Flashman Letters

Mugabe hits the jackpot - What a lucky man

"Master of Ceremonies Fallot Chawawa could hardly believe his eyes when the ticket drawn for the Z$100,000 prize was handed to him and he saw His Excellency RG Mugabe written on it," the bank said in a statement.

The lottery was open to all clients who had kept Z$5,000 or more in their accounts during December.

The bank said Mr Mugabe's name had been drawn from among thousands of eligible customers.

via news.bbc.co.uk

HT Will the Thrill: A False Sense of Security - March 26, 2012

What's going on here is that profit margins have never been wider in history. But profit margins are also highly cyclical over time. The wide margins at present are partly the result of deficit spending amounting to more than 8% of GDP - where government transfer payments are still holding up nearly 20% of total consumer spending, and partly the result of foreign labor outsourcing (directly, and also indirectly through imported intermediate goods) which has held down wage and salary payouts. Indeed, the ratio of corporate profits to GDP is now close to 70% above its long-term norm.

Now, if you look at the red line (right scale, inverted), you'll notice that unusually high profit shares are invariably correlated with unusually low growth in corporate profits over the following 5-year period. Thanks to continuing deficits and extraordinary monetary interventions, this effect has been largely postponed in recent years, allowing profits to expand to present extremes. We are not arguing that profit margins necessarily have to decline over the near-term, and our concerns don't rest on the assumption that they will. It is sufficient to recognize that the bulk of the value of any stock is not in the early years of earnings, but in the long tail of future cash flows - especially if payouts are low. Stocks are essentially 50-year instruments here in terms of the cash flows that are relevant to their valuation. There are a lot of factors and quiet math that affect the P/E multiple that can be appropriately applied to earnings. Slapping an arbitrary multiple onto elevated earnings reflecting extraordinarily inflated profit margins ignores all of it.

The upshot is that if investors are willing to believe (without the use of off-label hallucinogens) that current profit margins are the new normal, and will be sustained indefinitely, then Wall Street's valuations based on current and forward earnings estimates can be taken at face value. This assumption of a permanently high plateau in profit margins is quietly embedded into every discussion of "forward earnings" here.

via www.hussmanfunds.com

HYPERINFLATION – IT’S STILL NOT COMING…. | PRAGMATIC CAPITALISM

The latest reading from the Billion Prices Project clearly confirms the latest CPI readings from the government (thanks to Joe W). This index appears to debunk many of the known conspiracy theories about the government’s inflation data.  The latest reading of just over 2% confirms much of what Ben Bernanke has been saying over the last year – that inflation would prove transitory.

But perhaps more importantly it proves that the hyperinflationists and conspiracy theorists have once again been proven entirely wrong about the inflation outlook.  Personally, I think these misinterpretations are rooted in a vast misunderstanding of the modern monetary system (see here) and more general misunderstanding of what exactly hyperinflation is (see here for more).

via pragcap.com

The Japan debt disaster and China’s (non)rebalancing

Now Japan is faced with the same difficult options that it faced twenty years ago and that China faces today.  It can privatize government assets, or it can revert to the bad old days of consumption constraining policies.  But if it constrains consumption growth and does not replace consumption with a surge in investment, how can it possibly grow except with explosive growth in the trade surplus?  Domestic consumption, domestic investment, and the trade surplus are, after all, the only sources of demand growth for any economy.

So where does all this leave us?  It’s all pretty clear to me.  Of the two big trade deficit entities, neither the US nor peripheral Europe can allow their deficits to rise and we may even see, in the latter case, a sharp drop in the deficit.  Of the three big surplus countries, Germany is reluctant to allow it’s surplus to decline by much, and certainly if it declines faster than the European deficits decline, Europe’s debt crisis will be much worse than ever.

China’s surplus can decline only if we see a very improbable decline in its savings rate or a very unwelcome increase in its investment rate – and my guess is that the internal pressures are for the savings rate to hold steady as the investment rate declines.  And Japanese reluctance to solve its debt problems by privatization requires that it resolve them with an increase in the trade surplus.

Needless to say this isn’t going to work, and at least one of the above is going to be extremely disappointed.  The “good” news is that if this conflict leads to much slower global growth, as it certainly will, the resulting reduction in commodity prices, including oil, will help absorb some of the changes in the trade imbalances as commodity exporting countries see their exports fall sharply.  But I don’t see much other relief.

via www.mpettis.com

Chinese Business Media Cautions Japanese Bond Bubble Is Ready To Burst, Anticipates 40% Yen Devaluation | ZeroHedge

Japan has only one way out – a massive devaluation. If the stable national debt is 120 percent of GDP, the yen needs to be devalued by 40 percent because devaluation is ultimately equal to the nominal GDP increase. The devaluation is likely to sustain 2 percent to 3 percent of nominal GDP growth for Japan beyond the repricing induced increase, which is necessary to restore Japan's tax revenue. Deflation has caused Japan's tax revenue to decline as a share of GDP. It can be only reversed through restoring nominal GDP. A devaluation of 40 percent can restore Japan's competitiveness against Germany and South Korea, which will lay the foundation for Japan's industrial recovery.

 

The Bank of Japan is trying to weaken the yen through expanding its balance sheet. It has an asset purchase program of 65 trillion yen and a lending program of 5.5 trillion yen. The two are equivalent to 15 percent of GDP, comparable to what the Fed or European Central Bank have done. The effectiveness is limited so far. Because Japanese businesses, households and investors believe in a strong yen, the printed yen largely stays in the country and just slows down money velocity. The U.S. dollar has risen 10 percent against the yen from last year's bottom. This is probably due to the financial market upgrading its view of the U.S. economy rather than the BoJ's action.

To Andy Xie, the day of reckoning has never been nearer. And to those who have grown disenchanted with the Kyle Bass view of an epic JGB bubble pop, it may be time to refresh your lost cost hedge. Because a devaluation, to be truly effective, will not be visible from a mile away: it will be sudden, and very, very shocking, unless the government opts for the worse of to evils - a bond market collapse.

Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market. Of course, the government will collapse with the JGB market.

 

The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then.

via www.zerohedge.com

As ever amd always interesting

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about the nature of public debt. One view is that there is no burden of the public debt as long as the purchasers of U.S. debt are fellow Americans. In that case, the argument goes, we owe it to ourselves. Drawing on the work of James Buchanan, particularly his book Public Principles of Public Debt: A Defense and Restatement, Boudreaux argues that there is a burden of the debt and it is borne by future taxpayers. Boudreaux argues that all public expenditures have a cost--the different financing mechanisms simply determine who bears the burden of that cost. Boudreaux discusses the political attractiveness of debt finance because the taxes lie in the future and those who will pay for them may not be clearly identified. The conversation closes with a discussion of the role of expectations in both politics and economics of debt finance.

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via www.econtalk.org

Welcome To The United States of Orwell, Part 1: Our One Last Chance to Preserve the Bill of Rights | ZeroHedge

Everything that Richard Nixon did to me, for which he faced impeachment and prosecution, which led to his resignation, is now legal under the Patriot Act, the Foreign Intelligence Surveillance Act, and the National Defense Authorization Act (NDAA)." Daniel Ellsberg. Can

via www.zerohedge.com

Phil Falcone tries to rip off taxpayers

His vehicle - Lightsquared - owned a bunch of satellite spectrum. It was zoned for satellite - allowed to be used for low powered devices that did not interfere with users of adjacent spectrum.

He got its use changed - so that he could use it for high powered devices - that is a terrestrial LTE network. There was a condition. That his devices did not interfere with adjacent devices - namely GPS receivers.

This condition was clear right from the start.

Tests were conducted to see whether Phil's network would interfere with the GPS system.

And it did. And how. The devices could jam GPS at many miles range.

OK - so Phil was not allowed to build his LTE network.

He still owns satellite spectrum. What he started with. The FCC took nothing from him.

But he wants the FCC to give him spectrum he is allowed to use - spectrum more valuable than the stuff he previously owned.

“They can’t just leave us without some alternative to build a network,” said Jeff Carlisle, Lightsquared's EVP for regulatory affairs and public policy, at a briefing with media on Friday.

Yes they can. And they should. Of course I could lobby the FCC to get them to give me 10-20 billion dollars worth of spectrum I am not entitled to.

I could. But I am not that brazen.

If the government wants to give away that much spectrum they should auction it and the money should be used for the benefit of all taxpayers (say by paying off debt).

Make no mistake about it. If you are an American taxpayer Phil Falcone is trying to loot assets that rightly belong to you.

via brontecapital.blogspot.co.uk

Ending the doctor gravy train - Sigh

The pills-for-perks dance is commonplace in modern medicine, where based on appearances alone, one might easily conclude that the tail is wagging the dog.

According to an analysis by The New York Times, about 1 in 4 doctors take cash directly from drug companies or medical device makers and 2 out of 3 take free food for themselves and their staff. And it works: according to the Times, those who ride the gravy train are more willing to prescribe drugs in unapproved or potentially risky ways.

Is your doctor prescribing the drug because he or she truly believes it's the best course of treatment for you? Or is it because Maui's Royal Kaanapali is the course they've always dreamed of playing?

via www.bankrate.com

In New Delhi, a good monkey catcher is hard to find - Life in India

The MCD wants monkey responsibilities shifted to the wildlife branch of the Delhi state government.

It has only three monkey catchers on its roster, and upping the price paid per monkey – from $8 to $10 to $15 over the past four years – has made no difference. City spokesman Deep Matheu has explained that religious sentiment keeps some people away from the job, but the main problem? People are scared of monkeys.

via www.theglobeandmail.com