Investments

Financial Jenga

ICangles Investment Post…

The financial markets at the start of 2013 remind me of a giant game of Jenga, where players build a tower out of wooden blocks and then take turns pulling out blocks until the increasingly unstable structure eventually collapses. Today, the stock market is climbing towards new highs on a foundation of cheap money that is anything, but stable. Unfortunately, all that cheap money means investors have little choice, but to play this game. The term of the moment to explain the recent rally in the stock market is “moving out on the risk curve.” As central banks have embarked on a new round of money creation to purchase bonds and push yields down, investors are being driven into selling bonds and CDs to buy riskier stocks. Participating in the stock market rally has become one of the only viable options for investors to keep up with inflation, as central bankers try to force money to flow into more risky investments associated in their minds with driving economic growth. In the process the government is doing retirees no favors.

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Tulips on My Mind

ICangles Investments Post…

As 2012 comes to an end, rather than the oft mentioned fiscal cliff, I have tulips on my mind. Despite my documented concerns about government debt levels, the fiscal cliff is not a top concern. In fact as I write this a deal appears to be coming together between the Democratic and Republican parties, where they agree to the specifics of how the U.S. government will manage the borrowing of even more money. The inability of politicians to agree about going deeper into debt is not something I worry much about, even if the media is full of dire predictions of the impact on the economy if more debt is not incurred. However, I do think it is worth pausing and pondering exactly how bad things have gotten, when it is considered an economic crisis if the U.S. government is forced to not spend more money than it taxes. That the world’s largest economy has become so dependent on deficit spending that the inability of its government to spend more than it takes in would be considered a threat to the economy is the real danger.

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A Mixed Bag of Big Predictions

ICangles Investment Post….

As 2012 nears a close, I have made some big predictions about the future in financial markets and have hinted at others. I believe our current period has been fair, bad times are nearing and unexpectedly good times for investors will follow. In my view the future is a mixed bag, heavy with near-term risks and long-term opportunity. One thing I don’t think it will be is boring. As I have grown older I have become more cautious in predicting financial markets. Nevertheless I have never before made as many bold predictions for big changes as I am in the process of now making. In my view we are approaching an inflection point where the market will transition from a secular bear market phase into a secular bull market. The world will give birth to a new age, and it will not be without pain.

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Ill Winds Blowing

ICangles Investment Post…

The potential for global unrest upsetting financial markets is rising. From the Middle East to Asia ill winds are blowing. Last week in addressing the United Nations Israel’s prime minister drew a red line threatening military action if Iran produces weapons grade materials for a nuclear bomb. This corroborated my March blog post “Iran’s Nuclear Rubicon” where I argued fears over a military strike on Iran this year were unwarranted, as such action was unlikely until Iran crossed the red line or Rubicon of assembling weapons grade materials. My Iran mollification, along with my prediction from my March 2011 post “Forecasting the Reckoning” that risks in China were unlikely to occur until after that government’s 2012 power transfer should be of lesser comfort as 2012 moves into the rear view mirror and time passes. Looking around the world, global pressures are building and the risks of events negatively impacting financial markets is rising.

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The Government Bubble

ICangles Investment Post…

The Three Bears Economy has seen us move through the doctom bubble of corporate debt, the real estate bubble of consumer debt and now we are deep into the government bubble of debt. Previously people got rich oftentimes only on paper from dotcom stocks before they fell and then many saw their wealth on paper rise and fall with their home values. Now we are well into the era of people making money from government, including paper millionaires—retirees with million plus dollar government retirement plans. Pension millionaires include the ex-police chief of Stockton California, who after two years as chief, retired with an annual pension of over $200,000. Add in benefits and on paper you get to over a million dollars in payouts pretty quickly. But the government largesse the ex-chief and many Americans to a lesser extent are growing accustomed to will turn out to be as solid as pets.com stock or sky high real estate values, because it is built on unsustainable debt. In the case of Stockton the city is already in bankruptcy, and in the case of the global economy the clock is ticking on how much longer government spending will prop up living standards.

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This Bull is on its Last Legs

ICangles Investment Post…

With the news that China’s central bank is lowering interest rates, the bull market that began in 2009 is likely entering its final stage, which should carry it into at least the next year. Fears that the current global economic recovery is faltering led not just China’s central bank to cut rates, but the European Union to lower rates from 1 to 0.75 percent and the United Kingdom to increase its stimulus efforts. With a weak June jobs report, expectations of further monetary intervention by the United States also grew. But outside of China, monetary intervention is to a large degree pushing on a string. And even if China can give the world a temporary boost, the expansion of its economy will only provide a reprieve from the onset of the next downturn.

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China’s Economic Dark Side Part II

ICangles Investment Post…

China’s economic successes are well known. Less so is the case around the immense challenges the country faces in remaining on a path of progress. These challenges go beyond an over-reliance on exports, the high likelihood of an export led development model faltering during the transition from an export-focused to more consumer-focused economy, a sizable real estate market bubble and significant levels of low credit quality debt in the financial system, as mentioned in my previous post on China’s Economic Dark Side. In addition the money created in relation to China’s holdings of foreign debt represents a substantial liability and inflation risk, as articulated in my earlier post “Big Risks on Central Bank Balance Sheets”. What is more, China’s economic challenges extend to societal issues to such an extent that the country’s history of periodic periods of revolutionary implosions may very well repeat.

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Iran’s Nuclear Rubicon

ICangles Investment Post…

Clear analysis on Iran’s nuclear program is surprisingly difficult to find, and misperceptions are common. Among these misconceptions is that a metaphorical clock is ticking down, and if Iran’s nuclear program is not halted soon the country will field nuclear weapons. But while Israel’s government speaks of a clock it appears for the current U.S. administration the preferred analogy is that of Julius Caesar crossing the Rubicon. Iran’s nuclear program can be thought of as two parts. The first part, which is indeed nearly completed, is centered around manufacturing fissionable materials that could power a nuclear reactor. The second is utilizing that infrastructure to create much more refined, weapon’s grade materials. Similar to the crossing of the Rubicon River being Caesar’s point of no return, where he was committed to the overthrow of the Roman Republic, the initiation of weapon’s grade material production would commit Iran to fielding nuclear weapons and leave behind any pretences of a peaceful nuclear energy program.

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China’s Economic Dark Side Part I

ICangles Investment Post…

The story of the Chinese economic miracle is well known. Since opening its economy in the 1980’s, China has followed an export led development model to become the world’s factory, leading exporter and second largest economy. The 2008 Olympic opening ceremonies gave China an opportunity to showcase its success to the world, including with a miraculous display of firework footprints marching across the sky. But in China all is not as it first appears. It turned out the firework footprints seen on televisions weren’t really fireworks, but rather CGI special effects. Similarly, a closer inspection of the Chinese economic miracle reveals some financial special effects at work.

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Big Risks on Central Bank Balance Sheets

ICangles Investment Post…

The balance sheets of the major central banks of the world are in a dangerous state. In the United States, the European Union and Japan they have basically printed money to buy debt, counting the debt securities purchased as an asset and the money paid for them in the liability column. Despite many mistakenly believing China’s central bank must be in good shape with all the U.S. government debt held in its asset column, this overlooks its liability column. Reviewing the magnitude of central bank liabilities, the implications on future policy and potential economic challenges, arguments can be made that central bankers are either wisely learning from history or the equivalent of fools playing with matches in pools of gasoline of their own pouring. Unfortunately their lackluster track record argues more for the latter than the former.

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