s government balance sheet there’s still plenty of damage in store because the demographic compression isn’t over yet.

This is a must read article about the yen, assumptions, demographics from Dylan Grice at SocGen.

Today is all about the yen!

The new Japanese government has no choice but to systematically debase the yen. Everyone, especially Japanese exporters, are convinced that it will save/stimulate the economy.

Let the grand experiment continue!!

Yet, we know how it ends. CB’s are incredible effective in one task – debasing the currency. I think the BoJ is going to prove that to everyone who thought the yen was a safe haven.

Has the government succeeded in breaking the USD?

I don’t know about completely succeeding – yet (!), but they sure are trying their hardest:

(daily USD index)

On the flip side, gold is rallying, but silver is the more interesting story in my mind:

(weekly SLV)

In the meantime, the S&P is  rallying, but taken on a longer scale, it has a lot of work to make up:

(SPX weekly)

Just some food for thought – this rally appears to be driven by the FX markets as investors shift out of the fiat currencies, some faster than others, but gold is showing highs in various currencies, implying a fear of all CB’s. The yen continues to astound, making fresh 15-year highs:

(yen weekly)

Scary times when there’s no place to hide.