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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Why Facebook Flopped

ICangles Communications Post…

The reason for the failure of the Facebook initial public offering can be summed up in a single word, mobile. Problems at Nasdaq, investment banker miscalculations, a share structure tailored to strip shareholders of traditional rights, concerns over the leadership abilities of a CEO actively articulating his disinterest in making money or even one of their biggest advertisers in General Motors pulling out on the eve of the deal because Facebook advertising was deemed ineffective certainly didn’t help. But all of these issues could have been overcome. What could not be overcome was the inability to communicate a viable mobile strategy.

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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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Doing Nothing is Doing Something

ICangles Investment Post…

In my August post I recommended investors do nothing in terms of stocks. In my view as we end the year, stocks still represent a good value in terms of dividend yields versus bonds, and an investment portfolio should hold a healthy portion of stocks. The S&P 500 index of large cap U.S. stocks is yielding more than ten year Treasuries. So despite the volatility I didn’t argue for selling, but neither did I argue for aggressively adding to stock positions given legitimate concerns about European debt issues. I found it worrisome that the earlier stock rally had broken down, and plausible that a volatile stock market could move any direction—higher, lower or sideways. And for the year it basically did move sideways. But the value and lack of good investment alternatives in my mind argued for doing nothing and holding onto positions.

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Market Malaise

ICangles Investment Post….

Stocks are cheap. The S&P 500 is yielding about as much in dividends as 10-year Treasury securities. Think about that for a second. An investor can get as much income by buying high quality blue chip stocks as purchasing a ten year bond. And there is good reason to believe that for long term investors stocks will post strong capital gains over the next decade (I will get more into that in a future post). But investors can be excused for not being overly enthusiastic about the immediate prospects for stocks. Then again nothing looks like a sure thing short term–even the safe havens aren’t safe. To borrow a term made famous by Jimmy Carter during the current secular bear market a malaise has fallen over today’s market for all manner of financial vehicles to store value.

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