Thoughts from the Frontline
European Summit: A Plan with No Details
October 29, 2011
A Definite Plan (Minus Those Sticky Details)
Dear Mario
When Leverage Is the Kind-of Answer
Meanwhile Back in Portugal
Let’s Just Change the Rules
San Francisco, Kilkenny, Atlanta, DC … and the World Series Loss
Where is the peace dividend that was supposed to come after the end of the Cold War? Where are the fruits of the amazing gains in efficiency that technology has afforded? It has been eaten by the bureaucracy that manages our every move on this earth. The voracious and insatiable monster here is called the Federal Code that calls on thousands of agencies to exercise the police power to prevent us from living free lives.
It is as Bastiat said: the real cost of the state is the prosperity we do not see, the jobs that don't exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us. The state has looted us just as surely as a robber who enters our home at night and steals all that we love.
- William "Bill" Bonner
Exactly what happened in Europe yesterday? The market reacted like it was the Second Coming of the Solution to End All Solutions. No problem here! The European debt crisis is solved! But if you look deeply (almost always dangerous when it comes to Europe) there is more to the market "melt-up" than simple euphoria and relief. What you find is a very disturbing unintended consequence that will come back to haunt us, as, sadly, I have written about in the past. The finger points to our old friends derivatives and credit default swaps. This week, as I recover from a rather nasty bug, we look at gamma and delta and other odd entities that may be behind the real reason for the market response, as we march inexorably toward the final chapters of the Endgame. Let's see how far out on a limb I can go.
But first an important announcement. I am very excited to be able to introduce my readers to a mutual fund offered by my friends at Altegris Investments. This special fund is a blend of five commodity trading advisors, or CTAs. Normally, to access a CTA you be to be an accredited investor, with all the net-worth requirements and limited liquidity. But Altegris has figured out how to wrap a mutual fund around CTAs and create a fund of commodity traders with all the usual aspects of a mutual fund (daily pricing, liquidity, etc.).
I have long been involved in the commodity-trading advisor space (some 20 years) and am a proponent of CTAs as a way to diversify portfolio risk. I have written a detailed report on this fascinating sector in relation to the fund, and it is available for free at http://www.altegrismutualfunds.com/landing/mauldinreports1.aspx, along with more information on the fund (including the offering memorandum and important risk disclosures, which are also included at the end of this letter).
The fund has been very well received since its launch and has grown rapidly to almost $1 billion. There has been very active interest in the professional community, as advisors and brokers are looking for simple and realistic ways to diversify their clients' portfolio risk in a manner that is truly noncorrelated to typical stock funds and many other asset classes. Whether you are a professional or individual, you really should take the time to research what I think is a very solid fund. My partners at Altegris have decades of experience in the CTA space, with the largest available database of CTAs and long-term relationships with many of the managers (I actually started my investment career in the commodity fund space, so I have more than a passing knowledge of the arena). Given the potential for volatility in the global markets, I think it makes sense to have some exposure to funds that can go both long and short (depending on their models). I urge you to read my report:
http://www.altegrismutualfunds.com/landing/mauldinreports1.aspx
A Definite Plan (Minus Those Sticky Details)
Tonight there are so many moving parts it is hard to know where to start, so in the interest of time we will briefly scan a number of facts and opinions and see if we can come to something like a conclusion.
First, let's look at what came out of Europe. Before the summit, German Chancellor Angela Merkel went before her parliament and, in an impassioned speech, basically declared that unless the parliament approved the expansion and...
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Comments
Dave Scotese
Oct. 30, 2011, 6:16 p.m.
For Walter: Weimar Republic Hyperinflation. I believe John already mentioned that. And for the bad septic systems in HA, I propose a common law solution: Owners of the beachfront property that is being covered in human-waste feeding bacteria should be forming and publicizing the forming of an attack on all parties that deliver human waste into the ocean. The idea that you can only successfully sue for damages when the defendant has broken a law is wrong, foolish, dangerous, and destructive.
John,
You wrote “CDS markets should be moved to an open regulated exchange. And while we are at it, high-frequency trading should be stemmed.”
The rest of your letter is very agreeable to me, but this little bit suggests that you have less faith in people than I do. Remember that story in the Bible about the bread and fishes? Most people completely miss the point, which is that all those “starving multitudes” had fish and bread that they were hiding from each other out of fear of it being stolen should they bring it out. Jesus gave them faith in each other, and they had a feast.
If the “too big to fail” institutions hadn’t effectively robbed the taxpayers (if the “too big to fail” institutions ever stop robbing the taxpayers), they would fail, and people would clean up the mess, and everything would be fine after a few months. We all know how to trade copper and silver and gold and utensils, pocket knives, canned goods, etc. Paper money makes it all easier by maybe 1 or 2 percent, and what you’re advocating is that we try to preserve that 1 or 2 percent efficiency at the cost of God-only-knows-how-much. Regulations cost well over 1 or 2 percent, especially when “Let’s Just Change the Rules” is trotted out every few years so that the idiots who caused the problem don’t get too hurt by it. The real cost is in the faith that is transferred from “market participants as a whole” or shall I say “dollar vigilantes” to the state. Isn’t that a fundamental thread in Bastiat’s writings?
Dave.
Paul Dorio
Oct. 30, 2011, 4:33 a.m.
John,
Typically I sing your praise to everyone who will listen. But I must point out an interesting tendency: in the midst of an article about how dangerous is the European economic situation, you suggest investments for the intrepid reader. The biotech area really strikes me. I think it’s a toss up whether I would be better served investing in a basket of European debt versus a basket of startup biotech countries!
Anyway,could you at some point address the issue that you have, if you do, if the ECB were to print money? As we know from Occam’s razor, if the European crisis could be abated by an increase in the money supply, such a solution will eventually happen. I look forward to your comments. Thank you.
Walter reed
Oct. 29, 2011, 9:40 p.m.
Another quick question…why is there such resistance in Europe to re-capitalize the banks….bank shareholders do not have political power do they? Didnt our (US) banks float shares 2009? Why dont the European banks float shares to raise the capital they need? Sorry for my naivete
Walter reed
Oct. 29, 2011, 9:06 p.m.
I live in Hawaii ... the beautiful North Shore of Oahu ... there is MRSA bacteria all over the beaches and in the water..this is a deadly bacteria caused by sloppy, old, antiquated septic systems…the State of Hawaii is FORCING each home owner to upgrade their septic systems at a cost of tens of thousands of dollars or pay hundreds of dollars in fines every day its not done…....
how else are we gonna clean up the water and beaches if the state does not intervene…. I love freedom but I hate shit and piss in our waters…..
how would less government regulation/intervention solve this problem?
Douglas Reif
Oct. 29, 2011, 11:05 a.m.
I am confused about the details of the Greek debt relief. Is this simply a paper exercise of banks now valuing their Greek debt at 50%? Or are the Greeks paying exactly one half of interest and principal on appropriate dates? What happens to newly issued Greek debt?