Yen Update

As promised, I am going to check in periodically on the price action of the Japanese Yen (using FXY as a proxy). And so far, 126 held to the downside and 128 was broken through on the upside. From a macro standpoint, shorting the Yen seems really interesting and the fundamentals are going to line up at some point. But, as the savvy investors that we try to be, there really is no reason to rush in until the wind is at your back. And, at the very least, until there is greater clarity with respect to Europe, Japan will not be the focus of attention (despite its recent announcement about a budget that would make the most dyed-in-the-wool Keynesian blush). In any event, here's the chart to back up the story about why it simply is not time yet.

More Myanmar

I finished Where China Meets India by Thant Myint-u. Although about Burma, a country that has definitely piqued my interest lately, it was not the standard fare, as it didn't have an investment focus. Instead, it was part history lesson on Burma and the surrounding countries, as well as a log of the author's travels through the area. A few notes:

-The writer is western educated, but the product of Burmese parents. So, while he had been to the region before, it was years earlier, and he was able to identify the rapid transformation underway. He explored Burma, but also the regions in China (to the east) and India (to the west) that border it. The takeaway seemed to be that the distance between all these people is shrinking, and Burma is going to become a crossroads area for the large powers that surround it.

-A large factor driving everything is the resources in the ground, with estimates of hundreds of billions of dollars in natural gas, oil and other commodities in Burma. Clearly that is a compelling motivation for countries to gain access and to invest in infrastructure to extract it.

-For the Chinese, gaining a foothold in Burma is also about economic security and trade routes. They would like to establish a port that will allow them to receive imports from the west. Currently, the main thoroughfare is the Strait of Malacca, which is 1.7 miles wide at its narrowest point, and could be disrupted by a strong naval force.

-The Chinese, as compared to the Indians, already have a much more pronounced presence in Burma's largest cities. And certainly moreso than western countries that still have sanctions in place, preventing their companies from setting up shop. Recent news has suggested that the west is rapidly approaching the point where such sanctions will be lifted.

In certain ways, it is still like the wild wild west in this part of the world. There are separatist groups and sectarian violence still remains. But, the sense is that expansion is coming. I hope to get involved when the time is right.

Devil in the Details

I am ramping up in my preparation to read the Keen book (have some time away next week when I hope to plow through a lot of it, after finishing the current distraction about Burma). Largely, what that means is rummaging through his website to understand his basic position through shorter blog posts. And while I think much of what he has to say about causal elements makes sense (with the requisite caveat that his solutions might not), I do have a question about his explanation that I hope his longer form book will answer.

Essentially, even if I take his theory of endogenous money at face value, I still have yet to see what the main stimulant is for banks to begin the reckless binge of issuing more and more credit to less and less worthy borrowers. He makes reference to Hyman Minsky and the Financial Instability Hypothesis, so maybe he will elucidate on that point and the causation that exists. So far, the best I got, though, is that capitalism is inherently unstable. I don't think that's enough. I tend to think that the Central Bank plays a role here, by keeping interest rates too low for too long, thereby enabling and encouraging the reckless behavior in banks.

But, we shall see what he says.

More on Keen

I recently mentioned Steve Keen, an economist from the "Post-Keynesian" school of thought, whose work sounded appealing at first blush -- I plan to read the updated version of his magnum opus Debunking Economics in the next month or so. In the mean time, I just got through a recent journal article that he put out which provides a good introduction to his theory. Perhaps because I think of myself as a contrarian, there is much to his story that appeals. Again, in broad strokes, the main problem with neoclassical theories and models is that they start from the assumption that we are in equilibrium, thus their predictive powers have been lacking as it relates to periods of chaos (think recent time). Specifically, most economists don't account for the fact that banks endogenously create money through the act of lending (lending precedes reserves and not the other way around). So, debt does matter. Systems are inherently unstable. And I think I like where this reasoning is going.

Now, I should stop short of fully embracing Keen because (1) I have yet to read his book and (2) I know that he endorses large doses of fiscal stimulus as the recommended policy for what ails us. But I look forward to learning more. And perhaps having my mind changed.

On The Precipice

I'm not sure the title is really appropriate, especially since I haven't been able to watch the games as a Time Warner customer, but clearly I am referring to the Knicks season.

When I made my call at the start that the Knicks could win it all, I knew they were missing a big piece at the point guard spot, and noted as much when I said Baron Davis would be the ultimate x-factor. Of course, even though I thought they might struggle a little bit until he was ready, I never thought they would be this bad. From what I can gather, Stoudemire in no way resembles the player from last year and the team has seemingly quit on D'Antoni. And if that's right, then this team is destined for nothing more than mediocrity. Davis might have an impact when he returns, but it feels like this team is so lost right now, that even if he comes back in all star form, it still might not be enough.

Again, I feel a little hamstrung in this analysis since I can't watch them play. But, since there would be no point to this unless I made some bold comments, here goes...

They need a new coach and they need to trade Stoudemire.

The former is kind of a no-brainer. D'Antoni gets another 10 games or so to right the ship, perhaps a few more than that depending on when Baron Davis starts playing, but whatever the poison that is infiltrating this team, the coach is always going to be the first fall guy.

As for Stoudemire, he had the right personality to be the guy who signed here and helped set about the re-emergence of this franchise. But he has never been the type of guy who could take a back seat. So when Carmelo was brought in, he probably thought he would still be the top dog. But, he isn't and he shouldn't be. What's happening with him this season is either mental (see sentences proceeding) or physical (in which case get him out of here before he can't get you anything in return). And if he does get traded, there are really two ideas to pursue:

(1) Get a top flight point guard. Easier said than done. The only scenario I can see being remotely realistic is that it happens next offseason when the Nets fall flat in their pursuit of Dwight Howard, realize they won't be able to re-sign Deron Williams, and decide that trading him for Stoudemire at least gives them a marketable piece in return for their debut in Brooklyn. Undoubtedly, if it happened, it's the type of move that would re-invigorate Stoudemire, resulting in a win-win for both teams. Beyond that, I don't see any other star point guards out there to be had.

(2) Even more unrealistic than the first trade, package Stoudemire and Chandler for Howard and a pu-pu platter of Orlando's bad contracts. Not worth spending much time on it because I think it is so incredibly implausible, but I've put it out there.

Ultimately, this team sounds like it's poorly constructed from what I've read. And without confidence. So something will be done.

I Get It

On occasion, after reading about a topic over and over, something suddenly clicks, and you can make sense of it. It happened for me twice today. The second instance, I think, more meaningful than the first.

-Paul Krugman helped me (finally) to wrap my head around the concept of Say's Law and why it draws so much attention (it's also worth clicking on the link within Krugman's post). And, oddly, I don't think Keynes was so off in calling what he did into question within the neoclassical framework. Which is not to say that his prescriptions are the right ones in my opinion...

-The second moment of zen came from stumbling onto The Radical Subjectivist blog. He is a thinker in the Austrian tradition, but he satisfies the Steve Keen criteria of moving past the equilibrium requirements of most mainstream economic constructs. And he also remains skeptical of what government can and should do. In other words, he's convinced me that I need to spend some time reading Ludwig Lachmann.

I relate...

Courtesy of Gene Callahan:

"I don't know if I have a single reader who finds this topic interesting, but, as I have mentioned before, for me this blog is a writer's journal that happens to have readers."

In the land of ivory towers...

From over the weekend, Krugman continues his attacks on Romney. Now, I am not wont to defend Romney as I have no view towards voting for him -- but I think this piece shows that Krugman is nothing more than a lab-based academic who lacks any real world experience. Better yet, it is just another example where his critical eye seems to be on vacation as it relates to those arguments which confirm his thesis.

In this case, Krugman seems appalled at the notion of re-trading because he has zero understanding of how a deal gets done. When Bain is the high bidder, the process doesn't end there -- next comes due diligence, where the potential buyer gets to take a more thorough look under the hood of what it's buying. And it's entirely possible (and quite common) that something will come up that leads to a reduction on final pricing.

That Krugman thinks this "revelation" is some sort of black eye for Romney and Bain only speaks to his own lack of sophistication on the topic (and many others I would guess) while providing more slop to feed to his predisposed audience.

Interesting Alternatives

While my overall understanding of economics remains very basic, I think that I have picked up enough to be at least a little uncomfortable with all the different mainstream schools. Not surprisingly, then, I have come to appreciate those voices that reject the traditional and offer up ideas and stories that run counter to the way things were perceived pre-2008.

Surprisingly, though, one such voice is a guy named Steve Keen, who endorses the ideas of Keynes, but not in the way that they have been distorted by guys like Hicks and Krugman. What I like about his writing (and others like him) is that he convincingly demonstrates how all the competing schools still operate from the same faulty framing issues, and are unable to appreciate how their models of a complex economy become useless any time after T-zero. Even the Austrians fall into the same dichotomy problem, specifically government versus markets, as if it was really that simple.

Now, I am not yet convinced that stimulus will provide the answer, but I am at least receptive to the logic of this camp, since they fall under the heading of folks who saw what was coming. And part of my reluctance to embrace them is perhaps because of my own priors -- namely, I remain skeptical of how effective the government can be given it's lack of a profit/loss gauge to guide it to efficient decisions.

Catching Up

I like to read, but I find that if you ask me about a book anywhere from 3 to 12 months after finishing it, I am apt to remember little in the way of insights or important conclusions. Maybe my mind is simply going to mush with age. Thus, if for nothing else, this blog has served its purpose as the place where I can memorialize my initial reactions and big takeaways from the literature on my self-created "syllabus". Three more from late 2011/2012...

-There's Always Something to Do by Christopher Risso-Gill. The story of Peter Cundill, nicknamed the Canadian Warren Buffett for both his investing success and his adherence to the Benjamin Graham method. Nothing remarkable about the book, but it briefly mentions one of his interesting tactics: each year Cundill would visit the country that had the worst performing stock market over the prior 12 months, searching for opportunities.

-Hot Commodities by Jim Rogers. I probably would've found this book more interesting had I read when it first came out in the mid 2000s. Nevertheless, it is interesting to note how lukewarm Rogers is about gold at the time (versus his attitude now).

-Economics and the Public Welfare by Benjamin Anderson. A financial history book for the period 1914-1946 based on the observations of one of the key players of the time (chief economist at Chase). Generally, I am receptive to writing that deals with the depression of 1921, as it is often viewed as a compelling example of a deep slump that resolved itself rather quickly in spite of minimal government intervention. So what does Anderson (who was neither Austrian nor Keynesian) have to say? He points out that government expenditures from 1920-1923 went down every year (albeit from a higher base following the war) and that taxes were lowered slightly, with the result a net surplus from 1921 to 1923 (i.e., no deficit financing). Wages declined slightly and production lowered dramatically between 1920 and 1922 -- in other words, there was no stimulus to prop up prices. The markets were allowed to clear and the recovery was quick. He contrasts it with Japan, where there was coordinated effort between central bankers, politicians, and industry to prevent prices from dropping, followed by a 7-year period of stagnation, and then a banking crisis. Also of interest to me, the book looks at some of the data that has been argued by certain Austrian thinkers to demonstrate a credit-fueled boom in the '20s (masked by a natural period of deflation) that led to the '29 Crash -- Anderson identified a tremendous expansion in credit (sparked by easy money) which precipitated speculative behavior. Finally, the book spends a great deal of time looking at many of the New Deal policies and makes an argument that would seem to support the "Regime Uncertainty" thesis of Robert Higgs.

Basic Conventions

In my current gig as an investor in multifamily real estate, I've encountered the interesting and bizarre. And while nothing I'm about to write will re-invent the wheel as it pertains to my chosen profession, I still felt it was worth a little bit of ink spilled to jot down some thoughts.

-There are really three ways to measure an investment when you're underwriting:

1) Cap Rate, or year 1 yield on purchase price
2) Price Per Pound, or price paid for each unit
3) IRR, which tells you the annualized rate of return over the life of the hold period (however long that is)

From my standpoint, number 3 is total bullshit. Especially when it's used to analyze a deal more than 2 or 3 years out. The notion that you can possibly make a good prediction on rental growth rates and the trajectory of repairs and maintenance expense some 7 to 10 years in the future is foolish. It also provides the analyst with a lot of flexibility to paint a bullish or bearish picture, depending on the mandate. So, it's a little slippery. But, for whatever reason, most funds market themselves on the basis of exactly that -- "we're going to hold our assets for 8 years and anticipate low 20 returns during that time".

The other two can provide more insight, but context is very important. Starting with cap rates, you could have a situation where a 4-cap is a better deal than a 6-cap. If the former is coming off of depressed numbers because of recession but it's an asset in a good market, and the latter is peak pricing in a tertiary market during boom boom times, you can probably make the case for the "more expensive" investment. Again, context matters. The same can be said for price per pound. Is $150k per door reasonable in light of comparable trades and repro cost? Hopefully you can answer that question based on a thorough analysis of the market you're dealing with. Thus, when price per unit is used in tandem with a cogent and thoughtful view of cap rates, you put yourself in a position to invest well. And, if you have the ability to assess the current macro story reasonably on point, you're really in good shape.

-I saw the news that Morgan Stanley real estate funds got an extension on Fund VII, granting them the right to spend roughly $2.1 billion in equity over the next 12 to 18 months. If I had any assets in the markets they're looking at, I would consider hitting the bid during that time.

Just A Reminder

Whether Monetarist or Keynesian, there is a consensus amongst economists that FDR served the country well in 1933 by revaluing the gold exchange rate from $20.67 per ounce to $35 per ounce. Thus, when you hear about NGDP targeting or any other monetary stimulus plan, bear in mind that each idea represents some derivative of the FDR policy (i.e., expand the money supply and create inflation). So, I ask -- how could you possibly be anything but bullish about the prospects for gold?

Faith

Read.

My Perspective Has Broadened

One of the considerations that comes up in the debate about fiscal stimulus is whether the government crowds out private market actors through its diverting of resources and capital towards its particular projects. And most of the time, when I hear that conversation play out, it is framed in the context of interest rates -- i.e., there is only a finite amount of savings upon which to draw the needed capital to implement any particular project, and so the act of government drawing from that base serves to prevent someone else from doing the same, driving up the cost of capital.

But, then I caught the following comment over at Scott Sumner's blog, which I think expands the definition of "crowding out" in a useful way that I hadn't really contemplated (even though it should be rather intuitive). Given that I think government policy is imprecise at best, the notion that it could target only idle resources is simply naive. Inevitably, it will capture some portion of the resource base that is already being utilized, to the detriment of other actors. And, so, it is not simply about a competition for savings (that will cause interest rates to spike), but also a competition for any components of the production process (which might not manifest itself through interest rates).

Trying to Explain the Unexplainable

I'm a day late in picking this up, but Jonathan Finegold Catalan poses some interesting questions about stock market action and gold.

Starting in reverse, as you may recall, some time back there was a blog exchange between Paul Krugman and Bob Murphy about why the price of gold was going up. Krugman tried to boil it down to one explanation, consistent with his model and view of the world. But, as Catalan notices, he is incomplete -- Krugman identifies the desire of gold owners to hold rather than sell (with negative interest rates contributing), but fails to identify any catalyst, generally, for why gold should move higher prospectively. While Catalan does not necessarily explore those reasons, I think it's worth a moment to ponder.

It starts with the fact that US economists (think Krugman, DeLong, Roubini) employ a very US-centric view into their analysis, treating gold as some sort of absurdity that gets too much attention from the fringe element. And, in being so dismissive, they end up paying short shrift to gold's historical role as a monetary asset -- that a lot of people in places like India and China (you know, real small countries) continue to take very seriously. Therefore, as everyone knows that money-printing is the order of the day, these non-Western folks are happy to hold gold because they seem to understand currency debasement. More fiat but the same amount of capital and resources -- what could that possibly be a recipe for? So, while a gold standard may not be an inevitable outcome, the end of the dollar standard is. And gold should do just fine along the way.

As to why the stock market moves the way it does, I still believe that most of it is just noise. Sentiment captured by moves up, down and sideways (this being the best reason to use technical analysis). If you believe in Keynes, it is the "animal spirits" of it. Or Higgs, the notion of uncertainty impacting behavior. So, while in the "micro" timeframe things can seem out of whack, if you wait for the "macro" timeframe to play itself out, you mostly end up where you think you should.

Land of the Rising Sun

As I've mentioned it as an interesting opportunity to come (perhaps even this year), I am going to check in regularly on the performance of the Japanese Yen, using FXY as a proxy. (For those interested in how the ETF price correlates to the dollar exchange rate, it is roughly 1/exchange rate * 10,000.) While the reason to get short the Yen is purely about fundamentals, the chart can still be used to keep track of changing sentiment.

Currently, the FXY is dancing around 128, which has provided mild resistance to the upside. But the level I am focused on is 126, having served as resistance, and then support, since last March. A break below is not catastrophic, but it might signal the start of a more bearish trend.

Anyway, enough for now.

Mr. Softee

I am a big fan of Bill Fleckenstein -- he of daily Market Rap fame. In today's piece, he passed a quick comment that it looks like Microsoft has at long last started to perform commensurate with the fundamentals underlying the company. As you might recall, I made a wrong turn with the company about a year and half ago, when the stock was in the lows 30s, buying a decent sized position of Jan 2012 $30 calls. Needless to say, I took a pretty loss when I finally sold it off in early 2011. Still, I own some of the stock outright and think it stands to perform well over time. But, the question is whether anything that has happened lately would give anyone reason to think that the stock is finally ready to move. So, despite the TA skeptic that I am, below is a 1-year daily chart.



In my estimation, it still looks to be range bound, and stopped right at the level that you would expect it to (note: the lines you see were drawn a long time ago, so there was no tinkering with the chart today to tell the story I want to tell). Clearly, there are plenty of people who are looking at the chart and using it to guide their thought process. Which is not to say that it can't finally get going, simply that I would hold off on getting too excited yet.

Daily Peeves

Here goes:

-For the second time in recent memory, I am without MSG and Knicks game as a customer of Time Warner.

-The little newsstand in the lobby of my office building has closed. I will now be forced to pay an extra dollar for my daily 1.5 liter bottle of Poland Spring.

-I am totally disengaged from the hullabaloo that is the 2012 race. And not without reason. Which means I inevitably face at least another 4 years of a President and government that will leave me wanting.

-We have officially reached the point in each New York winter where it simply becomes too painful to be outside for any extended period.

Harumph!

Definition of Insanity

I found the following quote from a 1991 paper by Harvard professor Greg Mankiw interesting:

"At any point in time, policymakers with discretion are tempted to inflate in order to reduce unemployment. Economic actors, however, come to understand this temptation and adjust their expectations of inflation accordingly. Higher expected inflation in turn causes the short-run tradeoff between inflation and unemployment to deteriorate. In the end, discretionary policy yields higher inflation without lower unemployment."

The counterargument is that the economy is now stuck in some sort of liquidity trap with rates at zero. Thus, the calculus changes.

Still, it did get me thinking. Look, I know correlation is not causation. But, in the literature that I have endeavoured to read recently, there is a recurring theme where you see easy money precipitate large expansions of credit and a boom. The boom proves itself unsustainable (for whatever reason, but you might guess) and then comes the bust. So, without delving into any discussion of where interest rates will go and when, isn't it at least worth a conversation about whether the most popular solutions discussed today, that seem to incorporate both the worst of the quote above and the sequence I briefly touched on, could put us on a path to repeating ourselves. In a bad way.