Rehab

"I don't ever wanna drink again

I just ooh I just need a friend"

Amy Winehouse - Rehab

What a week, what a month, huge sigh of relief...aaah!

The S&P 500 is on track for its best October since 1974, up 13.6% as of this writing. Of course it just so happened to be down 13.6% from August 1 to September 30. But hey, up is better than down so we'll take it.

OK now what? Lets step back and take a look at the big picture. 

What we have been dealing with since 2008 has been a global debt deflation. Most of the developed worlds governments and citizens have been addicted to debt for decades, and they are in the early stages of dealing with this debt addiction. This week we saw one of the oldest citizens, Greece, with the help of her neighbors, move into Stage 3 of the five stages of recovery.

Lets review.

Five Stages of Addiction Recovery:

Stage 1 - Awareness  - This stage is marked by an awareness of the addiction, shifting perspective from outright denial to a willingness to address the issue.

Most of the world's debt addicts have now recognized that they have a problem. Sure there are a few holdouts, like Paul Krugman and the Keynesians  who listen to him. They believe that after a trillion plus in deficit spending the government still needs to borrow and spend more. Fortunately their numbers are quickly dwindling as it becomes clear that giving a debt addict more debt is less than effectual. (See today's WSJ editorial by CMU's Allan Meltzer Allan H. Meltzer: Four Reasons Keynesians Keep Getting It Wrong )

Stage 2 - Research and Consideration - The addict seeks to learn more about their addiction and how it is affecting their lives and the ones around them.

Our debt addicts begin to see how that short-term high leads to some pretty serious long-term problems, namely slower economic growth and higher unemployment. For many of them, as their debt balloons, it becomes harder and harder to score. The dealers (lenders) begin to realize that the odds of getting repaid become slimmer and slimmer, therefore the price of that debt fix increases (higher interest rates). Before you know it the addict is borrowing just to pay the interest on the debt.

Stage 3 - Exploring Recovery - The first clear step into recovery. The addict moves beyond denial and is willing to seek help.

This is where are friends the Greeks have been for the last several months. Finding themselves in a world of hurt, being shut-off from their dealers, they have begrudgingly decided to get help. Help is coming from her many indebted neighbors/dealers (its very incestuous). They don't want to see Greece fail because it would hurt/kill some of the dealers (banks/governments). So they seek to help prop her up long enough to work off the debt and hopefully start anew. The banks "voluntarily" agree to take a 50% loss on their loans in order to keep the addict alive long enough to hopefully recovery the other 50%. One problem is that other addicts in the region might also like that 50% haircut as they begin rehab.

Stage 4 - Early Recovery -  The first signs of early recovery. The very fragile addict goes through the early stages of withdrawal and hopefully doesn't relapse.

This is by far the toughest  stage of recovery for our debt addicts. It is a bit simpler when you are talking about rehabbing an individual, but when you are dealing with an entire society that was promised a certain standard of living trouble starts. Withdrawal hurts. Economies slow, unemployment rises (Spain is at an official unemployment rate of 21.5%), and citizens revolt. The loss of wealth, the transfer of wealth, is all very painful. (Unfortunately Amy Winehouse didn't make it out of this stage, her British coroner ruled it "death by misadventure").

Stage 5 - Active Recovery and Maintenance - This stage has no end. It is a life-long effort to change the way you have been living.

In the case of our debt addicts, this means coming to grips with the sad reality of living within your means. Politicians and governments can not promise more than they can deliver. Citizens must also live within their means, and make sure their politicians are doing the same. It is a long-term life style change. 

The Journey to Recovery

Throughout history we have seen countries enter and exit rehab successfully. Greece, Italy, Spain, Germany and many others have all defaulted on their debts. A cold turkey default, stuck it to their dealers (banks and citizens), and then moved on. The very unique aspect of our current situation is just how widespread the problem is. Many of our current addicts are also dealers. Because of its widespread nature cold turkey defaults would be catastrophic.  The entire western world has a massive debt addiction that they are just in the early stages of dealing with. Here in the US we are expected to help out those that we've loaned money to, while also trying to wean ourselves off of our own addiction. China is ready to step in as the dealer of last resort, but they won't do it for free...the price will be very dear.

Rehab is always difficult and often messy. Please get your house in order to weather the storm.

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.

Who'll Stop The Rain

Long as I remember the rain been comin' down

Clouds of mystery pourin' confusion on the ground

Good men through the ages, tryin' to find the sun

And I wonder, still I wonder, who'll stop the rain

I went down Virginia seekin' shelter from the storm

Caught up in the fable, I watched the tower grow

Five year plans and new deals, wrapped in golden chains.

And I wonder, still I wonder, who'll stop the rain

Heard the singers playin', how we cheered for more

The crowd had rushed together tryin' to keep warm

Still the rain kept pourin', fallin' on my ears

And I wonder, still I wonder, who'll stop the rain

Creedence Clearwater Revival: Who'll Stop The Rain

I haven't been writing much lately, because frankly, there isn't much for me to write about that doesn't depress me. And being depressed can be a real bummer, so I try and avoid it whenever possible.

When John Fogerty wrote this song some 40 years ago, he said the nation seemed to be in an unending malaise ... sound familiar? In three simple verses he alluded to man's struggles to find answers, first from ancient philosophers, second from the money promising politicians, and lastly from the Flower Power generations communal love. Unfortunately the answers weren't forthcoming..."And I wonder, still I wonder, who'll stop the rain."

Our current malaise has many fathers: inefficient and excessive government, corrupt crony capitalism, a broken financial system, and a society-wide breakdown of personal responsibility. To varying degrees, both the Tea Party and the Occupy Wall Street movements sense this and they're both asking ... "Who'll stop the rain." 

Clearly there are no simple solutions. Scratch that. The solutions are rather simple, very painful, but simple. The solutions start with simplification. Many of our problems come from the unmanageable size and complexity of our institutions and practices. Our government, our regulatory system, our tax system, and our financial system. The surging popularity of Herman Cain and his 9-9-9 plan are a vivid example of our desire for an anti-establishment leader with simple answers. They might not be the best answers, but at least they are comprehensible.

 Complexity makes things more difficult to manage, it increases uncertainty, and encourages mistakes. While almost all Americans are familiar with KISS (Keep It Simple Stupid), it seems that those in Washington are hopelessly lost. A good example is the grotesque Dodd-Frank financial reform act, that is supposed to protect us from another financial collapse, that has grown to over 2,300 pages. One part of the Dodd-Frank act is the Volcker Rule, which is designed to strip proprietary trading from government-backed depository institutions. The Volcker Rule, as Paul Volcker dreamt it up, was originally four pages designed to ban proprietary trading at banks and make the board and CEO personally responsible for compliance. It would also empower regulators that were knowledgeable and strong enough to go after violators. Simple. That was before the lobbyists/lawyers got ahold of it, with their objective to minimize interpretation. Now just this one part of the Act has grown from four pages to 300 pages. 

This abomination of a reform act totally misses the point. In a society as evolutionary as ours, and in a financial system as dynamic as ours, you can not hope to legislate via rules, you must legislate via principles. By the time the rules are written we've already moved on. Simple regulation based on principles, not rules, and a strong enforcement arm are our only hope of surviving another financial crisis. 

I know the world is a complex mess, but I don't believe that it has to stay that way. Most Americans want simplicity, most businesses want simplicity, complexity is a growth killer. 

Allow yourself a moment to dream about the growth potential in a world with the following changes:

A simple tax code without deductions and loopholes. 

A simple government balance sheet, where they can only spend what they take in (a balanced budget amendment).

Financial regulation that holds those at the top personally responsible.

I'm sure you can dream up a few more of your own.

While we're on the subject of simplicity, I recently caught this excellent interview with Steve Jobs circa 1997. "Focusing is about saying no" - Steve Jobs (WWDC'97) In it Jobs states that, "Simplicity, among other things, is a conscious choice between inclusion and exclusion. Often the magic is in what you leave out. But this means that you need to be comfortable with saying no, to yourself and others. This is not easy to do." While this presentation is geared to software engineers, it can easily be adopted in any business setting. I even found myself fantasizing about a world where politicians thought like this.

For another taste of Jobs wisdom watch this clip from the same presentation. Steve Jobs Insult Response In it he teaches you how to keep your cool while under fire, while clearly and simply explaining his vision of the customer experience. "You've got to start with the customer experience and work backwards to the technology." I kept thinking about how this vision is applicable across all industries, and in society. And could you imagine if a politician actually felt this way!

Apple TV rumor update. As you may be aware, Steve Jobs has been working on an Apple TV that seamlessly incorporates all of your devices and is simple to use. The key to this device is simplicity. Well, the rumor is that instead of a remote, you would just talk to the TV and tell it what you want. Using a version of the wildly popular Siri on the iPhone 4s, you would tell it what to record, play, etc. No buttons. Cool.

Where We Stand:

We are still in Risk-Off mode with nearly 75% of our assets defensively positioned. The S&P 500 has now moved more than 1% intra-day for the last 65 straight days. Volatility is a fact of life. Risk assets are at the upper end of their trading range, and if they break out our indicators will move more into bullish territory. Until then I like sleeping well, and that is how my indicators have us positioned. 

I don't know what will happen when Greece defaults. There is no such thing as an orderly default, nobody chooses financial pain. 

Here's where we stand today in our Global Tactical Asset Allocation Portfolios:

US Equities -- 5% Bearish,

 we are now at our minimum US equity weight.

Int'l Equities -- 5% 

Bearish, we are now at our minimum International equity weight. 

US REITs --  3% 

Bearish, we are now at our minimum target of 3%.

Int'l REITs -- 2% Bearish

. The sell-off in Europe has knocked these stocks down.

Gold --10% Bullish, but Gold Miners are moving towards neutral and Gold is also treading water. 

Commodities -- 5% Bearish, we are now at our minimum target of 5%

.

US Fixed Income -- 18% Bullish, but TIPS are showing some signs of weakness, neutral is on the horizon.

Int'l Fixed Income -- 6.5% Bearish, European banking problems have spread to emerging markets.

Cash Equivalents & Currencies --45.5%, divided between the US at 37.5%, 5% in China, and 3% Australia.

In case you missed it, here is Goldman Sachs response to Occupy Wall Street:

A Letter from Goldman Sachs

Concerning Occupy Wall Street

NEW YORK (The Borowitz Report)– The following is a letter released today by Lloyd Blankfein, the chairman of banking giant Goldman Sachs:

Dear Investor:

Up until now, Goldman Sachs has been silent on the subject of the protest movement known as Occupy Wall Street.  That does not mean, however, that it has not been very much on our minds.  As thousands have gathered in Lower Manhattan, passionately expressing their deep discontent with the status quo, we have taken note of these protests.  And we have asked ourselves this question:

How can we make money off them?

The answer is the newly launched Goldman Sachs Global Rage Fund, whose investment objective is to monetize the Occupy Wall Street protests as they spread around the world.  At Goldman, we recognize that the capitalist system as we know it is circling the drain – but there’s plenty of money to be made on the way down.

The Rage Fund will seek out opportunities to invest in products that are poised to benefit from the spreading protests, from police batons and barricades to stun guns and forehead bandages.  Furthermore, as clashes between police and protesters turn ever more violent, we are making significant bets on companies that manufacture replacements for broken windows and overturned cars, as well as the raw materials necessary for the construction and incineration of effigies.

It would be tempting, at a time like this, to say “Let them eat cake.”  But at Goldman, we are actively seeking to corner the market in cake futures.  We project that through our aggressive market manipulation, the price of a piece of cake will quadruple by the end of 2011.

Please contact your Goldman representative for a full prospectus.  As the world descends into a Darwinian free-for-all, the Goldman Sachs Rage Fund is a great way to tell the protesters, “Occupy this.”  We haven’t felt so good about something we’ve sold since our souls.

Sincerely,

Lloyd Blankfein

Chairman, Goldman Sachs

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