6 August 2014
I enjoyed your last letter. The invite to the Cranberry sounds intriguing as it’s been quite a while since I was in that region. The next time you are on the Greenbrier fishing the old familiar sections, you might pitch a few poppers to the Goggle Eyes for me. Pretty exciting business, the Small Mouth as well. We’ve just returned from a trip to Brunswick, Georgia (visiting wife’s family). I must say I detest the humidity and would not recommend anyone visit the section during this time of year. I managed a trip to up to Savannah, dragging along the somewhat unwilling pack as well. What a rich cultural experience encompassing the Revolutionary period. Everyone should probably visit Savannah at least once. I enclosed some photos.
You’ve probably been reading the journals and papers, though they seem a bit canned and drab lately, as has been your usual custom. Have you been following the markets? Pretty entertaining seeing how things behave when the many participants act somewhat in sync. It’s hard to believe our Central Bank owns $4.5 trillion in securities. This is Lombard, ex the collateral bit, writ large – well, sorta. The 10 year lingers in the neighborhood of 2.5%, which is somewhat remarkable and a testament to continued trust in US order, transparency and property laws, though there’s not much yield competition ’round the world, of course. Oh, and we’ve had a pretty big buyer right here at home to support things as well. It feels like equities are beginning to look around the bend at the moment, which may be premature. I’m not sure. I can still hear ‘ol Marty Zweig in the distance, “Never fight the Fed…” What do you reckon will transpire with the held securities? Hold them until they mature, then retire the dollars? Or, will there eventually be a gradual sales campaign? Doubtful as we’d have trouble financing matters were rates higher, given Washington’s profligate spending tendencies. I’d hate to be sitting on $4T, should yields eventually head higher. Talk about mark to market? AIG would be small potatoes. I see Charles Plossner dissented at the latest shindig. Hard to tell for sure if he’s onto something? Did you ever get around to his blurb in the Cato Journal? I thought this was pretty well written and thought out – particularly the inflation as sole mandate bit (I know, I know, I’m a broken record here). I think Stanley Fischer is of the same ilk. Maybe I’m thinking here, rather, of the elimination of forward guidance? Not sure. At any rate, who really knows what is going on in the employment world? The statistics in this realm are grey at best. However, one thing is clear – the American public is not too jovial about matters. Maybe you caught today’s Journal opinion poll? It’s the economy, Norbert! It almost always is. Catch the bit about the future of the younger generation. The simple truth of the matter is that it’s going to be slow slog for a great length of time (our lost decade and a half or so). Certainly constructive things can and will transpire during such times (periods of significant deleveraging), but higher wages and living standards probably will not be among them. I see we’re making sure the big boys have their Living Wills ready. It is probably the case that the big boys should be little fellers, you know, Jimmy Stewart types who actually know their customers. Nature would have remedied this one for us – with pretty large consequences, however. Maybe the Living Will bit is foreshadowing something? Given that poll (hard to go off of a sample of 1000, but they’re usually pretty representative of the bigger picture) the country is probably ready for a third political party. We’ve discussed this before, I realize, but it’s something that may truly be looming in the background. Money is what it takes. Imagine that. Read the bit about sentiment regarding the Capitol!
Of course, the poll probably reflects foreign policy matters to an extent and not totally the economy. This is certainly something that lingers in the shadows of each household while attempts by the larger media world are to place it directly in the limelight, or, say, the dinner table, an area principally reserved for “Honey, how was work today?” or “Find any job openings?” Not, “Did you note what happened in Donetsk this morning?” It is true, however, that the average Joe’s 401k is going to be affected by what’s going on in Timbuktu. Remember the MIT and University of Chicago boys and their excellent Russian adventure while running Long-Term Capital Management? Or, how about the the Thai currency debacle? These things eventually come out of the shadows at home in the form of “Dear, what happened on the last retirement statement?” It does appear on the foreign policy front that the Malaysian jet having been shot down will move the German leadership finally off of their principally trade oriented mores. Notice I mentioned leadership, as the average German has been indoctrinated post W.W.II with a significantly passive approach (rightly so) to all things that even contain a whiff of a military resurgence. There was a poll cited in a recent FT article that Merkel still faces a very wary populace in this regard. The same applies to Abe, noting the last regional elections. This situation is somewhat nerve wracking as one wants these two economies to begin to play a larger role in the global security state while at the same time one notes today is the 69th anniversary of Hiroshima. There is a strong pull to let sleeping dogs lie. I feel, and I’ve been wrong before, that Putin has his naval base and is, in the interest of his nation’s economy and people, going to settle down over the loss of his man, Yanukovych. Of course, attempting to get into Putin’s brain and predict outcomes is iffy at best. Knowing Mr. Xi’s intent is even trickier, given the Communist Party backdrop. So, most likely, Germany and Japan are going to have to pull more weight in countering other hegemonies. Clearly, deterrence still looms largest, however. The U.S., post the Second World War, has invested militarily (our boots on their ground) in these two states, providing security and allowing their economies to grow. This was an expensive endeavor, but not without an investment yield – regional stability. Germany and Japan will have to help curtail the radical islamic fold as well. The truth of the matter is, of course, that this, additional military expenditures, entails economic heft, which precludes Japan to some extent and certainly much of Europe. It’s been interesting to see the effects of the hike in the Japanese sales tax, which evidently is going to have a dramatic impact on their next GDP release. I still hold that a consumption tax well outweighs other forms of taxation in terms of benefits. Savings and investment should be the principal concern of US leaders and tax policy should be instituted with this in mind. “But, Tetraneuris, 2/3’s of our economy is based on consumption – we’ll tip over,” I can hear you rebutting as you read, Periwinkle. Regardless, the social engineering doctrine and lousy tax policies have to come to an end. Witness the present “inversion” mess. Silly, really.
The fact of the matter is, Periwinkle, wars bankrupt states. Rearming Germany and Japan is not going to be beneficial if it means new or unnecessary conflicts. The youth in these countries and our own have it correct. If only they could find jobs. Most of the world’s economies are swimming in debt and unfulfilled future pension obligations. There should not be an eventual race to the bottom in terms of which state can debase their currency the quickest. This is economic destruction. The world needs to trade more and fight less. The US needs global customers. I believe the present administration feels the same way. We are still very much in recovery mode as the Great Transfer plays out. Let’s hope things remain on an even keel.
Drop me another line and send a picture of the Williams or Upper Elk!
PS. Sorry for any dangling participles, just between flowers?! Good thing for spell check as well! These letters are often written impromptu and with haste. I see India (their “civil service”) is going to let such matters slide. The Brits would be appalled.