Jim Stuart's Blog: January 2012

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.

From nakedcapitalism.com

SELF-PORTRAIT

It doesn’t interest me if there is one God

or many gods.

I want to know if you belong or feel

abandoned.

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