Aw, Yer So Bad

Aw, yer so bad
Best thing I've ever had
In a world gone mad
Yer so bad

Tom Petty - Yer So Bad

Things I Think I Think

As I said in my last note, this market is impervious to bad news, which is always a touch unsettling. This market is full of paradoxes. Transports are going up with energy--usually a combustable mix. Silver and gold are setting records based on inflation fears, but the Treasury market is trading like inflation is dead. Through noon today the S&P 500 is up about 2.8% in April, and up a very respectable 8.35% year-to-date. 

This is not a bad thing! The other night I was at our neighborhood tavern watching the Penguins bow out of the Stanley Cup playoffs, when a friend of mine asked, "Chris, why are you so negative. The markets are soaring, you're rich, and getting richer every day. Whats not to like?" In a lot of ways he's right (though "rich" is certainly relative). Corporate profits are screaming, commodities are soaring, the economy is showing some signs of improvement (1.8% GDP growth), interest rates remain low, and we have a new Duke and Duchess of Cambridge...Love is in the air. "My sister got lucky, married a yuppie."

But what really continues to gnaw at me is that all of this is true only if you price it in dollars. My net worth (priced in dollars) has risen because the dollar has depreciated. How are we really doing, when you look at it on a global basis, priced in Swiss Francs, Australian dollars, or heaven forbid Gold? This is the difference between Nominal and Real returns. Adjusting your returns for inflation and the devaluation of the dollar.

Looking at nominal returns, we can feel good. Ignore the plunging dollar, and your lower global standard of living, you can feel good. "Aw, yer so bad, best thing I've ever had, in a world gone mad, yer so bad."  

According to a recent Gallup Poll 55% of the American public seems to think we are in a recession/depression, only 27% think the economy is growing. Haven't these folks been listening to Washington and Wall Street? Is this simply a case of individuals projecting their recent past into the future? Probably. Interesting survey nonetheless.

We Have A Strong Dollar Policy:   

Its official, this week both Treasury Secretary Timmy Geithner, and Federal Reserve Chairman Ben Bernanke said so! 

First Geithner, "Our policy has been and will always be, as long, at least, as I'm in this job, that a strong dollar is in our interests as a country. And we will never embrace a strategy of trying to weaken our currency to gain economic advantag

e at the expense of our trading partners," he said in response to a question after a speech to the Council on Foreign Relations.

Now Ben, taking a question during his 1st ever press conference.

 Reporter: There are critics who say Fed policy has driven down the value of the dollar. And a lower value to the dollar reduces the American standard of living. How do you respond to the criticism that essentially Fed policy has reduced the American standard of living?

Ben: Thanks, Steve. First, I should start by saying that Secretary of the Treasury, of course, is the spokesperson for US policy on the dollar. Secretary Geithner had some words yesterday. Let me just add to what he said, first by saying that the Federal Reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy. There are many factors that cause the dollar to move up and down over short periods of time. Over the medium term, where our policy is aimed, we’re doing two things. First, we are trying to maintain low and stable inflation by our definition of price stability. By maintaining the purchasing value of the dollar, keeping inflation low, that’s obviously good for the dollar. The second thing we’re trying to accomplish is to get a stronger recovery and to achieve maximum employment. Again, a strong economy growing with attracting foreign capital is going to be good for the dollar. In our view, if we do what’s needed to pursue our dual mandate of price stability and maximum employment, that will also generate fundamentals that will help the dollar in the medium term.

Here's where it gets good. 

Reporter: Mr. Chairman one can’t help but notice it’s been unsuccessful so far. 

Ben: The dollar fluctuates. One factor, for example, that has caused fluctuation has been the safe haven effect. For example, during the height of the crisis in the fall of 2008, money flowed into the Treasury market and drove up the value of the dollar quite substantially, reflecting the fact that US capital markets, are the deepest and most liquid in the world, and a lot of what you’ve seen over the last couple years is just the unwinding of that as the economy has strengthened and as uncertainty has been reduced. 

Doesn't this make you feel much better? Unfortunately as the graphs below show it is utter BS. 

Here is how the US dollar performed during Ben's "Strong Dollar" comments. He started talking at 2:15, the dollars high for the day. Credibility issues?

Rappin' Economics:

On a lighter note, but no less relevant, here is a great video of two economic heavyweights going toe to toe:

Fight of the Century: Keynes vs. Hayek Round Two

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

There's No Way Out Of Here

There's no way out of here
When you come in
You're in for good
There was no promise made
The part you played
The chance you took

David Gilmour - There's No Way Out Of Here - HD

Last night I received an email from the superintendent of my daughters school. He informed us that the much anticipated/planned/delayed groundbreaking ceremony for the $100+million high school remodeling project will be postponed. It appears that when the construction bids were opened last week, the lowest bid was a mere 16% above our cost estimates. Now this is simply shocking. When asked how this could be, the most common answer had something to do with inflation, the cost of materials and energy had gone up. The reason we are all so shocked at this "inflation" excuse is because our Fed chairman, Ben Bernanke, consistently tells us that core inflation remains low, and that any increases in food or energy are "transitory". 

One of the questions I would like to ask Mr Bernanke at his press conference today is, "How exactly do you define transitory, and how do we factor this transitory increase in prices into long term construction projects?"

Here is a nice picture of price increases over the last year. It does not include construction materials.

 

Last September, the Fed stated that one of their goals was to see prices rise more rapidly, and on that score they have succeeded. But, has their success in promoting inflation actually started to undermine the economic recovery?

Deja Vu All Over Again:

I don't know about you but my radar is starting to go off again. It feels like we have been here before, just three short years ago. The stock market is hitting new highs, as well as oil, gold, and commodities. Corporate earnings are strong, and the job market is showing some signs of strength (or at least stabilization). My net worth has increased, and my clients are happy. Clearly everything is right in the world, and I should be enjoying the ride. But something gnaws at me.

Maybe I'm just imagining things, but something just doesn't feel right.

The Fed is happily forcing money out of savings and out of bonds, and into risk assets. Those that are wealthy, are the predominate owners of those risk assets. Wealth disparity is at a record high. Asset inflation will spur an economic recovery, RIGHT?

In many ways today's problems are worse than those in early 2008. 

We have structural unemployment. Only 45.4% of Americans were employed in 2010, the lowest level since 1983. Only 66.8% of American men were employed, the lowest number ever.

We've transferred the problems of the failing banks onto the backs of our governments/citizens. Those governments are now in the process of trying to figure out how to shrink their deficits.

The failing banks that were bailed out are now actually Too Bigger To Fail.

We're now fighting an extra war in Libya.

The Fed's massive printing of dollars has caused the US dollar to depreciate versus other currencies, and commodities.

Commodity inflation is very real, and has led to sparks of unrest throughout the Middle East.

Home prices are still falling.

I could go on but I'm getting depressed. 

These problems are all well known, and the markets continue to ignore them and march ever higher. The Bernanke talks of transitory inflation, and the Feds ability to handle it when the time comes, and the markets march higher. 

At least we know that the President was born in Hawaii.

My job is to diversify and stay in harmony with the markets, and right now that means being nearly fully invested (just underweight bonds). Enjoying the ride, but it's a ride that feels increasingly unstable.

I wonder if we can really buy enough time, and grow the economy enough, to work our way out of this hole. 

Wish I could be more hopeful, but I still don't believe you can fix a debt problem with more debt, eventually there will have to be defaults and a shrinking of the economy. I applaud the Fed's efforts in trying to make this as painless as possible, I just believe that the pain will eventually come.

Until then, and until our indicators turn negative, we'll go along for the ride.  

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

Things I Think I Think

Let me tell you how it will be;
There's one for you, nineteen for me.
'Cause I’m the taxman,
Yeah, I’m the taxman. 

This video of President Obama set to the classic Beatles song Taxman is priceless, enjoy:

Taxman Obama vs Rx

In our business it is important to constantly be on the lookout for hubris. Just when you think you've got it all figured out, along comes Mr Market to knock you down a peg or two. That's why it's critical to listen to those who have opposing views than you. Clearly the consensus view is that when the Fed finishes buying 70% of all Treasuries being issued (QE2) in June, interest rates on Treasuries "must" rise in order to attract new buyers. Bill Gross and PIMCO, the largest fixed income managers, are so sure of this outcome that they are actually short Treasuries. For a contrarian view, take a listen to this CNBC interview with one of the hottest hands in the fixed income space, Jeffrey Gundlach of Doubleline Capital ( 'Moment of Truth' Coming Soon for 2011 Investments: CEO ). Gundlach believes that the economy and the stock market are only being held up by QE2, if you take away QE2 then they'll both falter, causing interest rates to fall. Austerity is another near-term negative headwind for the economy, which will cause rates to fall. In the long-run he does believe you get a real inflationary shock, but in the near-term he sees us slipping backward, both in the economy and in interest rates.

Another contrary view, though one I'm becoming more and more of a believer in, is that a $100,000+ college degree (and debt load) is a bad investment. As with every investment you need to do a cost benefit analysis, and certain laws (such as the law of diminishing returns) hold true. Peter Thiel says higher education is a bubble, "A true bubble is when something is overvalued and intensely believed." If you have children nearing college age please read this, it is very thought provoking!

Peter Thiel: We’re in a Bubble and It’s Not the Internet. It’s Higher Education.
http://techcrunch.com/2011/04/10/peter-thiel-were-in-a-bubble-and-its-not-the-internet-its-higher-education/

From day one I was never a fan of bailing out the banks. Even though I worked for one (National City) that didn't get a bailout (Instead PNC got the bailout money to buy NatCity). The idea of bailing out banks (as well as the auto companies, etc) is an anathema to capitalism. I could go on for pages but I won't bore you. If you want to get your blood boiling a bit read this excellent piece from our friends at Rollingstone:

The Real Housewives Of Wall Street

http://www.rollingstone.com/politics/news/the-real-housewives-of-wall-street-look-whos-cashing-in-on-the-bailout-20110411

Since its tax time lets take a quick look at some tax facts.

It's widely quoted that over 50% of Americans pay no tax (even I've used that number before), but the real phrase is, "Over 50% pay no federal income tax, but they do pay payroll and state & local taxes."

The following table shows that the top 10% (>$125,000) of income earners pay about 51% of total taxes, and make about 45% of all income.

The bottom 20% (<$22,000) pay about 2% of all taxes, and make about 3.5% of all income.

While there is a lot of whining going on about how the US has one of the highest corporate tax rates, the real whining should be that our tax system is so complex and full of loop-holes that only the dumbest corporations pay anywhere near the published tax rate. As the table below shows corporate taxes are only 8.9% of Federal Revenue, down from 27.3% in 1955. On both the corporate and individual side, simple flat rates, with no loop-holes, would be much more efficient and would probably generate more revenue than our current total broken tax structure. On a personal note, my tax return came in at a weighty 81 pages. 

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.