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Inflation Expectations


Prem Watsa, Chairman and CEO of Fairfax Financial Holdings, has often been referred to as “Canada’s Warren Buffett” due to his successful insurance and investing track record. However, in a recent interview with canada.com, Mr. Watsa expressed very different views regarding inflation compared to Warren Buffett’s recent statements on the subject.

            Inflation Expectations
80% of the economy [the private sector] is de-leveraging. 20% is government stimulus. Companies are operating at 65% of capacity or utilization rate. Unemployment is rising. If in six to 12 months’ time, the stimulus and bailouts don’t work, and we are at zero interest rates, what then? We had 20 years of good, meaning no recession to speak of, and only one year of bad. We are not worried about inflation, just the opposite. If wages start to go up, there will be inflation. But there is lack of demand. That’s the problem.



Greenspan’s Legacy
The Greenspan policy was part of the problem. If Paul Volcker had been chairman of the U.S. Federal Reserve would this have happened? Not likely. He would have put interest rates up in 1996 when Greenspan warned about “irrational exuberance” and the tech bubble. Mr. Volcker would have let Long Term Capital Management go bust, raised interest rates and we never would have been in this current situation.
By pelcmarek at 2009-12-05 09:47 | Stocks | 1 comment
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Charlie Munger vs Stanley Druckenmiller

The partnership was hit hard in the vicious bear market of 1973 and 1974 when it fell 31.9 percent and 31.5 percent in back to back years. After this difficult experience, Charlie Munger followed Warren Buffett in concluding that he no longer wanted to manage funds directly for investors.

Led by Stanley Druckenmiller since 1981, Duquesne Capital's funds have never posted an annual loss. Since the fund's founding, Duquesne has averaged 37% annually.


“The way I play the game, if it looks like the markets are becoming less analyzable, you just don't play. Well, this has been a very toxic and hostile environment, so we're not playing that much.”

Soros has taught me that when you have tremendous conviction on the trade you have to go for the jugular. It takes courage to be a pig. It takes courage to ride profit with huge leverage.

Superior performance requires 2 key elements: preservation of capital and home runs. Druckenmiller is saying that in order to really excel you must take full advantage of situations when you are well ahead and running a hot hand.
Great track records are made by avoiding losing years and managing to score few double digits or triple digits years.

The queen in chess, which can move in all directions, is a far more powerful piece than the pawn, which can only move forward. [analogy: hedge funds vs. pension funds]

Was dead wrong entering 19 Oct. 87 with a leveraged long position. Market opened over 200 points lower, liquidated his entire position and went net short; and made a small profit.

PS: In 2008 Stanley Druckenmiller earned $260 million 
By pelcmarek at 2009-10-06 19:19 | Stocks | login or register to post comments
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Paolo Pellegrini - man behind John Paulson's bet

By Richard Teitelbaum

Pellegrini engineered a massive bet against subprime mortgages that catapulted Paulson & Co. hedge funds to 2007 gains of as much as 590 percent -- and firmwide profits of more than $3.5 billion.

Mariner, hired Pellegrini as an analyst in early 2003. At the time, a Mariner hedge fund was trading collateralized debt obligations -- bundles of housing loans and other debt.
 
Pellegrini, then 47, approached Paulson in the summer of 2004, asking for a job. “He said, ‘My analysts are more junior than you,’” Pellegrini recalls. “I said I didn’t care.”

Paulson, who makes all investment decisions at the firm, orchestrated the research and assigned Pellegrini to look into housing -- something he was familiar with from his time at Mariner. The surest bet against the housing market would be to buy credit-default swaps on subprime mortgage-backed securities. CDSs are insurance-like contracts used, in this case, to speculate on the default of a bond.

Pellegrini says the critical question was whether adjustable-rate mortgages would default as they reset at higher interest rates. Pellegrini believed they would, so in April 2005 Paulson & Co. began buying CDSs in small amounts for its existing funds.

The first year the trade was in effect was a nervous time. “From early 2005 to early 2006, it wasn’t clear the trade was going to work,” Pellegrini says. “People thought we were throwing money down the drain. We asked, Are we missing something?” Pellegrini says he would wake up in the night pondering the trade.

Before he increased his bet, Paulson wanted proof of a housing bubble, and he thought Pellegrini could produce it.

Pellegrini and his colleagues zeroed in on numbers from the Office of Federal Housing Enterprise Oversight’s home price index from 1975 to 2000. He drew a regression line through the data points that showed prices would have to fall 30 percent to 35 percent just to get back to the historical trend.

The next step was to determine the relationship between home prices and defaults. Pellegrini hired a New York firm called 1010Data Inc. to help him integrate two databases: One, compiled by Santa Ana, California-based First American Corp. and called LoanPerformance, tracked 6 million securitized subprime mortgages.

The other was based on an S&P/Case-Shiller home price index, sorted by postal code. The combined database showed that even if home prices merely flattened, defaults would surge. “There was a very strong relationship between mortgage losses and home prices,” Pellegrini says.

As home prices continued to rise, Paulson & Co. took advantage, paying as little as 1 cent for every dollar of credit protection.

The asymmetry was incredible.

The housing market peaked in mid-2006.For the last half of 2006, Credit Opportunities gained 19.4 percent, according to investors. In 2007, it showed a 590 percent return. In 2008, a year when the average hedge fund lost 19 percent, Credit Opportunities posted an 18.3 percent return. Firm assets rose to $30 billion at the end of 2008 from $7 billion two years earlier.

By pelcmarek at 2009-10-05 00:26 | Stocks | login or register to post comments
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Debt deflation laboratory of the Baltics


Property prices in Estonia's Hanseatic capital of Tallinn have fallen by 59pc from their peak in the Baltic boom, a remarkable state of affairs for an EU country nestled against Russia on the most dangerous fault line in Europe

Cost per sq.m has dropped from €1,611 (£1,455) to €669 since April 2007, according to Ober-Haus Real Estate Advisors. Swedbank says up to 30pc of its mortgages in Estonia are in negative equity. Recent loans are in euros – not the local kroon.

Professor Ülo Ennuste from Tallinn University says the private net wealth of Estonia's people has fallen below zero. I know of no other country in the world where this has occurred, though Latvia may be deeper in hock. Estonia's foreign debt is 116pc of GDP, second highest in Eastern Europe.

It is not a good moment for the poster-child of the flat-tax revolution, but those crowing the end of "Margaret Thatcher's Baltic Model" neglect half the story. Estonia's euro peg is anything but free-market. It makes Tallinn dance, awkwardly, to Frankfurt's distant tune. It stoked the boom by enticing people to borrow cheap at eurozone rates: it is now prolonging the bust.

The economy will contract by 14.5pc this year, twice as bad as Iceland (OECD forecasts). Industrial production has fallen 28pc. The unemployed receive half their former pay for a few months, then benefits fall to £12 a week. The shock awaits this winter. Chief victims will be ethnic Russians on the lower rungs of industry.

Most governments would try to cushion the blow. Estonia is instead pushing through yet another austerity package to keep the budget deficit below the EMU ceiling of 3pc of GDP. Such is the totemic appeal of euro entry in 2011.

"This is an absolutely mad policy," Mr Ennuste told an Open Europe Forum. "We're in a vicious circle where thousands more lose their jobs and don't pay taxes, so there have to be more cuts. We need fiscal relief packages at once. This makes nobody happy but the Kremlin."

The government could spend more. The national debt is just 5pc of GDP. It chooses not to do so. Such ultra-orthodoxy shows admirable discipline. Estonians will be a shining example to us all if they pull it off – and hold their society together.

"Estonia's credit rating (A-) is going to rise against other countries next year," said economy minister Johan Parts. "The next phase of the global crisis is how states are going to manage their huge deficits."

Dag Kirsebom, the author of Hard Landing: a Fairy Tale of the Rise and Fall of the Estonian economy, said the elites had lost the plot. "They are complacent, and they shouldn't be. We're in a downward spiral but all they are focused on is joining euro.

"The free-market model worked great for 15 years and then they ruined it with crazy lending. Did Margaret Thatcher say you should borrow money from Swedish banks to buy German cars? I don't think so. They screwed up, and now it is too late. They need to let the currency fall to reflect the damage already done."

The euro is more than a currency ambition for Estonia. Like joining Nato, it is part of a national strategy of locking into every part of Europe's security system as quickly as possible to keep Russia at bay.

What puzzles me is the strange serenity in the ministries. Officialdom seems to think it enough that they have managed to defend their peg without recourse to the IMF, and that their neighbour has collapsed even faster.

"The situation in Latvia is a tragedy," said Mr Parts. "Nobody will lend them any money except the IMF, and it has the same menu whether you are Latvia or Zimbabwe. The big difference between us and the rest of the Baltics is that we had a buffer of reserves, and we didn't run budget deficits in the good times."

Mr Parts quoted Aristotle to defend Estonia's currency peg: "Give me a single fixed point and I can move the globe". But is the euro the right "fixed point" when the currencies of Sweden, Russia, Poland, Ukraine have plunged around you? The official view is that exports are not sensitive to the exchange rate. This overlooks the suffocating effect of deflation in a post-bubble economy saddled by debts and wage levels that raced ahead of productivity. The country faces an "internal devaluation" within the EMU bloc to right the ship again. Such cures are painfully slow, and very damaging to democratic solidarity.

Edward Hugh from Baltic Watch advises the four fixed-peggers – Estonia, Latvia, Lithuania, and Bulgaria – to bite the bullet and negotiate a joint devaluation against the euro rather than suffer the political agonies of deflation.

Estonia's leaders will hear none of it. They can defend the peg as long as reserves last at the central bank. They have the firepower to hold the line, but does that make it a wise policy?

By pelcmarek at 2009-09-24 09:48 | Stocks | 1 comment
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Charlie Munger was hit hard........

Munger ran the Wheeler, Munger investment partnership from 1962 to 1975. It did exceptionally well for the first eleven years, compounding at 28.3 percent gross vs. 6.7 percent for the Dow, without a single down year.

But the partnership was hit hard in the vicious bear market of 1973 and 1974 when it fell 31.9 percent and 31.5 percent in back to back years.

This decline was despite as Charlie puts it, "having its major investments virtually sure of eventually being saleable at prices higher than the quoted market prices." The partnership rebounded strongly in 1975, rising 73.2 percent, bringing the overall record over fourteen years to 19.8 percent vs. 5.0 percent for the Dow.

After this difficult experience, Charlie followed Warren in concluding that he no longer wanted to manage funds directly for investors (Warren had closed his own partnership in 1969). Instead they decided to build equity through stock ownership in a holding company-Berkshire Hathaway.
By pelcmarek at 2009-09-22 18:34 | Stocks | login or register to post comments
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De Margerie Says Oil Is Overvalued Based on Supply (TOTAL CEO)

By pelcmarek at 2009-09-22 18:07 | Stocks | login or register to post comments
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Plunge In Crude Prices

Oil traders are paying more than ever in the options market to protect against a plunge in crude prices.
 
The gap between prices of options betting on a decline and those that would profit from a rise in oil widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch. Crude stockpiles in the U.S. are 14 percent larger than a year ago and OPEC is pumping 600,000 barrels a day more than the world needs, according to the International Energy Agency.

While the recovery from the first global recession since World War II pushed oil up 62 percent this year to $72.04 a barrel in New York, growth alone isn’t likely to erode the glut by the end of next year because production exceeds demand, data from the Paris-based IEA shows. A drop in prices would penalize companies from Exxon Mobil Corp. to BP Plc and exporters Russia and Saudi Arabia.

“If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. “It was a very weak summer. We came out with more gasoline than we started.”

Right to Sell

Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.

The premium for December and other put options shows “the market is worried,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.

Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said.

Oil inventories totaled about 2.8 billion barrels at the end of July within the 30 nations of the Organization for Economic Cooperation and Development, according to the IEA. The total is equal to 62 days of demand, and 4.6 percent more than the same time last year.

Brimming Stockpiles

Supplies are brimming on both sides of the Atlantic. U.S. distillate fuel inventories, which include heating oil and jet fuel, are the highest since 1983 at 167.8 million barrels, according to the Energy Department. U.S. gasoline supplies are 2.2 percent greater than they were in late May, the start of the peak-demand summer driving season, at 207.7 million barrels.

Gasoil stockpiles, the European equivalent of heating oil, near Europe’s refining hub of Rotterdam reached a record 3.03 million tons (23 million barrels) on Sept. 10, according to PJK International BV of Oosterhout, the Netherlands.
 
More than 60 million barrels of fuel is stored on tankers offshore, according to the IEA.
 
“There’s all this heating oil with no place to go,” Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. “I’m fairly certain we’ll see prices in the $30s this year.”

Crude rose as high as $75 a barrel on Aug. 25 as government spending to revive growth spurred demand around the world. Oil for October delivery slumped as much as $2.94, 4.1 percent, today to $69.10 a barrel on the New York Mercantile Exchange.

Gross domestic product in the U.S., the world’s biggest energy consumer, will expand by 2.4 percent in 2010, after shrinking 2.6 percent this year, according to the median estimate of 57 forecasters surveyed by Bloomberg.

Al-Naimi’s View

Saudi Arabia’s oil minister said stockpiles have become irrelevant to crude prices because of the rebound.

“Economic growth is the name of the game,” Ali al-Naimi told reporters in Vienna on Sept. 9 before a meeting of the Organization of Petroleum Exporting Countries. “Oil today is a commodity. As long as economic growth is there, the price is going to go up.”

Traders are betting with al-Naimi. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.

OPEC, whose members supply about a 40 percent of the world’s oil, agreed at the meeting in Vienna to maintain current production quotas and eliminate surplus production.

Above Target

The group pumped 1.2 million barrels a day above its target of 24.845 million barrels a day in August, according to Bloomberg estimates, and more is on the way. The group will increase shipments by almost 1 percent this month, according to Halifax, England-based consultant Oil Movements.

Kuwait’s OPEC delegate, Mohammed al-Shatti, said Sept. 17 a “small” reduction in output will be needed next year because of lower demand. The group agreed to record production cuts of 4.2 million barrels a day through December of last year.

Stockpiles would need to shrink by almost 1.1 million barrels a day in the OECD, close to the combined production of OPEC members Qatar and Ecuador, to get inventories to OPEC’s targeted levels a year from now, IEA data show.

The glut will cut demand at refiners from Valero Energy Cor. to Total SA as the seasonal peak in consumption approaches. The profit from turning West Texas Intermediate crude into gasoline and heating oil fell last week to $3.42 a barrel, the lowest since December. Plants in the U.S. and Europe are being idled.

Valero Energy

San Antonio, Texas-based Valero, the largest U.S. refiner, shut its plant in Aruba and is idling operations in Delaware City, Delaware. France’s Total, Repsol YPF SA of Madrid and Zug, Switzerland-based Petroplus Holdings AG have switched off refinery units in Europe.

“Combined refining margins for gasoline and heating oil have fallen to their lowest level since 2000 and refiners are going to respond by cutting runs, and cutting back on crude purchases,” said Verleger, a former U.S. Treasury adviser.

While Verleger has dropped a forecast made in July that oil would sink to $20 a barrel, traders are anticipating a decline. The Nymex’s most popular option is the right to sell December crude at $60 a barrel, with 69,244 contracts outstanding, exchange data show. The right to sell at $50 a barrel is the second most widely held.

By pelcmarek at 2009-09-21 11:05 | Stocks | login or register to post comments
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Is the American Recovery and Reinvestment Act of 2009 working?

Keynesian models predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs.

Modern macroeconomic models predicted only one-sixth of that GDP impact. Economist Robert Barro of Harvard predicted the impact would not be significantly different from zero.

Of the entire $787 billion stimulus package, only $4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter

The data available so far tell us that the government transfers and rebates have not stimulated consumption at all.


By pelcmarek at 2009-09-20 18:01 | Stocks | login or register to post comments
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Debt Deflation

The theory was developed by Irving Fisher following the Wall Street Crash of 1929 and the ensuing Great Depression.

In Fisher's formulation of debt deflation, when the debt bubble bursts the following sequence of events occurs:
  1. Debt liquidation leads to distress selling and to
  2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
  3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
  4. A still greater fall in the net worths of business, precipitating bankruptcies and
  5. A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make
  6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
  7. pessimism and loss of confidence, which in turn lead to
  8. Hoarding and slowing down still more the velocity of circulation. The above eight changes cause
  9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

CPI inflation has dropped to –2.2pc in Japan (a modern record), -2.1pc in the US, -1.8pc in China, -1.4pc in Spain, -0.7pc in France, and -0.6pc in Germany.

If PIMCO guru Bill Gross and hedge fund manager Paul Tudor Jones are right in fearing that the US economy will tip back into a "W-shaped" recession as the sugar rush of fiscal stimulus fades, we may wake up to find that we have baked deep deflation into the pie for 2010 and 2011. The G20's talk of "exit strategies" and rate rises will seem surreal. 

Irving Fisher explained why the self-correcting mechanism of economies breaks down in his Debt Deflation Theory of Great Depressions in 1933: "Over indebtedness to start with, and deflation following soon after". Most of the West has exactly that, but worse – debt is much higher.

He coined the term "swelling dollar" to describe how falling prices and incomes raise the real burden of debts, leading to asphyxiation. There is a "swelling yen" in Japan today. Earnings were down 4.8pc in July from a year earlier. Bonuses fell 11pc. Wholesale prices fell a record 8.5pc.

Yes, Japan rebounded in the second quarter as shipping finance came back from the dead. The free fall has stopped. That is all. Industrial output was still down 23pc in July year-on-year.

What matters for debt service is that Japan's economy has shrunk by a tenth. Debt has not shrunk. It is rising. The public debt will rocket to 215pc this year.

China is in better shape but it is remarkable that there should be any deflation at all in a year when banks have let rip on credit, doubling lending to $1.1 trillion in the first six months.

The money has leaked into property and the Shanghai stock market; or worse, it has been spent building yet more excess plants to produce goods the world cannot yet absorb. This is much like the late phase of America's Roaring Twenties when asset prices reached their crescendo even as the underlying economy – burdened with over-capacity – tipped into deflation.

Beijing is at last tightening credit, mostly by stealth. We will learn soon whether Market Maoists are better at pricking asset bubbles than Ben Strong's Fed in the 1920s, or Ben Bernanke's Fed today.

I suspect that Dr Bernanke is more worried about deflation than he dares to let on. His ex-colleague Frederic Mishkin let slip last month that the Fed would be showering more money on the economy (buying US Treasuries), not less, were it not for market angst over the monetization of US deficits.

Bernanke is learning that he cannot in fact administer the anti-deflation medicine he talked about so confidently seven years ago. He can act only if and when the danger is so blindingly obvious that resistance crumbles.

We have debt deflation group: Paul Tudor Jones,John Horseman, Kevin Harrington etc.

Here are videos: http://www.blinkx.com/video/hedge-fund-heavyweights/_QtVdHUvFRKmgbkUY0dM6A 

                         http://www.youtube.com/watch?v=NIdGH6maIao

By pelcmarek at 2009-09-16 18:27 | Stocks | 2 comments
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Oil below $69 amid weak crude demand

Oil prices below $69 a barrel Tuesday in Asia as investors weighed concerns about weak crude demand against optimism of a global economic recovery.

U.S. oil inventories are higher now than in May, and analysts expect demand to drop off in the autumn following the summer driving season.

"Inventory levels are still at historical highs, reflecting sluggish demand," said Jan Lambregts, global head of financial markets research for Rabobank in Hong Kong.

Investors will be looking at supply data from the American Petroleum Institute late Tuesday and the Energy Information Agency on Wednesday for clues about the consumption trend. Analysts expect inventories to drop 3.0 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

The dollar rebounded late last week, sparking a $4 drop in oil prices.


By pelcmarek at 2009-09-15 04:27 | Stocks | login or register to post comments
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