End the Credit Rating Addiction

One of the earliest take aways from the global financial crisis was the importance of access to information for effectively functioning financial markets. And, in that regard, credit ratings can serve an incredibly useful role in global and domestic financial markets—in theory.

A CDO Cure for Europe

In the first half of 2010, angst about European sovereign debt receded and market volatility eased. In the second half of 2010, concerns about Greece, Ireland, Spain and Portugal returned to dominate headlines.

Higher Rates, Please…

Interest rates are at historical lows and Mr. Bernanke has promised to keep them there for however long it takes to restore the health in the economy.  This however, is precisely the opposite of what needs be done to restore the economy’s balance, and ultimately its health.  Extremely low interest rates only encourage misallocation of capital and serve as an incentive to create debt.  This policy is at the expense of thrift and savings.  The way to solve a crisis of excess leverage is to reduce leverage.  Seems pretty simple.  In order to encourage a reduction of leverage, interest rates must go up, providing incentive to save.


Neither a borrower nor a lender be,

For loan oft loses both itself and friend,

And borrowing dulls the edge of husbandry.

Hamlet Act 1, scene 3, 75–77

Unemployment remains stubbornly high, at 9.6%.  GDP growth appears to be tailing off after the effects of the various fiscal stimulus packages have run their course.  Consequently, debate rages amongst policy makers and economists as to what can and/or should be done to help the economy.  On one hand, we have the Keynesians led by the administration who suggest that more fiscal spending need be done to stimulate spending and overall economic growth.  On the other side, we have the austerity folks, citing Rogoff and Reinhart, who suggest that the amount of debt now on the Federal balance sheet will permanently hamper growth. 

The Politics of Chinese Adjustment

I am often asked, especially by my Peking University students, to list what I think is the sequence of steps China will take to address its economic imbalances.  Remember that rebalancing, in the Chinese context, has a very specific definition.  It means raising the consumption share of GDP.  This is just a way of saying that consumption growth must outpace GDP growth, and over the next few years it inevitably will, if the rest of the world is unable to absorb a rising Chinese trade surplus.

Territorial Spat between Japan and China: Creating Seamounts over Molehills

Two ships go bump in the night near some uninhabited islands in the East China Sea. The Japanese Coast Guard arrests the captain of the Chinese vessel for illegally fishing in their territorial waters. The Chinese react violently, exploding the issue into a diplomatic row of utmost importance. From afar, there is nothing odd about the event. Fishing vessels are often caught operating inside territorial or disputed waters. Many boats are impounded and captains arrested, but few cause the uproar as what was recently seen between these two Asian giants. Did it reflect the growing rivalry between China and Japan, or was it the result of a much deeper problem that could move center stage. The answer lies closer to the latter rather than the former.

Measuring Drug-Related Terrorist Activity in Mexico


Since mid-2009, Mexican drug cartels have increased their use of terrorist tactics as a means to coerce rivals and intimidate authorities and society. The September 2009 grenade attack on in Morelia, Michoacan, which left eight people dead and 37 wounded, formally inaugurated this new phase of drug violence, which has since intensified.

Most Wanted: Leadership and Courage

Three years into this epochal crisis and still not much light at the end of the tunnel. However we can now see what has worked – or at least taken the pressure off – and what still needs to be done.

Venezuela’s Chavez Needs the Opposition

The results of the September 26, 2010, National Assembly elections in Venezuela were very interesting for the country’s future. Although claiming over 52% of the votes, the opposition managed to obtain only 38% of representation in the Assembly. This disparity was a result of the new electoral law, which re-allocates vote representation in the different states. Without two thirds of the Assembly, President Hugo Chavez will have to reach consensus with the opposition in order to approve major laws, enhancing political debate in the country and addressing concerns of a greater share of the population.

Economic Engineering

Human knowledge is the assimilation of a vast range of experiences. The incorporation of new ideas from other disciplines allows scholars to incrementally expand the frontier of knowledge. Otherwise, we become trapped in an obsolete paradigm, like the medieval scholars who argued incessantly about how many angels could dance on a pinhead. The adoption of mathematical techniques, for example, allowed economists to model and test new ideas. Likewise, the use of engineering principals can provide interesting insights into cyclical properties. The oscillation of objects creates sinusoidal patterns, with defined amplitudes and frequencies. This phenomenon is repeated throughout nature. Scientists, during the 19th century, established the basic laws of thermodynamics, which today provide the basis for many modern machines—including air conditioners, steam turbines and jet engines. The foundation rests with the thermodynamic cycle, whereby heat chases cold. The way an air conditioner works is by pumping a cooled gas through metal coils, drawing in the room’s warm air and expelling it out again. As the warm air passes over the coils, the heat is absorbed into the gas and the colder air is pumped back into the room. However, as the warmed gas is re-cooled, the energy must flow into another zone that is relatively cooler. That is why the back of an air conditioner is always blowing hot air. An air conditioner is actually a heat exchanger that moves energy from one place to another. Nevertheless, every engineer knows that the differential in temperature is what makes the process works. The allowance of only one phase of the sinusoidal progression stalls the operation. By applying this concept to economics, it can be inferred that there can be no expansion without contraction.

War & Peace + Inflation + Secular Bull = Dow 38K?

I mentioned this morning that Jeff Hirsch is the anti-Prechter — forecasting a wild $38K Dow in 2025. (Discussed this AM here, with Jeff’s full piece here)  

Jeff and I are in the same secular bear market camp; However, he argues that the current secular Bear market will end ~18 years after the last secular Bull market ended in March 2,000. I cannot place the end of the Bear that precisely, but I figure its coming sometime this decade.

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