Agcapita Mar 2010 Update
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Transcript of Agcapita Mar 2010 Update
Agcapita UpdateMarch 2010
1
Contents
3 “TheU.S.governmentmustmakeadjustmentsinitsspending.”
3 “Ifitwerepossibletotakeinterestratesintonegativeterritory,Iwouldbevotingforthat.”
3 WhytheUSFinancialSectorisstillnotHealthy–Morebailoutstofollow?
4 HowMuchIsTooMuch?
4 PeakOil
5 EmergingEconomyDecouplingRevisited
6 AIG–ohdear,ohdear,ohdear
6 BenBernankeTheSecondComingOfRudolfvonHavenstein?
7 AustrianDefinitionofMoneySupply
8 USInflationis10%not3%
Wecontinuetoliveinhistoricfinancialtimesandinparticularinthefirstsynchronized,global,fiatmoneyinflationeffort.Furthertothiswehavezerointerestratepoliciesinvirtuallyeverymajormarketandthemonetarybaseoftheworld’sreservecurrencyisup150percentinthelast24monthsandgrowing.
Insuchanenvironmentitcanbeachallengetodistillactionableinvestmentthemesfromthenoiseanduncertaintyinthemarketplace.Thisiswhythecompassbywhichwesteerisvalue.
Investorsmustbeinthebusinessofbuyingcashflowinexpensivelyinordertogeneratelong-termreturns.IfIhadtolabelmyapproachitwouldbevalueinvestinginformedbytheAustrianSchoolofEconomics-valuedrivenattheinvestmentselectionlevelwithAustriananalysisatthemacroleveltoprovideinsightintotrends.
ItisoftrendsthatIwanttospeakmoreaboutbecauseweareinthemidstofsomeunsustainabletrendsifhistoryandAustrianEconomicsisaguide.Ihavewrittenthismanytimesinoneformoranotherbutitbearsrepeating:
Thereisnowaytocreatecapitalandtheprosperitythatflowsfromitotherthanthroughprivatesavingsandprivateproduction.
Sadlythisisamessagetowhichourgovernments,undertheswayofKeynesianideology,areunwillingtolisten.Itisaxiomaticthatstatespendingrequiresthatcapitalisfirsttakenoutofthehandsoftheprofitmakingprivatesectoractivitiesviataxes,borrowingorinflationandthendeployedintypically,loss-makingpublicsectoractivities.
ToquoteJensParssonsfromthe“DyingofMoney:LessonsoftheGreatGerman&AmericanInflations”-“Everyonelovesanearlyinflation.Theeffectsatthebeginningofinflationareallgood.Thereissteepenedmoneyexpansion,risinggovernmentspending,increasedgovernmentbudgetdeficits,boomingstockmarkets,andspectaculargeneralprosperity,allinthemidstof
Summary
2
temporarilystableprices.Everyonebenefits,andno-onepays.Thatistheearlypartofthecycle.Inthelaterinflation,ontheotherhand,theeffectsareallbad.Thegovernmentmaysteadilyincreasethemoneyinflationinordertostaveoffthelattereffects,butthelattereffectspatientlywait.Intheterminalinflation,thereisfalteringprosperity,tightnessofmoney,fallingstockmarkets,risingtaxes,stilllargergovernmentdeficits,andstillroaringmoneyexpansion,nowaccompaniedbysoaringpricesandanineffectivenessofalltraditionalremedies.Everyonepaysandno-onebenefits.Thatisthefullcycleofeveryinflation.”
TheAustrianshavemanyusefulinsightsontheeconomicconsequencesofstateexpansion.FriedrichHayek,theprominentAustrianeconomist,wrote“TheRoadtoSerfdom”and“TheFatalConceit”asawarningagainstanexpandingstateandinterventioninthefreeoperationofthemarkets.Despitethealmostuniversalbeliefthatmoregovernmentisneeded,Hayek’sworksshouldmakeuspondertheultimatedamagecausedbysuchactions.Ithasbeenstatecontroloverthecostofmoney(i.e.interestrates)andthemoralhazardcreatedwith“toobigtofail”thatleddirectlytotheproblemswenowface.Moreofthesamewillnotsolveourproblems.Hayekoncesaid“Idonotthinkitisanexaggerationtosayhistoryislargelyahistoryofinflation,usuallyinflationsengineeredbygovernmentsforthegainofgovernments.“Youcanbringthisquoteuptodatebyaddingthefinancialsectorastheotherbeneficiary.Givethissomethoughtasyouwatchthegovernmentsoftheworldpursuetheircurrentfiscalandmonetarypolicies.
Ifyouhaven’talready,pleasetakethetimetoreadthesebooksorifyoufindthemoverlydauntingasastartingplacethenperhapsconsiderFrederickBastiat’sshortbutseminalwork“TheLaw”.Iamconfidentthatallthesebookswillcastsomelightonwhatwearecurrentlysowingandwhatwecanexpecttoreap.
Onafinalnote,wecontinuetobelievethatwithallthatistakingplacethisisamarketwhereconcernsabout“returnofcapital”shouldtakeprecedencetoconcernsabout“returnoncapital”.
Summary (continued)
3
Agcapita Update (continued)
Chart 1: Months of shadow hoMe supply
“The U.S. governmenT mUST make adjUSTmenTS in iTS Spending.”
Inthespiritofdeliciousirony,KansasCityFederalReserveBankPresidentThomasHoenigsaidrecently“TheU.S.governmentmustmakeadjustmentsinitsspendingandtaxprograms,”(emphasismine).“Itisthatsimple.Ifpre-emptivecorrectiveactionisnottakenregardingthefiscaloutlook,thentheUnitedStatesrisksprecipitatingitsownnextcrisis”.ThiscomingfromthesameFedthatincreasedthebasemoneysupplyover150%inthelast24months.ClicktoreadHoenig’sspeech.
“if iT were poSSible To Take inTereST raTeS inTo negaTive TerriTory, i woUld be voTing for ThaT.”
SanFranciscoFederalReservePresidentJanetYellenhasbeennominatedbyObamatobeViceChairoftheFed’sBoardofGovernors.Yellen,whohasconsistentlydownplayedthedangersofinflation,isnowabletovoteontheinterestrate-settingOpenMarketsCommittee.InsupportofherviewthattheFed’sroleistocreatefullemployment,Yellenrecentlysaid,“Ifitwerepossibletotakeinterestratesintonegativeterritory,Iwouldbevotingforthat.”
why the us finanCial seCtor is still not healthy – More bailouts to follow?
ResidentialMortgageBackedSecurities(“RMBS”)-Arecentstudyestimatesthat5millionhousesandcondominiumsonwhichmortgagesarenowdelinquentwillgothroughforeclosureorrelatedproceduresthatputthemonthemarketoverthenextfewyears–themajorityoftheestimated7.7millionhouseholdscurrentlybehindontheirmortgage
Source:JohnBurnsRealEstateConsulting
payments.Basedontheaveragesalesrateoverthepastdecadethis“shadowinventory”isenoughtolastabout10months.
WhenthisinventoryisreleasedpriceswilldropevenfurtherandmagnifythealreadylargelossesonmortgagesandRMBSbeingsufferedbythebankingsector.
CommercialMortgageBackedSecurities(“CMBS”):Theotherlargeassetsittingonbankbalancesheetsiscommercialrealestateloans.ItsclearfromtheCMBSmarketthatallisnotwellinthecommercialrealestatelendingworld.
– AttheendofJanuary,arecord10%ofCMBSbybalance($72.3billionofthe$723billionofoutstandingCMBSloansintheU.S.)wereinthehandsofspecialservicers,upfrom9.43%onDec.31,2009.
METROAREA NUMBEROFMONTHS
Phoenix 15
LasVegas 18
Miami 24
Orlando 27
Stockton,CA 27
U.S.Average:10months
4
Agcapita Update (continued)
– Thespecial-servicingrateisnowsixtimeshigherthantheyear-end2008levelof1.62%.
– The60-daydelinquencyratehasincreasedto6%.
Morecommercialloansarecertaintobecomenon-performingovertime,asoverleveragedborrowersareunabletorefinanceatmaturity.Inaddition,thepaceofmaturingCMBSloanswillaccelerateoverthenextfewyears.AccordingtotheCongressionalOversightPanel(COP)recentreportonthestateoftheUScommercialrealestatemarket:
– Between2010and2014,about$1.4trillionincommercialrealestateloanswillreachtheendoftheirterms.Nearlyhalfareatpresent–underwater!–thatis,theborrowerowesmorethantheunderlyingpropertyiscurrentlyworth.
– Commercialpropertyvalueshavefallenmorethan40percentsincethebeginningof2007.
– Increasedvacancyrates,whichnowrangefromeightpercentformultifamilyhousingto18percentforofficebuildings,andfallingrents,whichhavedeclined40percentforofficespaceand33percentforretailspace,haveexertedapowerfuldownwardpressureonthevalueofcommercialproperties.
how MuCh is too MuCh?
USFederalgovernmentspendinghasgrown7timesfasterthanreal(inflation-adjusted)medianhouseholdincomeoverthelast40years.
Governmentspendingcannotoutstripprivatesectorincomeindefinitelyunlessthegovernmentplans
todefaultorinflateawayitsobligations.WhatishappeningtoGreece,Ireland,UKandSpainisamicrocosmofthedecisionsthatrapidlyexpandinggovernmentstheworld-overmaybefacedwithinafewyears.
peak oil
Chart3isdrawnfromtheWEO-2008reportthatshowsthat“oilfromfieldscurrentlyproducing”isprojectedtoenterasignificantdeclineinproduction.Theproductionshortfallismadeupprimarilyby“oilfieldsyettobedeveloped”,“oilfieldsyettobefound”,and“naturalgasliquefaction”.However,thelowrateofoilfielddiscoverysincetheearly1960’sbegsthequestionofhowthisgapwillbefilled.
Medianhouseholdincome
Chart 2: total us federalspending v Median inCoMe
Source:HeritageFoundationbasedonUSCensusBureauandOMB,2008inflationadjusteddollars
19701975198019851990199520002005
250%
200
150
100
50
0
In1970Totalfederalspendingwas$870billion,andmedianhouseholdincomewas$38,851
Totalfederalspending
$41.355+32%
$2.79trillion+221%
5
Agcapita Update (continued)
eMerging eConoMy deCoupling revisited
Emerging-marketconsumersrecentlyoutspentAmericanconsumersforthefirsttimeinmodernhistory.Forexample,Januaryauto-salescomparedtoayearearlierwereup:
– 50%inIndia– 33%inMalaysia– 6%intheUS
Thesourceofthisdomesticstrength–highgrowthratesandhighdomesticsavingsratesthatprovidealargepoolofproductivecapital.TheemergingeconomiesarenowlargerintotalpurchasingpoweradjustedGDPtermsthanthedevelopedworld.Inevitablythiswillmeanthattheirgrowthisincreasinglydependentontradeamongstthemselvesratherthanwiththedevelopedworld.
Chart 4: ConsuMer spending – us vs. eMerging eConoMies
Source:JPMorganChase
19901995200020052010
35%
25%
nEmergingMarkets’ConsumptionnU.S.Consumption
Chart 5: global ppp gdp in 2008
Source:EverestCapital
OtherEM26%
US21%
DevEurope21%
Japan6%
OtherDev3%
China12%
India5%
Russia3%
Brazil3%
Chart 3: iea 2030 oil foreCast
Source:IEA
19902000201020202030
120
100
80
60
40
20
0
mb/d
nNaturalgasliquidsnNon-conventionaloilnCrudeoil-additionalEOR
nCrudeoil-fieldsyettobefoundnCrudeoil-fieldsyettobedevelopednCrudeoil-currentlyproducingfields
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Agcapita Update (continued)
aig – oh dear, oh dear, oh dear
AmericanInternationalGroup,Inc.(“AIG”),theinsurerthathasabsorbedapproximately$180bnintaxpayerfunds,recentlyreporteditsresultsforthefourthquarterandfull-year2009.AIGreportedanetlossattributabletocommonshareholdersof$8.9billionforthefourthquarterof2009,or$65.51perdilutedcommonshare,comparedtoanetlossof$61.7billionor$458.99perdilutedshareinthefourthquarterof2008.Fourthquarter2009adjustednetlosswas$7.2billion,comparedtoanadjustednetlossof$38.5billioninthefourthquarterof2008.However,fromsection1A,RiskFactors,ofthecompany’s10-Kfilingthenarrativetakesaturnfortheworseindeed:“AIGhasbeensignificantlyandadverselyaffectedbythemarketturmoilinlate2008andearly2009,and,despitetherecoveryinthemarketsinmidandlate2009,issubjecttosignificantrisks,asdiscussedbelow.Manyoftheserisksareinterrelatedandoccurundersimilarbusinessandeconomicconditions,andtheoccurrenceofcertainofthemmayinturncausetheemergence,orexacerbatetheeffect,ofothers.SuchacombinationcouldmateriallyincreasetheseverityoftheimpactonAIG.As a result, should certain of these risks emerge, AIG may need additional support from the U.S. government. Without additional support from the U.S. government, in the future there could exist substantial doubt about AIG’s ability to continue as a going concern.”(Emphasismine)
ben bernanke the seCond CoMing of rudolf von havenstein?
DylanGriceofSocieteGeneralehasdoneareviewoftheWeimarRepublicinflationinhislatest`PopularDelusions’note.PrussiancentralbankerRudolfvonHavensteinmonetizedGermany’sdebtduringandfollowingtheFirstWorldWar,eventuallyleadingtomassiveboutsofhyperinflation.
Apparentlyeconomicthoughtatthetimeheldthatincreasingmoneysupplyhadnothingtodowiththerateofinflation.Instead,GermansweretoldthehighratesofinflationwerecausedbythewarreparationsGermanyhadtopay.Morefromthenote:
“Onemightthinkthatthebigdifferenceisthattodaywehaveagreaterexpertise.Surelyweunderstandwhathappenswhendeficitsarefinancedwithprinted
Chart 6: weiMar gerMany Cpi
01/2104/2107/2110/2101/2204/2207/2210/2201/2304/2307/2310/23
100,000,000,00010,000,000,0001,000,000,000100,000,00010,000,0001,000,000100,00010,0001,000100101
60%inflation
5,300%inflation
16,579,999%inflation
Source:SGCrossAssetResearch
7
Agcapita Update (continued)
money,andthatitisonlybackwardandcorruptstatesthatdon’tknowanybetter,likeBoliviaandZimbabwe?Butjustafewyearsagodidn’twethinkthatitwasonlybackwardandcorruptstatesthatsufferedbankingcrisestoo?
Andanyway,howcouldVonHavensteinnothaveknownthatthecontinuedandescalatingprintingofmoneytofundgovernmentdeficitswouldcauseinflation?TheUnitedStatesexperienceofunrestrainedmoneyprintingduringtheCivilWarhadbeenwelldocumented,ashadthehyperinflationofrevolutionaryFranceinthelate18thcentury.Isn’titpossiblethat,liketoday,hewasoverconfidentinhisabilitytocontrolhiscreationandintheeconomictheorywhichtoldhimsuchcontrolwaspossible?Certainly,inanarticleintheNewYorkTimesontheeveoftheFirstWorldWar,againfromLiaquatAhamed’sbook,thereseemstohavebeenevidenceofthegeneraloptimismthattherewouldbeno“unlimitedissueofpapermoneyanditssteadydepreciation…sincemonetaryscienceisbetterunderstoodatthepresenttimethaninthosedays.”
Thefactiswedounderstandtheeconomicsofinflation.Despitewhateconomistseverywheresayaboutbeingin“unchartedterritory”withQE,weknowthatifyoukeepmonetizingdeficitseventuallyyougetinflation,andweknowthatonceyou’reonthatpathitcanbeextremelydifficulttogetoffit.Butweknewthatthen.Therealproblemisthatinflationisaninherentlypoliticalvariableandthatconcernoverdebtsustainabilityandunfundedwelfareobligationsleavesusmoredependentonpoliticiansthanwehavebeeninmanydecades.”
austrian definition of Money supply
TheTrueMoneySupply(TMS)wasformulatedbyMurrayRothbardandrepresentstheamountofmoneyintheeconomythatisavailableforimmediateuseinexchange.IthasbeenreferredtointhepastastheAustrianMoneySupply,theRothbardMoneySupplyandtheTrueMoneySupply.ThebenefitsofTMSoverconventionalmeasurescalculatedbytheFederalReservearethatitcountsonlyimmediatelyavailablemoneyforexchangeanddoesnotdoublecount.InanyeventtheTrueMoneySupplycontinuestogrowrapidly.
Chart 7: true Money supply
Source:LudvigvonMisesInstitute
6,282
5,282
4,282
3,282
2,282
1,282
282
1959
1964
1969
1974
1979
1984
1989
1994
1999
2004
2009
billionsofdollars
8
Agcapita Update (continued)
us inflation is 10% not 3%
Despitetherosypublicassertionstothecontrary,inflationisnotrunningatsubduedlevelsintheUS.IfyoucalculatetheUSCPIusingthepre-1980smethodologyyoucanseefromtheShadowstatsdatabelowthatinflationisapproachinglevelsnotseensincethe1970swhentheUSlastlostcontrolofmonetarypolicy.
Chart 8: Cpi vs sgs alternative
Source:Shadowstats.com
1980198219841986198819901992199419961998200020022004200620082010
15
10
5
0
-5
Year-to-YearChange%
CPI-USGSAlternateCPI
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