Back In America

I left late Friday evening to enjoy some downhill skiing in the frosty northern lands of Canada. The scenery was beautiful, the people rather friendly, and the architecture, motivating. I always enjoy seeing cosmetically adorned brick buildings; our homes should be ornate and representative of a people who care. Nothing puts me off more than functionally driven housing. If the post-industrial world has claimed one underserving victim, it is the myriad of grand style that has been supplanted with faceless and formless buildings dotting the landscape.

What does that say? I’m so poor I just can’t take the time to cast some concrete into a more pleasant shape. I’m so destitute that constructing living spaces in anything other than cubes is a hindrance to my well-being. The old neighborhoods we drove through were splendid to look at, and full of cathedrals and churches made with the tall pride of a people replaced with a generation whose catchall is “no one can build them that way anymore.”

Oh really? “Can’t,” or “Are too lazy to try?”

That being said, I’m glad to be back in the U.S. If I have one criticism to place against Canada, it is this: your costs of living are stupid expensive.

Between dropping $1.20 per liter for gas (well over $5 a gallon for those who don’t care about the metric system) paying 20-25% more for all goods we purchased (all beer including domestics starts over $10-12 a pack. I was “overjoyed” to pay $50 a meal for Mrs. Thaler and myself, when eating out and that was for “decent” food, not great), I simply cannot fathom how you Canadians get ahead in life. Those prices would easily devour the entire budget of most ordinary citizens. You really see how high the costs are, now that the two dollars are near par with one another; the old excuse of a weak Canadian dollar is no longer valid.

Oh, I’m actually playing devil’s advocate. I know exactly how you get ahead. Don’t pretend like I don’t know that Canada has a brazen and rampant black market for labor. I’ve heard the stories from before healthcare reform, when men and women could work some paltry handful of months a year to qualify for coverage, and then quit their jobs and work under-the-table on all sorts of odds and ends for the rest of the time. And I know that remnants of that dark pool still exist. There’s nothing like tax free income to escape the burden of high costs.

It’s a shame; I’d probably visit the country more if I could at least engage in the simple enjoyment of living without constantly needing to contribute money to someone else’s welfare or benefits. It’s fairly ridiculous how much money those price disparities eat up with just the simple necessities like food and drink. This concerns me, because it looks like the Democrats put us on a similar path not long ago.

Two men should be able to exchange as freely as possible between themselves, without having to constantly feign worry for others; it’s a pretty straightforward transaction until you start chaining the planet to the participants. I’m a firm believer that a homeowner should be able to fix the roof on his house as easily as possible, without resorting to hiding in the shadows to avoid the open hands. It disgusts me to think that we could be dealing with these price levels at home in just a few short years, if a prolonged liberal majority were to ever hold office.

I’m busy logging off everything and filing the last few pieces of work, before turning down the lights in my 9th floor office, and setting foot out the door.

This weekend, some friends and I are going deep into Canada, for some downhill skiing and proclivities. In another hour, I will head to a meeting with a client, and from there you can be guaranteed I’m not coming back to work.

Enjoy your long weekend, but take warning before it comes: you cannot expect the events unfolding today to not have ramifications. I understand S&P has a poor track record, and that also most of you are chronic followers. But price inevitably comes from developments in the real world.

The market may rally through bad news on any given day. But if will not rally through bad news on every given day. Eventually, this shit will catch up with people.

Much of the end of 2011 was based on the perceived “cheapness” of stocks in terms of their recent earnings. But are those earnings going to hold up to the test of time?

If you disagree with me when I say we are going much lower, well then that is your prerogative. But you could at least have a cash cushion set aside for when you are wrong.

This morning I’m enjoying a bagel covered in cheese, accompanied by a parfait and some fresh juice, while working through my morning stack of papers.

Just moments ago, I sold out of my entire position in BG, for any price. I’m taking a massive loss on this position; my original purchase was over $70 a share, and I’ve been adding in increments the whole way lower.

I should say that I love the company; they have been expanding aggressively, taking on strategic supply agreements in Brazil for sugar to be made into ethanol, purchasing grain ports in Ukraine and elevators in the Midwest United States. They’ve been running products to places like China that are willing to pay top dollar. And generally, I like their strategy of handling risk in grain and edible oil prices by managing their vast operations rather than trying to treat each segment like an individual entity.

I would definitely consider buying back my position, in the future.

But for right now, the tentative nature of this balance we find ourselves in makes the risks to the company too extreme to justify holding any longer.

When I began betting against oil and energy, now almost seven months ago, I didn’t think I’d be banking on the collapse of entire swaths of the global economy. I thought oil would trade and sustain lower prices, and then the rest of the world would take a little hit but recover because of lower input costs from the lower oil and energy.

Then I started digging into the numbers.

This Europe issue is too serious to be hanging out in multinational granary operations. If Europe goes into a serious recession (which it appears they definitely are) then you are going to see economies in emerging markets across the planet (like Brazil or the Ukraine) fold up in droves.

Look at the riots and shortages hitting Greece. Ask yourselves, do you think a company like BG is going to have any say in a place like Argentina, if times get that hard?

With the exception of their domestic U.S. operations, and a few key locations, I could see their entire operation getting confiscated.

Remember, the rights of the farmer are always second to the rights of the hungry masses.

I’ve seen people living on the streets who are as pleasant as any others. I know guys without a bit of property to their names who are nothing short of perfect gentlemen. I’ve met men and women who have every reason to be upset, because of various hardships and what-have-you, but refrain from descending to that primal level.

But the guy who’s hungry is never thoughtful. In fact, he’s usually pretty mean.

I’m not going to get stuck holding a grain operation if things turn sour before April comes. You can’t avoid the sort of hits BG could suffer, if they’re thrown right. A bad outcome in Europe could lead to their biofuel segment in Brazil getting hazed, their grain port in the Ukraine being shut down, their crops in South America and Europe being taken possession of, and leave them holding a fraction of what they now possess.

If everything turns around, I’ll consider buying back in come autumn.

Even now oil prices are breaking fast, as Obama reminds the world that he is a presidential candidate first and a president second.

Basically, Obama did the math and realized something very important, where P equals price of oil and s equals people’s savings, over a period of time after Obama fucked with Iran in an election year, from before:

(P-s)/(t_2-t_1 ) = Δ

I don’t really buy that the Iranian oil embargo would have done much to the supply situation of oil anyway, as the world is more than happy to go behind our backs to do what they need to do to secure cheap energy. If anything, I think the embargo would have given powerful leverage to other countries in their efforts to force pricing lower.

It would have created local markets for Iran with very few buyers. And big countries that can satisfy their thirst cheap with Iran don’t need to meddle in European markets.

And European markets that don’t have China budging in would have prices that make coming to U.S. markets unattractive.

And a U.S. without European interference has more than enough oil.

But I don’t disagree that the market didn’t see eye to eye with me and was more than too happy to bid oil up anyway. So Obama and company just caved. Pretty hilarious, actually, since now those of you pushing oil as the single greatest investment of 2012 now need to come up with an excuse to hold prices here…and how quickly too.

Don’t look now, but I bet Nigerian oil worker strikes will be the number one Twitter feed any minute…

The next three months are crucial to the survival of the EU. If they are to make it out alive and into the future, the require support and cooperation of the markets.

Remember that the ECB and EFSF, along with the potential cooperation of the IMF, have hundreds of billions of euros on the sidelines. That’s not enough money to fix the crisis. It is potentially enough money to spark a rally in euro bonds just in time to absorb their auctions.

That’s what I would gather they have been doing throughout the past three days.

It started with CDS contracts being sold in size a few nights ago (the Fly posted the numbers in the news section). Then it spread to euro bonds the next day.

Today, Italy had a twelve month auction at yields near half of what they were going for at the time.

Who buys bonds like that, other than a government body? Why purchase that many one year bonds down to that yield level, when any investor could get them for the higher yield on secondary markets?

Now the Europeans are entering the end game, buying their own debt in size, determined to try and bring back the private money to the table with visions of huge payoffs. Will they succeed? Or is their bluff even now being called by Soros’ type investors shorting their debt as fast as they can get their trades cleared?

I guess the answer is: we’ll see, won’t we.

The damage to European credibility is done; the endless pumps of goodwill and faith have all been expended over months of false statements and rumors hitting a press that is mostly incapable of discerning the occasional statements of truth from the hearsay, distortions, and outright lies.

Merkel’s latest commitment to the euro has thus far bought her nothing. The discounting of EU stability will continue over the coming months with the euro breaking down deep towards the 1.2 mark. The numbers have been run, and re-run, and the masses are coming to realize what the majority of us have known now for two year – in the present reality there is a snowball’s chance in hell that Europe can pay off all its debts without destroying the euro.

Since last summer, it felt like every other day a new rumor about the salvation of Europe would be all that was needed to spark a rally in stocks, commodities, and the euro exchanges. But those rumors came with a price and have done their damage; the fact that almost all of them were wrong has maimed the ability of market participants to take anything coming out of Europe at its word. The days of the never ending fund announcements are coming behind us now, as no one believes them (or even that they could succeed) any more.

No one is coming to Europe’s rescue.

Remember that the euro is the currency of the largest combined economy in the world. Its exchange rate affects global trade; as much as 30% of China’s GDP comes from exporting to Europe; it is equally irreplaceable with other emerging markets in South America, Asia Minor, and the Middle East. As much as 30% of America’s net trade (imports and exports) comes from European relations – which translate to a healthy portion of our own GDP, as unless I am mistaken we are a net exporter to Europe.

It was barely two months ago that the EFSF and swaps from the Fed were going to fix all of this. Attempting to organize a multi-trillion euro reorganization of their budgets and debt, market activities valued the euro at an exchange of 1.4 dollars.

As of this morning, the euro is trading below 1.27, making a loss of the euro’s value equal to roughly 10% against the world’s reserve currency.

That is enormous. It affects all sorts of trade relationships and exchange behavior across the entire planet, and it is not being accounted for. Listening to these analysts at very large banks (like JPM this morning) saying that emerging markets are a safe place to invest or that American markets can avoid being influenced by the toppling of such a behemoth of a standard is not reassuring.

As the euro continues its slide below 1.3, watch for a great multitude of projections, on all faculties of the markets from revenues to earnings to asset/liability valuations, to be broken utterly.

And so it fell to its knee, with a great crash.