Food For Thought

short and sweet…

America could confiscate the combined net worth of the entire Forbes 400 and balance the budget for 1 year. That’s it. Put Buffett, the Walton clan, and Zuck on welfare and we’d still be up shits creek by 2013. Let’s hope the “super” committee has some better ideas. We’re not holding our breath though.

Forbes 400


Why does everyone care about Italy?

Well there’s this…4th largest debt load in the world

via visualecon
and then, there’s this…GDP in the entire Eurozone is only projected at .5% next year. Italy is trending even lower.

and then, there’s this…which is what happens when you try to solve a debt crisis via austerity

via reuters








and then, of course there’s this…Italian financing costs, which have come down in the last few days after hitting record levels. We suspect the most recent drop in yields was certainly due to ECB intervention. We would expect them to be under constant pressure as banks around the globe slash exposure.

Why have US equities ignored Italy/Europe the past month?

In response to this article at pragcap, which is a great site by the way…

“There’s 1 of 2 things going on here in my opinion;  1)  The equity market is over the Euro crisis and is certain that the EMU governments will fix this disaster.  Or 2) There is now a disconnect between reality and perception.”

Those two points are completely valid but we think the easy explanation is as follows…

Markets were expecting a dismal Q3 earnings and jobs picture and many had baked in an accelerating US recession. We then got one decent report after another in October (payrolls, GDP, etc). Were they good? no. Did they stave off recession fears, yes (for atleast another quarter). And this is why US equity markets de-coupled from the Euro-calypse. Will it last? Not if Italy (which no one really cared much about 2 months ago) goes up in smoke. As we’ve said, be prepared for more volatility.  If you extrapolate the Greek fiasco to Italy, we would expect headlines to dominate trading.  One minute euphoria, the next the world will be ending. Don’t get married in either direction. We would certainly err to the downside especially if you see any negative US economic data come out.

Italian 10yr yields soaring today…only eclipsed by the 2s and 5s, as the curve has now inverted.

Well, this can’t be good….

On reality…

We hear a lot of people talk about “kicking the can” mainly in reference to political indecision and the unwillingness to make tough choices. Things have been coming to a head regarding the Eur-ocalypse and we’ve heard things like there’s “no more cans to be kicked” a few times in the last weeks/months. Some of the fringe have been saying the day of reckoning for fiat currency is upon us…and to that I say…

There are always cans to be kicked. G-pap will get thrown out of Greece, they’ll institute the agreed upon restructure, markets will go to the moon and then focus will shift to Italy. Italy will implement some watered down austerity(again), declare everything is under control and then in a month or two we’ll be writing this same thing again. Rinse and repeat. That’s how it works. volatility will continue.

being who he was, John Pierpont Morgan, was oft asked the question of what the markets would do…

 “It will fluctuate,” Morgan reportedly replied.

truer words were never spoken.

There is no fiat end game. Atleast not one that any of us will probably live to see. What is certainly possible and has obviously been occuring is the continuation of a slow protracted deterioration in wealth for most people, atleast in the US and some other developed countries. You can only fix debt problems in government a few ways. Inflate, cut spending, or increase revenues. Any of these options guarantee pain for the masses.

 -Cheers, 1689