Indy Telecom & Industrial Media

You can download a copy of Obama’s budget blueprint here.

It’s a rather interesting read, but my only bone to pick is that the estimates seem a little too optimistic (e.g. the assumed 3+% growth rate). Turns out that I’m not the only one who feels that way – the WSJ econ blog also talks about this.

There are also a lot of pretty graphs on a variety of things, but there is no mention of any of the important ones (e.g. treasury bond performance or inflation).  While it could be argued that it is not the place of a budget to talk about these things, in these perilous times, it becomes necessary.  More so given all the money that is being printed.

Two great pieces by the wonderful folks at PIMCO -

•  Hairy Lips Sink Ships by Bill Gross
  
• Saving Capitalistic Banking From Itself by Paul McCulley

(via Paul Kedrosky)

This day, last year, people were predicting the DJIA to hit 20,000.

Now I think we’d be lucky if we did not go into the 6,000s.

Check out the yields for inflation indexed bonds issued by the treasury.  We’re almost down to half of where we were at just a few months ago.

Look at the data above, and then look at the inflation data.

Even a quick look at the data shows that breakeven inflation that’s embedded in TIPS yields would be at least 1% per year. This effectively means that the market is literally burning through all the money that we are printing.

The data can be downloaded here: Inflation Data (source) and TIPS Yield Data (source).

Turns out that the rising cocoa prices have been creating problems for chocolate manufacturers.

But the upside is that while chocolate may be expensive, apparently cocaine is now cheaper than ever.

Here’s another set of cuff links made by Lana for me. They are quite gorgeous – especially the pearl ones!

Hurry!  Offers valid only until recession lasts (which will not be much longer, cause then the depression would set in).

(Pic courtesy Akshay)

I recently read this narcissist yet insightful (albeit depressing) piece on Bloomberg that talked about how there might be a cause-and-effect relationship between being rude and being rich.

While it may not apply to a precious few, I’m sure we’ve all seen the type. Well, turns out that establishing yourself as the alpha male (or female) has a lot to do with success.

The richer you are, the less reliant you are on other people. It doesn’t matter much what others think of you, since you are unlikely to be asking them for a favor any time soon.

And yet while the rich may be rude because they are wealthy, it is just as likely to be the other way around. Just as plausibly, they are wealthy because they are rude.

Carnegie and other self-help writers have missed the point the last few decades. Getting ahead in life isn’t about making people like you. It is about getting them to serve your interests.

Success depends, more than anything, on an inner ruthlessness. As anyone who has spent much time with chief executives will know, they are mostly an unpleasant bunch.

To quote a friend, “You’re trying to be the asshole you’re not. Be the asshole you were meant to be.”

“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession, but the economy is resetting to a lower level of business and consumer spending based largely on reduced leverage in the economy. Our model is things go down and they reset. The economy shrinks and then it doesn’t rebound. It builds from a lower base effectively.”

–Steve Ballmer

An unsual paper by Benmelech and Bergman that examines the contagion effect of bankruptcies within a given industry (airline, in this case). As someone who has been consulting for this industry the past year, this is quite interesting to me.

While it is difficult to separate the link between the bankruptcy of competitors with the state of the industry in identifying this contagion effect, Benmelech and Bergman use what they call a “collateral channel” to identify a, “causal link from bankrupt airlines to the cost of debt capital in non-bankrupt airlines.”

Using transaction prices of secured debt tranches issued by U.S. airlines, we identify a causal link from bankrupt airlines to the cost of debt capital of non-bankrupt airlines. We use the term ‘collateral channel’ to describe this effect.

This is interesting for several reasons. Firstly, generally, poor performance of a major player in an industry usually results in a fall in valuation of assets of its competitors (because the fallen player’s assets would be available at lower than fair-market prices). Secondly, as an industry begins to be affected by bankruptcies, the constituent companies become a little wary of acquiring more assets for many reasons (e.g. conservative spending, wary of market perception, flooded supply lowering demand etc).

Given this, Benmelech and Bergman make a rather interesting observation that lower secure debt tranche prices are closely associated with an increase in potential buyers who are in bankruptcy.

But what is most interesting about this paper is the data that they used to arrive at these results. Very unique and gives you something to think about. You can find the paper on their website.

Interesting new technology called Siftables showcased at TED Talks.

CNN just had an interesting interview with Bill Clinton, where he talks about his many mistakes.

Gramm-Leach-Bliley Act, the Commodity Futures Modernization Act, repealing Glass-Steagal etc. – bad, yes.

But the worst of the lot? Giving Alan Greenspan a free reign.

A bunch of people have sent me this, and it’s definitely worth reading – Jeremy Grantham talks about the state of the world (and American) economy in the 4th GMO quarterly of 2008.

Reading it brought to mind some points that I have been thinking about for a while now – and this is as good a place as any to talk about them.

One of the interesting things that is mentioned is the four ways in which the economy could turn out – a few big write downs until our debt is back to something reasonable, wait for the passage of time to wear down debt levels, or inflate our way through this debt. Of course, he also talks about the fourth option (which I would call a Greenspan-ian one) where we just move from one asset-class driven inflation to another (tech bubble to real estate – we all know how well that worked out).

Traditionally, the US has always inflated its way through all debt. Unfortunately, right now we are in an economically deflationary period. However, our government seems to think that writing down our debts is somehow wrong, and that we need to print more money to get through our current predicament. This does not make sense in the slightest because this is the very definition of a bubble — overinflated asset valuations, and a correction when the bubble bursts.

Of course, it does not help that everyone keeps calling it a credit crunch. Was there a period when there was a lack of credit liquidity in the market? Of course. But is it really a credit crunch? No, a more realistic take would be a debt overload (or, in Lana’s words, a big cluster fuck).

Therefore, printing additional currency is more likely to make things worse because printing more money is a short term patch that will worsen things in the long run.  Soon, we’ll reach a period of excessive liquidity, which will end up driving inflation through the roof within the next five years, if not sooner.

Another thing that I really enjoyed is when Grantham mentions Taleb’s Black Swan. Many people (and I’m guilty of this on occasion, as well) have misused Taleb’s Black Swan as a definition for high sigma events. Yes, Black Swans do occur in nature and yes, they serve as a fantastic example to all of us on the impact of the improbables and the unthinkables.

However, the current economic crisis is by no definition a Black Swan. We all knew it was coming all along, and we fed it along. Every American consumer consuming in excess of what’s needed, buying McMansions, big cars, and being knee deep in debt. And every one with half a brain cell predicting the bubble for what it was.

If anything, this is as white as it gets and we were just too blinded by our greed to see it. If you did not see this coming, you were a fool.

I also liked his take on Obama’s cabinet, and how he had a chance to bring in some real change, but instead chose yes-men and spineless folks who I’m afraid won’t stand to do the right thing.

That said, here are a few predictions from my end –

• Our economy has not bottomed out. There will be more write downs, and this is not going to be over any time soon.
• We will definitely go through a period of some rather unhealthy inflation that is likely to wreak even more havoc into American families already strapped for cash.
•  There is another asset class whose bubble hasn’t really quite burst yet — retail consumer economy. Sure, we are going through a rather conservative spending phase. But in my mind, that’s a bubble that may have fizzled out a little, but is far from bursting. And that is another rather scary thought.
• We really haven’t seen the full implications of this world wide. We’ve not even truly begun seeing the effects of this in the middle east (think Dubai), China (who knows what the real economic situation there is – outside of what the government tells us), India or South America.
• One word -Buffet.  Could he be wrong? As an investor in Berkshire Hathaway and an ardent devotee of the Oracle of Omaha, I’d like to think not. But there is always this tingling doubt at the back of my mind.

That’s my take. Arguably, it is a bit cynical, but I’d like to believe that it is a bit more realistic than what the media would have you believe.

Before the second war, World War I was always called the Great War.

However, with the advent of the second war, the Great War was no longer an adequate moniker.

On that note, we always refer to the Great Depression by that name — however, given our current condition, perhaps we should take a leaf out of the books of war historians and call this World Depression II.