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Late Night Thoughts

Asia’s markets are settled this evening, in response to Turkey jacking their interest rates to 12% in the dead of night, if such sources as Reuters are to be believed.

Central banks have had such a firm hand on everything for the past few years, it really would not surprise me if we just shrug this off and keep going. But I’m not going to rest my hat on that this time.

Ultimately, jacking interest rates to 12% is really bad for growth. Turkey is an importer, so maybe this helps the rest of the world to up that production a little bit. But my concern has always been that we’d hit the point where the rest of the world couldn’t stand the US’ cheap money policies. I thought we were there with the EU, but they passed the buck somehow.

Where did that buck end up, I wonder?

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Monetary Policy Remains Overwhelmingly Accommodative (And Outlook)

The fed decision to test the waters with a taper while I was away did surprise me, somewhat. Yet it did not phase me much and so I elected to remain on vacation, silent on the issue.

I would state now in hindsight that a $5B per month taper (with as much as another $5-10B in the works) would still put the Federal Reserve on path to add another ~$800B to its balance sheet in 2014. This remains colossal and would have the Fed assets outstanding at just under $5 Trillion by 2015.

They may very well have tapered by $5B/month just because they were running out of things to buy…(laughter)

If I were to state things that concern me as potential impediments to the US economy and growth, they would list (1) consumer slowdown from budget impacts (pension, healthcare costs, rents/mortgage, increased retirement contributions, etc), (2) foreign existential shocks (EU breakup, Asian crisis, similar collapse that disrupts foreign trade) – where exactly did the EU government debt go and why is it now suddenly not an issue? Who is buying it (ECB, Fed, banking scheme, inter-government trade imbalances, etc)? And what stops non-payment concerns from popping up again in the future? and (3) the election of a Republican majority

But banking solvency just isn’t on that list right now. Neither is inflation, really, although long term prospects of an uncontrollable outbreak of inflation remains a viable possibility. With credit expansion in this country limited to growth of government balance sheets, deflationary pressure is set to commence…until it doesn’t. In the meantime, another ~$1 Trillion of free money to those closest to the trough will keep a major disruption of financial assets here at home as a low probability outcome. Of course, this bodes ill for the “wealth equality” lot, but they’re too dumb to call the system out on that, so we maintain the course.

Concerns aside, I am optimistic. Recessions don’t last forever, and my concerns are outweighed by hope in outlook. I am very long (no margin) and prepared to reap the rewards of economic growth. It’s been almost six years; the system has been on a hyperactive outlook for problems which greatly reduces the likelihood that a real “Black Swan” manages to crop up. It could still happen of course, but with hundreds of thousands of financial professionals calling bubbles as quickly as problems crop up, and a full time central banking staff armed with an unlimited supply of money attacking them at first sight, how exactly is a crisis supposed to materialize from all of this?

The only room for crisis in the US is rampant commodity/asset appreciation, which remains benign. That or an elsewise major shock to the consumer. Financial assets and liquidity issues are covered.

Now, that being said, historically we haven’t had a period longer than 10 years without a recession since at least 1789 (and probably not since long before that either – I just lack records to verify a more robust claim). I’d say the expectation of a correction since the Great Depression is 5-10 years with occasional 1-3 year shocks intermittently. We’re past the small shocks phase, which would put the expectation at right about where we’re at.

These times are unprecedented and the support the Fed is willing to lend the markets (unlike any time in recorded history) makes me think we blow through the averages. I want to say this ship will have the wind to sail to years seven, eight or nine, uninterrupted. We may even match the record holder of 10 or above.

However, it would be foolhardy to doubt another recession will most likely crop up before 2020. The ever growing levels of margin debt to buy equities may well be the first sign of the beginning of the final run before that. Of course it could be nothing.

My belief then is that a long commitment remains the way to go. I have been positively surprised by recent developments that have overridden prior comments on wanting to have a larger cash position by about this time (end of 2013) that I made late last year. However, as gains are taken, a portion should begun to be set aside, starting sometime mid 2014 to early 2015. This should create a reserve build-up of steadily marching intervals (10-20%, with a 1-2% increase every month topping out at around 40-50% of ones account value) sometime around late 2015 to early 2016.

At such time, a second hard look should be had. Earlier and exceptional strength should trigger a reassessment of these statements. Casual to quality growth does not necessarily change them. A major weakness (such as a shock of a GOP majority and fear of monetary policy interference) of course may necessitate a sudden course change.

My most hated places to invest are land/real estate (excluding multifamily or renting derived), oil companies (excluding natural gas predominated), and retail (excluding facilitation to the ultra-rich).

My favorite places center around natural gas production expansion, uranium, coal, multifamily REITs, and I remain interested in holding physical precious metals in a full position in the event an inflation shock from significant expansion in credit hits the economy.

I’m indifferent to the insurance market – especially health insurance. It could swing either way; they crawled into bed with the devil so it’s all political at this point. On the one hand, the entire market is shifting in wild and unpredictable ways. On the other, the feds are rigging the game in the insurance companies favor. Just stay away.

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Japan vs China Feud Will Secure Nuclear

Long ago, when I first purchased CCJ, in the midst of a nuclear reactor melting down on a coastline in the Pacific, I told you that there was more to this than the panic being cultivated by professional fire-alarm pullers.

And there were two primary reasons at that time which I gave. The first, and most obvious, of course, was that one does not just restructure the load production of a country’s power grid over night. Watching Japan struggle with prices as they import the coal needed to replace that energy has been an exercise in this concept.

Across the planet, other nations that declared their intentions to wean off nuclear energy are also realizing how difficult this task will actually be.

But the other main reason I gave why Japan, specifically, would not be divesting itself of nuclear assets was not economical. It was military.

Japan’s hardship is that it is an island nation with weak natural resources. And Her ancestral rival is a massive half a continent, sporting more than one billion people and rich natural resources just a short ship ride away.

In a peace time environment, Japan may have taken her sweet time (and much wasted money and hardship) restarting the nuclear energy program. The Japanese are a notoriously conservative culture, and if you have ever worked with a Japanese company, you know just what I mean by that.

But even Japan, with her slow, careful processions, has limits of patience.

Japan’s greatest threat is a blockade of supply routes. A steady flow of resources into the country is necessary to maintain it. These supply routes, not unlike the UK’s in World War 2, would prove a great headache and cause of domestic problems in a military conflict.

It’s bad enough importing food, goods, raw materials, munitions, etcetera. And having your nations power grid at the mercy of getting boats past enemy naval fleets is just one extra pitfall that Japanese military leadership will not want to deal with.

This was one of the main reasons Japan decided on the nuclear path years ago to begin with. A nuclear reactor carries enough fuel both active and in storage to supply full power for around 3 years.

Compare that to a coal plant, which under full load can require a delivery of about 15,000 tons of fuel a day. This approach requires a constant flow of fuel and also very large holding sites, both of which become attractive and hard to defend targets in wartime.

I bring this up because just recently, Japan’s leadership has reaffirmed the country’s commitment to safe nuclear power. A recent report from Cameco management issued guidance of a sizable fraction of Japan’s total nuclear assets beginning to come back online. This same report detailed that Cameco has observed Japan to be net buyers of nuclear fuel at this point in time.

This should be seen as reducing the uncertainty surrounding Japan’s fuel assets. One of the many worries supplying downward pressure on nuclear spot price has been that Japanese utilities may begin selling off unused fuel. This does not seem to be the case.

In the same presentation, Cameco also reassured audience members that Cameco will not be entering into any long term fuel contracts at these prices, which Cameco considers unreasonable. They are waiting for the market to set rates higher, and have instead dedicated themselves to shoring up the balance sheet and controlling costs to bide the time.

For the moment, the uranium market remains cold. But Cameco is committed to outlasting the cold spell. I remain very excited in the prospects of CCJ, and it remains my largest position at this time.

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Selling SCO First Thing Monday

I have a hedge position in SCO, which is up nicely from $27.36 where I purchased it. I will be dropping it on Monday and not looking back. I don’t much care for trading positions based on global events. It’s a messy business, and rarely works out. But this is an exception.

Iran’s behavior has simply changed too much to be ignored. First by acknowledging the holocaust, now having a conversation with the President. It was a subtle shift at first, but it is very noticeable.

You must understand, the president of Iran operates beneath the Ayatollah. The same people have headed Iran since 1980. Supreme Leader Khamenei himself served as president of Iran from 1981 until 1989.

So, pretending that Iran has suddenly completely changed their whole outlook on life is stupid.

Which makes one ask, why is Iranian posture changing? Have incentives correspondingly changed, somehow? Perhaps we’ve finally broken their less charismatic personality traits with our sanctions?

Look, it was just four short years ago that I watched the Basij, with clear backing from the IRG, firing shots into crowds of protesters, running down students on the backs of motorcycles, and generally beating the hell out of anyone who opposed the Iranian government. These protests didn’t look that disruptive. The people who attended weren’t violent, or trying to declare a state of anarchy, or generally doing anything a reasonable person would consider unethical. They were just protesting. And this lot, directly supported by Iran, road in and just slaughtered everybody they could.

Also, we’ve been sanctioning Iran literally since the inception of its current form in 1979. We’ve upped those sanctions continuous, notably in 1992, 1995, 1996, 2001, and 2010, while the EU and international community got more involved in 2010 and 2012. So you’ll forgive me if I don’t think Iran has cracked under sanctions.

But this sudden shift in behavior is attention getting. And so I don’t want exposure to the short side of oil.

There are many reason Iran could be cooling off their rhetoric. Yes, a general outreach for peace with their neighbors is such a reason. Unfortunately, their immediate intention to set off a nuclear test warhead is another.

Iran cannot test a bomb in the middle of calling for the extermination of two UN members. While such foul language may be merely unnerving in normal circumstances (and good for riling up nationalism behind their government), if Iran were to succeed in setting off a bomb while shrieking for the eradication of the United States and Israel, the resulting emotions would be nothing short of panic. War-inducing, perhaps…

If they want to test a warhead, they need to put in the time to convince the rest of the world that they really aren’t as batshit crazy as they’ve been pretending, and can really be trusted not to ruin everything.

You can talk crazy while you build a Bomb. But you have to talk sane when you detonate it.

I can’t see the future. For all I know, this sudden, unexpected shift with Iran is exactly what the good men and women of the US Press thinks it is. But if you any experience with the track record of the US Press Corps, whether their first impression of major events (like the Arab Spring), judgement of character (such figures as John Edwards comes to mind), or general literacy of the complex (I can’t think of a piece on Obamacare this year not riddled with errors)…and it starts to actually make it worse that the press thinks this communication between Iran and the West is so cut and dry for the good.

These are not the lot with which you would want to run with first impressions…

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Pure Lunacy In The Eurozone

This morning, Italy announced they are now in the 8th consecutive quarter of economic decline. Do you understand how crazy that is?

In the 9th floor, a cool air drafts around my slippers, sneaking in to touch my feet. The black tea in my mug gives off a warmth to the touch, and the paper between my fingers stains the skin lightly. Dim shadows from the clouds outside the windows provides the need for a lamp on the side table that casts humming of electricity, while I read.

Italy, and all of the EU, are subjecting themselves to needless pain, just so that some dim witted economists and politicians from the 90’s can continue to enjoy the benefits of a legacy!

The thread that holds the eurozone together has slipped and is now strangling the wearer. But these fools won’t cut themselves free from some misplaced fear of tattering the shirt!

Fine; they’ve chosen their coffin. Do you believe, dear man reading over my shoulder, that we are near a bottom, just because numbers came in “better than expected”? Wrong!

These policy wonks have been calling for a bottom, always two quarters out, for two consecutive years now. They fail because they fail to grasp the intricacies of the problem. The debt maturities are breaking against the wall. Each crest that is survived simply marks a trivial point before the next wall of water raises up.

There’s one path for Europa, and that is the destruction of the euro. They may dismantle the debt instruments directing it, or they may dilute it directly. Their cheap side games are distracting from the main choice at hand, which is that the continent cannot survive if it allows itself to be dragged beneath the surface, anchored by the stubborness of those that created this mess in the first place.

As we are now almost three years past the start of the EZ crisis, my fears of Europe derailing US markets is on soft footing. However, even if America should rise above our distant cousins, and leave us sitting, as here in my office, watching curiously as distant spectators, my sympathies for what our brothers are being wrongly subjugated to stand.

There is no reason that a quarter of Spain should be sitting idle. There is no reason that almost a fifth of Portugal should be in despair. There is no reason that over half of Greek youth should be permitted to sink into shambles of anarchy.

There is no reason for any of this, other than the pride of a few.

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What Would Lower CEO Pay Mean For Stocks?

I’m watching Eliot Spitzer run for comptroller of New York, and listening carefully to what he says. Whatever your feelings for Spitzer’s personal, errr…tastes, when it comes to enforcement and fiduciary responsibility, the man is both feared and respected. The closest to misuse of taxpayer money you can hit the guy with were some of his trips as government may have been more about prostitutes than business; like 2 parts hooker, 1 part official duty.

And there is no doubt that company executives fear him. That may have something to do with Spitzer’s willingness to shoot first, between the eyes, on the scantest of evidence, and then try to take testimony from the accused…

As comptroller, Spitzer would have oversight of very large funds of money. He is promising to be an activist on shareholder rights, pushing for reasonable CEO pay. These are resonating issues, even now five plus years after the recession.

So this is a thought experiment; what do you think would be the implications of shareholder activism pushing CEO pay in line?

My personal guess follows this line of thinking; the ability of CEO’s to make a big payday is predicated on granted options which in turn are pushed from stock buybacks. Buybacks hike earnings per share and directly support share prices, helping investors, particularly because capital gains taxes are lower than dividend taxes.

Of course, they could also be viewed as executives using corporate funds to rig their paychecks – the company buys up what will, to some degree, be given back to them directly.

If this process is brought under close scrutiny, then lost compensation will probably reverse the progression that got us here. I would expect share buybacks to become increasingly rare, with dividend hikes becoming the norm again – that would be the quickest, most direct way for company executives to increase their compensation. Accordingly, price/earnings growth would slow, and there could be immediate fallout from price/earnings resetting to lower multiples to expand dividend yields.

And I tend to think that more dividends/less buybacks may be what elected officials want. This would increase tax revenues without needing to start the messy and contentious debate about long term capital gains taxes.

What do you think? Leave a comment.

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