Thank You, Uncle Ben!

This is what we really need: leadership. It looks like Bernanke persuaded heads of Central Banks to do something. They probably didn't have any choice, situation is really scary. It looks like dollar carry trade is unwinding right now. Banks, which borrowed dollars to buy Euro denominated bonds, now are forced to sell everything and buy dollars back, because Euro fell related to dollar and they are probably facing massive collateral calls. I wouldn't be surprised if a lot of hedge funds got caught the same way and now are faced with huge margin calls.

Central Banks action is good, but not enough. Not even close. We need coordinated QE from Fed and ECB. Soft default of Greece killed a lot of liquidity (talk about unintended consequences). Sharp rise of yields on Italian and Spanish bonds created huge strains. International financial system is in a huge trouble. If something big happens (default of one more country, failure of a big bank, exit from one country from Euro), everybody will suffer. We are not isolated in US. We can have much more trouble than in 2008.

Why I Closed Position in 3D Systems

I closed position in 3D Systems (DDD) today. This is a change of plan. Initially, I wanted to accumulate position, trading around it. But I didn't like last earnings report and liked conference call even less. So I decided to make a pause and sold position.

This is a good company, with good growth and excellent balance sheet. But we don't invest in present, we invest in future. And last quarter somewhat reduced my confidence in future. Maybe it was one off quarter. If so, I will change my opinion.

Stock remains a great trading vehicle. I might buy it back when it trades lower. 

Netflix's Bigger Problem

I closed my Netflix (NFLX) position today. Way too late. The only good thing is that I bought it when it wasn't on anybody "buy" list, well below $50. Sure, I should've sold it long time ago. Well, rear sight is always 20/20.

Yes, last quarter report was the trigger. Actually, one little thing in the report: it seems to me that Reed Hastings, CEO of Netflix, wants Netflix to be like HBO. Well, HBO is a part of Time Warner (TWC), and if you look at long term chart, it's not a good investment, to put it mildly. If Netflix wants to be HBO, I don't want to invest in it.

There are a lot of comments. People are rightly questioning latest moves, cost of streaming content, attempts of content providers to charge more and/or strangle Netflix as a competition to cable TV. Everybody is missing one thing: there is almost no content. I cancelled my Netflix DVD subscription not because of price increase, but because couldn't find anything on DVD I wanted to watch. I went through US and foreign classics, some new movies in 2009 and 2010. There are probably 3 movies released in 2011 I want to watch. I watched one in the theater. For 2 remaining I can use pay-per-view on Dish Network, much cheaper than keep Netflix subscription. I don't care about multiple remakes and remakes of remakes. I hate most of the comics based movies. Vampires and zombies are not even funny anymore. There is nothing else out there. I have the impression that content providers are reducing costs by dumbing down their production. Well, they are losing me as a customer.

Somebody might say that my taste is not mainstream, that only fringe watches, for example, Woody Allen movies, that most people want to see transformers and vampires and zombies. Maybe. But I know for sure that there are a lot of people with diverse tastes which are (were) Netflix customers. And many of them have the same problem: there is nothing to watch.

Full disclosure: I don't have any positions in NFLX or TWC.

This is a Breakout. Why am I not Happy?

As children say, the answer is "because".

First of all, breakout (S&P over resistance at 1220) is not confirmed. Let's wait until Monday. Second problem, bigger one: Nasdaq composite did not break out over its resistance level of 2670. Not even close. If you look at charts, during this depression Nazz was the leading index.

I will be happy if market is going up. I will be extremely happy. After all, my long positions exceed my cash and fixed income positions. But I have serious reasons to be careful. Current action doesn't look like bull market action.

Exhibit one: earnings reports and reaction. Google (GOOG) beats by a mile, stock jumps the next day, no follow up. Intuitive Surgical (ISRG) beats, stock jumps the next day, no follow up. Same picture with Intel (INTC), VmWare (VMW).

Exhibit two: market still pretend to depend on Europe. Well, it's a good excuse for market to not go up on great earnings. What would be a next excuse? And next after that?

Actually, Europe deserves extra deliberation. First of all, it's not going anywhere. Second, for better or for worse, but EU economy is bigger than US economy. Now, cutting through BS they feed us from all sides. EU is there to stay. There is no way to dissolve such union, not right now, not in the nearest future. Eurozone, i.e. currency union inside of EU, is there to stay as well. As much as Germans grumble, saving Eurozone is much (orders of magnitude) cheaper than dissolving it. Granted, currency unions of independent countries never survived long before. But Eurozone countries are not politically independent. They are part of EU.
Currently they are coming to a kind of soft bankruptcy for Greece. They will need to recapitalize banks, to create some kind of loan mechanism which can't be killed by speculators. In a year or two we will see something like QE from European Central Bank (ECB). They are moving slow, but they are moving. They will not fall apart, the price is way too high.


So, there is no end of the world coming from Europe. Why, or why am I not happy? Why don't I predict a huge bull market? Because we are in a Great Depression 2.0. Everything is moving faster now, so in 2008-2009 we quickly went through analogy of 1929-1932. Rally of 2009-2010 was quite like rally of 1932-1936. Now we are in analogy of 1937. Everybody tells about austerity, savings, cost cutting. Nobody (that is, except for Fed) is talking about stimulus. That's a huge mistake. We need stimulus. We need inflation. We need more debt, public and private. And everybody is talking austerity, cost cutting, deleveraging.

Unfortunately, analogy ends right here. In 1942, Great Depression was ended by stimulus package also known as World War II. World War now is so scary, it's almost impossible. Even if it happens, it will be the end of the world, not a stimulus package.  And the only modern depression known to us after WWII is going on for 22 years already without any sign of ending any time soon. I mean Japanese Great Depression (1989 - ?).

That's why I am not happy. That's why I don't believe in any big rally. We might get to S&P 1400 by the year end, sure. I will be a seller then. Because austerity is coming, and bear market is coming with it.

US Downgrade is Stupid

I don't know what is used instead of brains at S&P. Up until 2007 they easily stamped AAA on collaterized debt obligations consisting of barely prime or even subprime mortgages. Now they slap downgrade on the country which paid its debts for more than 140 years! Yes, last debt limit debate was crazy, unnecessary and damaging US reputation. But memory of it will fade quickly. After all, there were similar partisan battles in 1979 and 1987 (first time republicans played the role of idiots, second time, democrats).

I agree with Barry Ritholtz. This doesn't say anything about US credibility. It says everything about rating agencies credibility. It's zero. And probably will be below pretty soon.

Game of Chicken

You would think that theatre of absurd around debt limit is senseless. Not at all. It's politics as usual, only at its worst.

On one side we see ideological idiots from GOP. They want nothing less than reversal of Roosevelt's New Deal. Don't be fooled by rhethorics. They tell you that they want responsible government, staying away from business making everything work. In reality they want the end of Social Security, Medicare, undemployment benefits and other things which construct social safety net. That's big business program running amok, desire to hire people as cheap as possible.

On the other side, mostly no less ideological Democrats, including President. They want big government running everything, clean energy (impossible), end of oil (impossible). Thanks God, they at last abandoned idea of "gun control", which in their lingo means total ban on firearms for population.

Until lately, both sides somehow found compromise in the last 30 years. It was messy, expensive, with a lot of unnesessary spending. Both sides are guilty in that spending, GOP sponsoring no less stupid programs than Dems. Government waste is an equal opportunity sport in Washington.

The problem now i entirely of GOP making. As much as I hate many things Dems do, current crisis was created by GOP. They voted for current budget, but now refuse to authorize increase of debt limit necessary to execute said budget. In fact, they are trying to hold the welfare of the whole country hostage of their interest.

They played game of chicken with Obama. They thought they can call his bluff and force him to agree to any extreme program they can think of. Their problem is that in politics they are children compared to Obama. He saw an opening which allows him not only to win White House next year, but also to soundly beat GOP in both Senate and House. He is going for shutdown of government and possible default. And he is putting the guilt sqaurely on GOP, where it's really belongs. They forgot that politics is an art of possible. They wanted impossible and already lost.

Next steps are obvious. On August 2, Treasury will declare which payments will be stopped first. Of course, accourdint to 14th Amendment, part 4, interest and principal payments to holders of Treasuries will be first priority. There will be a lot of hurt, thousands of people are going to be laid off. Next stage will be delay in payments to all government employees which will not be laid off. Then come payments to unemployed.

I hope that GOP will stop somewhere there. Because if everything is going out of control and US defaults on its debts to holders of Treasuries, all financial hell is going to break loose. It's a financial analogy of 6 mile wide asteroid. When it hits, nothing is safe.

Looks like current generation of GOP is done, losers. They are not going to survive this. It's a pity, because a landslide of Dems next year isn't any better for the country. We really need a divided government. But we also need a government which can compromise and find solutions. Well, that will have to wait until 2016 at least.

What's next? I hope that hard default isn't going to happen. GOP really doesn't have any justification for a hard default situation, they are going to be voted out and be happy that they are not rolled in tar and feathers before kicked out of Capitol. So let's hope that after some bickering they vote for debt extension before the end of August. Everything is going to be OK, right?

Wrong. Very wrong. We are going back into depression no matter what solution of debt limit crisis is adopted. Recovery, while it lasted, was triggered by Obama stimulus. That stimulus was tiny compared to what was (and is) really needed. We needed at least twice as much. And we need much more than that now. Instead, we are getting severe budget cuts. Ain't gonna help recovery. Budgets are cut in states, in counties, in municipalities. Now federal budget is going to be cut. Dozens of thousands of people are going to lose their jobs. Some "economists" and all GOP elected want to tell us that that's OK, that private business, facing less competition from governments, will pick up the slack. That's bullshit. Private business is doing nothing of the kind and is not planning to. We are in depression and business is not expanding, with just a few exceptions. There are no real competition for resources: interest rates are very low, wages are stale, unemployment is high. We are going back into deflation mode soon. The only little hope left is QE3, which is probably coming in October or November. I'm afraid that's not enough.

US got out of Great Depression thanks to World War II. World War III is unthinkable. What is going to pull us out this time? Or maybe developed world is going Japanese way for decades of depression?

What am I going to do with my money? I'm keeping big (for me) cash position right now and will keep it until debt limit crisis is resolved one way or another. I'm going to start investing right after debt limit is raised. Unfortunately, there aren't many places to invest in depression. It's going to be fast growing tech and some dividend paying stocks. Tobacco is out. Dying industries (paper books, newspapers, TV stations, movie studios, cable TV) are out of the question. As usual, I'll play it by ear.

We Need More Debt!

Somehow it's a common knowledge that debt is bad All kinds of debt, public, private and corporate. Every day you can see several articles crying: deleverage!

This is totally wrong. It's wrong for all kinds of debt. Reducing debt right now is bad for the country, bad for corporations, bad for the people.

First of all, reducing total national debt is bad for economy. All money is debt. Most people don't understand that, for details, look here: http://seekingalpha.com/article/178797-how-the-government-creates-money
Because money is debt, reducing total debt reduces amount of money in circulation. Which leads to low inflation, and in severe cases, to deflation. Well, many people, especially those living on savings and fixed income would tell me: what's wrong with the deflation? Our income can buy more things! True, but deflation increases cost of credit, depressing business activity. In severe cases (see Great Depression) high deflation leads to dozens of thousands companies closed, failed banks and very high unemployment. In the last hundred years, best growth was achieved in economies when inflation was between 2 and 5%. We are running around 1% right now. We need more inflation, more money, more debt.

Many people say that debt is a bad thing. It's almost from Christian church playbook of Dark Ages, when interest bearing credit was banned (usuty!). Economy was doing great in Europe between 7th and 13th centuries, wasn't it? In some Muslim countries credit is against the law, do they have good economies? Debt by itself is a good thing. It allows corporations to finance their expansion. It allows young people to start living comfortably, go to college, buy a car, a house. It allows government to pay for a lot of things, especially when economy isn't very good.

Word of the day: austerity. Why? Did anybody ever got richer by austerity? Did US escaped Great Depression using austerity measures in 1930-1932 or in 1937? You don't grow corporation using austerity, you don't grow economy using austerity. For people proper measure of debt is a relation between market value and debt. For a person it's a relation between income and debt. And for a government, GDP to debt. Ways to improve picture and grow in all cases is to increase income, not to cut expenses. I can understand austerity measures in Greece, where government sector was more than half of all economy. They need to cut budget and privatize like crazy. There isn't much room for privatization in US (USPS, ports and airports, anyone?) and government sector isn't that big. Main reason for US to take more debt: our government can borrow at outrageously low rate. If I could borrow at 3% for 10 years, I'd be loaded to the gills.

There is one more "reason" to reduce debt: someone sometimes will have to pay it. Well, corporations and governments can live many dozens of years with a big load of debt, just roll it over, preferably at good rates. And now is as good time to roll over debt as ever, at current low rates. Debt is only bad if you can't roll it over.

If we had booming economy, low unemployment and elevated inflation, I'd be first to call for debt reduction, especially government debt reduction. But we are in Great Depression 2.0, we need to pull our country (and the whole world, whether we want it or not) out of it. The only way to do it is to take even more debt.