Saturday, January 14, 2012

After A Break

I have been caught up in year end and post holiday projects for the last 10 days, and have been away from the blog. I am finally up to date, more or less, and post these words from the lovely Raffles Hotel in Singapore. Tomorrow, after lunch, we get on a Seaboune cruise ship to travel down into Indonesia, and eventually to Bali. My 95 year old Dad is leading the charge, which is remarkable in more ways than I can say.

Some things have shifted in my 10 day absence:

     * Europe has moved from pre-crisis to muddling-through mode, and the equity markets in the US have responded happily. Predictions of decoupling (US from Europe) have been plentiful. Does this make sense?

     * Romney appears to be the unstoppable frontrunner in the Republican primary field, after his impressive win in New Hampshire last Tuesday. Gingrich, aided by an infusion of money to his SuperPac, is beginning to execute a scorched earth attack in South Carolina, calling Romney a vulture capitalist and deriding his claim to having created 100,000 jobs while CEO of Bain. Will any of this make any difference?

     * The economy added 200,000 jobs in December and the unemployment rate dipped to 8.5%. The S&P has risen 11% since mid-December and at Friday's 1289 close is just 5.5% off its summer high of 1364. The start of a bull market?

     * The US has announced tough new Iranian sanctions, using the Fed to block countries and companies that trade with Iran, including as the key target, oil trade. Europe will join us, though it may be 6 months before the sanctions are put in place. Iran in response is threatening to close off the Straits of Hormuz, while we are using back channels (unusual) to tell the Supreme Leader that this is a red line that Iran must not cross. A lead up to war?

Four questions. My personal answers (and remember, these are just my forecasts, and I miss as many as I make): No to all four questions, with comments below.

Europe will not muddle through. If there is no credit event between now and a year from now, then I will be wrong. The ECB has stepped up significantly in providing liquidity to Europe's banks, though only intermittently and indirectly to its sovereigns. This helps a lot, but will not be enough. Much of the Eurozone is already in recession; the rest will follow soon. By itself, this is not disastrous. But as it takes out potential export markets for Greece, Ireland and Portugal, causing their deficits to accelerate, the increased needs of these countries for funding, over and above their current Troika agreements, could break the bank, and cause a sovereign default. The Troika, Greece and the IIF have suspended the "voluntary bond restructuring" talks. Hedge funds have bought Greek bonds in quantity with clear intentions not to accept a voluntary restructuring, and force a CDS triggering event, where they would be paid out in full. Only the IMF (amazing to say) has stepped into the policy zone to declare that an austerity only format will fail, but they have been overruled (up until now) by their Troika partners - the EU and the ECB. Too little vision. Too much austerity. This will not end smoothly.

In terms of the GOP, Romney may lose South Carolina, or he may squeak by, but it is most likely too late to stop him. He will survive the Bain attacks for now, but he will not survive them in November. They go to the heart of his candidacy, which is his claim that he understands how to create jobs from his private sector experience, and that he created 100,000 jobs while CEO at Bain. He did not create 100,000 jobs while at Bain, when the company/plant shutdowns are factored in, and unless Romney releases a detailed summary fat sheet on the 100 or so deals that were done by Bain when he was CEO, this will dribble out in painful, slow form as investigative journalists do the necessary research. Venture capital firms are job creators; private equity firms are not. Bain is both. The deals Romney claims the most job-creating credit for (Staples, Sports Authority) were venture deals. Most of the 100 deals, though, are private equity deals, where the objective is always to squeeze the income statement and balance sheet to create cash flow to service the debt you used to buy the company, and to pay all kinds of hefty management fees so the investors can get their money back. There's nothing wrong with private equity. It's an important part of the capitalist system. Where Romney is way off base is to claim that this private equity work makes him a knowledgeable job creator. It doesn't. This is Romney at his dishonest best.

As for my forecast that if Romney is the GOP nominee that there will be a third party run (50% chance) and from there, a further 50% chance that the Party will splinter, we will just have to wait and see. At this moment, the odds seem to be shifting against it. But does anyone really know what Ron Paul will do? Does even Ron Paul know? It is just too early to tell.

As for the economy, I feel confident in saying that this is not the start of a bull market. The employment number will prove to be a bit of a pre-Christmas, seasonal fluke. Europe is slowing, as is China. Corporate margins and earnings have been stellar in 2011. So isn't it time the historically low PE ratio of around 12 moves back up? I can only say that I don't think so. There is little real demand in the economy. Obama has deftly held off the GOP long knives on budget cuts, but there will be some, even if the President is not contested at the end of February in this drive to extend the payroll tax cut for the full 2012 year. Earnings forecasts will begin to surprise on the downside (already beginning). So 2012 looks tough, even if Europe does muddle through. If there is a credit event in Europe, watch out!

As for Iran, I am an optimist. Their saber rattling in the Straits reminds Joe Klein of North Korea's way of acting when they wanted to talk, but didn't know how to begin the diplomatic conversation. I think he is right, and he also warns us that this is scary stuff. In a big war game a few years ago, to simulate how we would do against a swarming attack on our fleet by small Iranian PT type boats, we lost 16 warships. A 36 mile wide strait is not where you want a US fleet to have to navigate. But Iran knows they would lose, and that their naval, air force, and command and control assets would be wiped out with little apparent gain, as the Straits would be reopened; the oil tanker traffic would restart; Iran's oil exports would be mostly stopped; and the regime would be under serious threat. This picture seems far too risky. I predict real negotiations will begin before summer.

I am told by family and friends that I overdramatize, always insisting that this conversation, or this chain of events, or this specific event is of enormous, even world-changing importance. And I think they are right. Having said that, I think 2012 will prove to be a world-changing year. Major stuff, sometimes unseen or misunderstood in the past, will be coming up, moving into focus and impacting the current flow of events in surprising ways.

A Major Year. So let's get on  with it!

Tuesday, January 3, 2012

Other Things to Watch in 2012

This post is a sort of addendum to yesterday's. Lots of other interesting stuff is going on that will bear watching in 2012. Here are just a few of those:

          * Governor Walker Recall: About 515,000 valid signatures supporting a recall vote for Governor Scott Walker of Wisconsin must be submitted by mid-Janury in order to force a recall election.It looks like this will happen, with a sufficient surplus to survive challenges. Polls show Walker should lose; and if so, this would be just the third recall of a governor in history. If Walker loses, this will be interpreted by many as evidence that Republicans, after November 2010, overreached, and that their anti-union, anti-Medicare, anti-entitlements, anti-taxing the wealthy programs are not supported by the Majority. This might be a harbinger of what happens come November.

          * Healthcare: The Supreme Court will hear the ACA case in March, and will probably rule in August. I believe it will be ruled constitutional. If so, this would be a boost for Obama. Also watch trends in healthcare costs. There was a significant slowdown in Medicare cost increases in 2010 and 2011, with analysts suggesting this might be due to health care organizations getting ready for the ACA going live in 2014. If the cost moderation trend continues, this would be a strong positive, suggesting the ACA might help moderate costs. Also keep track of what employers begin to do with their healthcare coverage as 2014 approaches. One of the "doomsday" scenarios has 50 million plus employees being dropped from employer healthcare programs, versus the forecasted 15 million. If this proves to be the case, the forecasted ACA budgets will be busted wide open; if not, we might come to find this bill will pay for itself.

That Fierce Embrace

David Whyte, author of the poem included below, "Self-Portrait", relates how he wrote this poem in Amsterdam, after visiting the Van Gogh Museum, and looking at some of the artist's self-portraits. "I was struck," David says, "by how the artist looked into the mirror, hence into our image, without a trace of self pity. I returned to my hotel, determined to see if I could write a poem expressing the same qualities I saw in Van Gogh's eyes. When I dropped into the poem, and the image came up, I was surprised at the first line I wrote down." As was I, when I first heard the poem.

For me, the question is about living authentically. Can I look Life in the Eyes, without recoiling or seeking escape? Am I ready to be defeated, perhaps more than once? Can I fall into Life and therefore towards what I long for? Can I speak quietly, saying "This is Who I am." Can I look the fierce and flying owl directly in the eyes, even as he swoops to attack?

If we can, we will touch God.



It doesn’t interest me if there is one God
or many gods.
I want to know if you belong or feel
If you know despair or can see it in others.
I want to know
if you are prepared to live in the world
with its harsh need
to change you. If you can look back
with firm eyes
saying this is where I stand. I want to know
if you know
how to melt into that fierce heat of living
falling toward
the center of your longing. I want to know
if you are willing
to live, day by day, with the consequence of love
and the bitter
unwanted passion of your sure defeat.

I have been told, in that fierce embrace, even
the gods speak of God.

By David Whyte

From Fire in the Earth

Monday, January 2, 2012

Possible Tipping Points in 2012

In 2002, Malcolm Gladwell wrote a fine book on "tipping points", the places where small changes can result in huge shifts in what happens next. Different patterns, events and energies have come together, often unnoticed. Then a single event happens that sets in motion a host of new and often unexpected happenings. Something new is emerging, that only a short time before the triggering, or "tipping" event, would have been difficult to predict. Later, when people know what to look for, the pre-tipping point currents are visible (as they would have been before, if you knew what to look for).

Tipping points of historical importance are infrequent. As Newton told us, a body in motion tends to stay in motion. Things tend to go on as they have been going.And there's another Newtonian Law - to every action there is an equal and opposite reaction. So when some force pushes for change, other elements resist.

So what are some good examples of what I consider historical tipping points? The Declaration of Independence, which declared that "all men are created equal, with the right to life, liberty, and the pursuit of happiness." This had never been declared before. It had been thought about, written about. But it was the declaration of these words that created new possibilities and tipped the Western world toward democracy.

The Emancipation Proclamation, that corrected a fundamental flaw in the Declaration, and set in motion a chain of events that we are still working out today. The Assassination of Archduke Ferdinand, which set in motion a chain of events that led to World War I. The Japanese attack on Pearl Harbor, that stopped the powerful American isolationist movement in its tracks, bringing the US into World War II. And 9/11 that initiated the War on Terror.

And more recently, on December 17, 2010, Mohamed Al Bouazizi, a Tunisian fruit vendor, set himself on fire in protest of government policies. He died on January 4, 2011. Ten days later, Tunisia's President Ben Ali fled with his family to Saudi Arabia, and the Arab Spring had begun.

So the tipping points I am looking for are big deals, true pivot points in history. Looking to 2012, I see four possible tipping points:

          * collapse of all or part of the Eurozone
          * fracturing of the Republican Party
          * Iran standing down on nuclear weapons
          * Israeli-Palestinian two-state peace agreement

What to Remember When Waking



In that first
hardly noticed
in which you wake,
coming back
to this life
from the other
more secret,
and frighteningly
where everything
there is a small
into the new day
which closes
the moment
you begin
your plans.

What you can plan
is too small
for you to live.

What you can live
will make plans
for the vitality
hidden in your sleep.

Saturday, December 31, 2011

A Fresh and Wild Perspective

This is a 25 minute piece with Slovenian born philosopher, Slavoj Zizek
looking at our almost 2012 capitalist world and telling us he sees an underlying energy for something very new. He calls himself a pessimist; but I am not so sure.

Another Miracle

A poet friend of mine, David Whyte, told me that Samuel Coleridge almost went mad after seeing the flocking patterns of starlings. Nothing in the scientific, linear world explained it. How could such complex, synchronized, flowing movements happen spontaneously, without apparent direction? Scientists can explain it now. It turns out hugely complex systems can organize themselves with as few as one simple principle - in this case, maintain distance and attitude in relation to the next starling in the pattern.This is true in complex human systems as well: any complex system organizes itself around clear principles of identity. If everyone in the system knows the principles and are committed to abiding by them, the system can self-organize, grow and develop in astounding ways. I like to look at this like Whittier did, when he said, "As for me, I know of nothing else but miracles."

Murmuration from Sophie Windsor Clive on Vimeo.

Some Questions Must Be Answered


if you move carefully
through the forest
like the ones
in the old stories
who could cross
a shimmering bed of dry leaves
without a sound,
you come
to a place
whose only task
is to trouble you
with tiny
but frightening requests
conceived out of nowhere
but in this place
beginning to lead everywhere.
Requests to stop what
you are doing right now,
to stop what you
are becoming
while you do it,
that can make
or unmake
a life,
that have patiently
waited for you,
that have no right
to go away.
~ David Whyte ~
(Everything is Waiting for You)

Sunday, December 25, 2011

Creation Charged: Two Poems and a Picture

The Sower  Vincent van Gogh

God's Word is in all Creation

By Hildegard of Bingen

No creature has meaning
without the Word of God.
God's Word is in all creation,
visible and invisible.
The Word is living, being,
spirit, all verdant greening,
all creativity.
This Word flashes out in
every creature.
This is how the spirit is in
the flesh—
the Word is indivisible from God.

 God's Grandeur

By Gerard Manley Hopkins

THE WORLD is charged with the grandeur of God. 
It will flame out, like shining from shook foil;  
It gathers to a greatness, like the ooze of oil Crushed.
Why do men then now not reck his rod? 
Generations have trod, have trod, have trod;    
And all is seared with trade; bleared, smeared with toil;  
And wears man’s smudge and shares man’s smell:
the soil Is bare now, nor can foot feel, being shod.  
And for all this, nature is never spent;  
There lives the dearest freshness deep down things;       
And though the last lights off the black West went 
Oh, morning, at the brown brink eastward, springs
— Because the Holy Ghost over the bent  
World broods with warm breast and with ah! bright wings.

Joy Expressed

Liz Foldi is a friend of mine. Among other wonderful things, she is a dancer. Part of her life is a dance ministry, using dance as an element of sacred expression, a kind of liturgy in motion. I find it profoundly uplifting. Joy Expressed. The words to the song are after the break.

Saturday, December 24, 2011

The Annunciation

The Annunciation  Fra Angelico

The Annunciation
By Denise Levertov

We know the scene: the room, variously furnished,
almost always a lectern, a book; always
the tall lily.

Arrived on solemn grandeur of great wings,
the angelic ambassador, standing or hovering,
whom she acknowledges, a guest.

But we are told of meek obedience. No one mentions
The engendering Spirit
did not enter her without consent. God waited.

She was free
to accept or refuse, choice
integral to humanness.

Aren't there annunciations
of one sort or another in most lives?
Some unwillingly undertake great destinies,
enact them in sullen pride,

More often those moments
when roads of light and storm
open from darkness in a man or woman,
are turned away from
in dread, in a wave of weakness, in despair
and with relief.
Ordinary lives continue.

God does not smite them.
But the gates close, the pathway vanishes..

She had been a child who played, ate, slept
like any other child - but unlike others,
wept only for pity, laughed
in joy not triumph.
Compassion and intelligence
fused in her, indivisible.

Called to a destiny more momentous
than any in all of Time,
she did not quail,
only asked

a simple, "How can this be?"
and gravely, courteously,
took to heart the angel's reply,
perceiving instantly
the astounding ministry she was offered:

to bear in her womb
Infinite weight and lightness; to carry
in hidden, finite inwardness,
nine months of Eternity; to contain
in slender vase of being,
the sum of power -
in narrow flesh,
the sum of light.

Then bring to birth,
push out into air, a Man-child
needing, like any other,
milk and love -

but who was God.

Are We Broke?

No. But it's amazing what per cent of the country thinks we are.

Expanding deficits. Public debt that has just passed 100% of GDP, or $15 Trillion. So when pundits and political leaders say we're broke, it's easy to believe them.

We are just not broke, and that's the simple truth. Why not? Because we have our own "fiat" currency that is not tied to gold or to a fixed peg to some other currency. Our currency floats freely with market conditions. The country has no debts in some other currency that could prove a problem. We can issue, or print as much as we like, whenever we like. If we owe money in dollars, we can always print dollars. Not by actually issuing a new pile of greenbacks, but by issuing notes or bonds - some IOU that says this note/bond/IOU is backed by the full faith and credit of the United States. As long as people accept that pledge, we have as much money as we want or need.

Thursday, December 22, 2011

2012: My Questions, Issues and Hopes

I am sitting in the Nashville airport, with a three hour delay in my flight to Phoenix to be with my son, Chris, who lives there with his Mom and Step-Dad, and my daughter Maren, who is flying in from Washington DC tomorrow. I want to list, in no particular order, the questions I carry into 2012; what I feel are a few of the major issues; and  one or two hopes for what may happen:

1. Europe has dominated my thinking for several months. I am deeply troubled by the top-down, imposed austerity that is being put in place by the Eurocrats. It is the apparently invariant neo-liberal orthodoxy practiced by the IMF for many years in the developing world, and adopted 100% by the Germans, and, with less power, by the French. The answer to any sovereign budget problem is "fiscal consolidation", which means austerity, budget cuts, and tearing huge holes in the social safety net and the powers of unions. Austerity will not work in Europe (as it also will not work in the UK or in the US). The problem is not public deficits, or public debt buildup. It's an imbalance in trade competitiveness, leading to large surpluses in Germany, almost identically offset by current account deficits in the periphery. Why would Germany want to punish its customers? It is nonsensical. What the periphery needs, and what they had before the 2008 crisis, is good vendor financing and PDI (Private Direct Investment). Europe, at some level, and in some form, will blow up in 2012: sooner, if the ECB continues to refuse the role of lender of last resort; later, if the ECB takes up the mantle of unlimited purchases of sovereign  bonds. There will be, early or late in 2012, I believe, a major credit event (one or more countries leaving the Euro, one or more major bank collapses, etc.) The US will get hit, and possibly, hammered. One or more banks may go down. My hope: this will give us a second chance to break up the banks into smaller, more manageable entities, and wipe out a ton of private mortgage debt that will never be repaid.

Behold, The Light!

Georges de la Tour, The Newborn

The Light that will not be put out. What an amazing promise! When we believe the Light is truly inextinguishable, our next question is "Do I belong to the Light? Am I somehow connected to the Light, so that, even if the Light stays on, I know I won't be disconnected from its Power?" Does Life have Purpose, and therefore Hope? Do I Belong? Is it all going to be OK? These are the perennial questions. Every faith tradition carries its own answers. But we need to do more than repeat the words and assurances of our personal faith tradition. We must know in our gut that this is so, and we can then repeat after St. Julien of Norwich:

          "All things will be well. And all manner of things will be well."

Thursday, December 15, 2011

Crisis Forecast

Michael Platt is the founder of the $30 billion hedge fund, Blue Crest. I believe the European crisis Platt describes has a 60/40 chance of happening by summer.This will shake up everything and hurt millions of people without any good reason. The "debtors are bad performers" and the "only solution to the debt problem is more austerity" views that Merkel and Sarkozy have rigidly carried into all policy discussions, and form the basis of the recently concluded summit agreement,are wrong, arrogant, and supremely dangerous. And when (if) this all blows up, who do you think will be deemed to be at fault? Certainly not the neoliberal economic dogmatists (Merkel, Sarkozy, Lagarde, Draghi). No, no, of course not. The blame will fall on the "worthless PIIGS" - the Portuguese, Italian, Irish, Greek and Spanish citizens who aren't disciplined enough to stay in the shops and off the beaches. It makes me weep!

Tuesday, December 13, 2011

Balance Sheet Recessions

A balance sheet recession occurs when some major asset class valuations collapse. The US experienced a balance sheet recession beginning in 1929 when the stock market tanked. Japan experienced one in 1990 when its real estate market collapsed. The US, and then most of the world, experienced one in 2008 when the US housing bubble burst. Recessions centered around the collapse in personal and corporate wealth are very different from a "normal" inventory/business cycle recession. In the one, both the consumer and business have been badly burned, and they are not willing to borrow for new spending or investments. In the other, borrowing and spending pick up soon after businesses begin rebuilding inventories, and money is moving back into the economy.

Why does this matter? A balance sheet recession requires a very different policy response than a normal business cycle downturn. Specifically, government spending must replace private spending, until both households and companies have repaired their balance sheets and are willing to invest/borrow/spend again. During the Depression, it took 12 years and a World War to pull the US out. In Japan, the deleveraging took 16 years. There is no reason to think the US will get by with a fast turnaround, especially when the fiscal hawks are committed to austerity and budget cutting. The lesson, as outlined by Richard Koo in The Holy Grail of Maroeconomics: Lessons from Japan's Great Recession, is that the government must be willing to step into the private sector's place, while households and companies deleverage, and deficit spend to support employment and economic growth. Let's take a look:

First let's look at a comparison between our housing price collapse and Japan's:

From Richard Koo's recent paper


From zero

There's a slow-rolling run on Greek banks. Deposits are down 20% from June 2010. Quite simply, this will not end well for Greece, or the Eurozone as a whole. 

The Grand Bargain "fiscal compact" agreed to in principle Friday morning by the entire EU, save Britain, is already developing cracks. Problems are showing up in Finland, France and even Germany. The tentative agreement is a stability-cum-budget discipline pact: all stick and no carrot. The market had imagined that Mario Draghi, head of the European Central Bank, would see this commitment to austerity as a green light to start buying sovereign bonds and printing money. After all, mid-last week he had hinted at exactly this; but Friday he said no, and asked, rhetorically, "How could anyone have thought the ECB would break its charter to print money by buying new issues of sovereign bonds?"

More and more commentators are now writing: "Why austerity, when the problem is trade imbalances?" Remarkably, I have never seen any quotation from "Merkozy" indicating they understood this was the problem, not excessive public spending.

There is no "deus ex machina" that will emerge onto the stage (or as Paul Krugman wrote, there will be no "Draghi ex machina" to save the day.) The Germans and the French determined that this was a morality tale, and that the bad countries had to be punished. Wrong story. Wrong solution.

I am, quite frankly, outraged by the level of their arrogance.

So now the tragedy will unfold. First up, most likely, will be the downgrades: sovereigns and banks, surely France and possibly Germany. Equity markets may shrug, but credit will react. Sovereign yields will rise and values will fall, exacerbating the capital raise problem for the banks, holding tons of sovereign debt on their books. Almost no one has money to pump into the banks, with the exception of Germany; so most will shrink their balance sheets to get to the 9% target by the required June 30 deadline. The just beginning recession will accelerate as credit flows slow down.

Somewhere, some time in the not too distant future, there will be the dreaded "credit event" (a Greek default, one or more big banks going under, etc.), and the messy pot of bad stew will overflow. When? Surely by spring or early summer, but no one really knows. Remember: Argentina chose Christmas to default; so this could break open in the next few weeks.

This is an entirely unnecessary and avoidable problem. The decision by Merkel and Sarkozy to frame this as a good guy/bad guy morality play, causing everyone to castigate the "worthless, underperforming Mediterranean countries", is an unmitigated disaster. I hope they both get flat out fired in the next elections.

And don't believe anyone who tells you we are decoupled from Europe!

Hang on!

Saturday, December 10, 2011

Princeton Students Occupy Goldman Sachs

As a Princeton grad, class of 1963, I cannot tell you how proud I am of my alma mater. We need to find ways to encourage our future leaders that they must do more with their lives than moving and making money. For their county's and for their own sakes, they need to reach higher, towards the distant stars, with dream building and deep contribution in the service of mankind.

Dragonflies Draw Flame


Gerard Manley Hopkins

As kingfishers catch fire, dragonflies dráw fláme;
As tumbled over rim in roundy wells
Stones ring; like each tucked string tells, each hung bell's
Bow swung finds tongue to fling out broad its name;
Each mortal thing does one thing and the same:
Deals out that being indoors each one dwells;
Selves - goes itself; myself it speak and spells,
Crying Whát I do is me: for that I came.

Í say móre: the just man justices;
Kéeps grace: thát keeps all his goings graces;
Acts in God's eye what in God's eye he is -
Chríst - for Christ plays in ten thousand places,
Lovely in limbs, and lovely in eyes not his
To the Father through the features of men's faces.

Walking in the Embers of Ayn Rand