EJ
07-17-06, 09:08 AM
Peace Dividend: R.I.P.
No one talks about the peace dividend (http://www.investorwords.com/3644/peace_dividend.html) much anymore, "the reallocation of spending from military purposes to peacetime purposes, such as housing, education, and social projects." The term was coined at end of the Cold War in the early 1990s, when many Western nations significantly cut military spending.
Cutting military spending is never politically expedient, so to make the political price pay a good return, here in the US Clinton cut a deal with Greenspan at the start of his first term, as documented in Bob Woodward's account in The Agenda (http://www.amazon.com/gp/product/0671864866/ref=ase_wwwitulipcom-20/002-7133889-3673616?s=books&v=glance&n=283155&tagActionCode=wwwitulipcom-20), wherein low interest rates and ample liquidity were guaranteed in return for a return to fiscal discipline via deep defense spending cuts. It played out like this, as reported in January 1993 (http://www.iht.com/articles/1993/01/29/usec_4.php):
"In past recoveries, government spending has helped push growth to double the present recovery rate, but such options are not open to Mr. Clinton. Government purchases declined in the final quarter by 1.7 percent as defense spending continued to contract, and any attempts to force-feed the economy will run smack into demands by the financial markets and the Federal Reserve Board to cut the U.S. budget deficit."
"Thus Mr. Clinton's meeting with Mr. Greenspan was the monetary front of his effort to keep from turning into a pumpkin. On Wednesday, Democratic congressmen tried without success to corner Mr. Greenspan into committing the central bank to cut interest rates and take up the slack in the economy if they vote to trim the deficit by limiting spending and raising taxes. As one Democrat said, if they did the right thing they did not want to be left 'twisting in the wind' by rising interest rates."
Speaking like a pre-Reagan Republican, Clinton describes the linchpin of his first term economic policy: "When deficits disappear, capital, more than $1 trillion so far, is liberated to create wealth and jobs and opportunity at every level all over America," Clinton stated earlier this year. "The less money we tie up in publicly held debt, the more money we free up for private sector investment. In an age of worldwide capital markets, this is the way a nation prospers . . . by saving and investing, not by running big deficits." Subsequently he pledged to "make America debt free for the first time since 1835," and argued that "fiscal discipline has widened opportunity and created hope for all working people in our country."
Most didn't think the policy of deficit reduction could work, including Clinton himself (http://www.newamerica.net/index.cfm?pg=article&DocID=273). He had to take Greenspan at his word. "Everyone present assumed that raising taxes or cutting spending would, at least in the short run, dampen economic growth. White House economists gave serious consideration to the possibility that their plan would throw the economy into recession. The only way to avoid this dismal fate was if the Federal Reserve or the bond market would lower interest rates to spur economic activity and make up for the depressing effects of deficit reduction. According to Bob Woodward's account in The Agenda, Clinton replied to this news in a half whisper: "You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of ****ing bond traders?"
That was more than a decade ago. Now the US is fighting terrorism, two wars and appears likely to get dragged into a widening regional conflict as Israeli tropps today enter Lebanon (http://www.teluguportal.net/modules/news/article.php?storyid=8079) in search for 12,000 missiles that remain hidden in thousands of basements, attics, auto repair shops, and so on, perhaps 8,000 of which were gifts from Tehran (http://news.scotsman.com/international.cfm?id=1033212006). Word over the weekend (http://tinyurl.com/pp6sh%29) is that more sophisticated missiles that can really do some damage are ready for launch, likely in the next three weeks before the Hezbollah runs out of food and fuel.
The Clinton era policy of declining deficit spending and falling interest rates is now upside down. The US is running large and growing deficits and interest rates are rising. Unless energy prices decline, rates will continue to rise for years, mostly staying a point or so behind the rate of inflation, with the US economy hanging on the hairy edge of recession along the way. Any fast moves in the wrong direction, in oil prices or interest rates, and the US will find itself in an intense inflationary recession that will be very hard to manage from a policy standpoint. Pouring liquidity into a recessionary economy that's already experienced energy price induced cost-push inflation may send US creditors running to Asia and Europe for cover and US interest rates through the roof, and stimulus from additional tax cuts and expanding deficit spending even further is likely to be marginal.
Under these conditions, it's not surprising that hedge funds are buying Dec calls on $1,000 gold (http://tinyurl.com/rteuy).
Are we in a private equity bubble?
Asks the NYTimes today (http://www.nytimes.com/2006/07/16/business/yourmoney/16advi.html?_r=1&oref=slogin) (subscription required). The short answer is that we are and have been for years. Like every bubble, the private equity bubble is reaching its nadir six months or so after the participants privately acknowledge it as such and a year after the Fed started serious efforts to get the debt markets -- that are driving the bubble -- back under control. I know several in the private equity industry who told me six months ago that the debt markets were out of control, the deals are getting bigger and sloppier, so I suspect we are three to six months from the end.
Unlike the NASDAQ bubble, where we had negative index funds like USPIX available to make money off the bubble's demise, there is no obvious way to profit from the inevitable collapse of the private equity bubble. One can short the stocks of companies that have benefitted from the loose credit quality standards and excessive engineering that enabled the public company deals, but the last deals in a bubble are usually the worst from a value standpoint and therefore more short-worthy, but as they are as in the case of the $20M Kinder Morgan deal, private companies so maybe the only way to participate is to wait for the companies to go bankrupt in the next recession and buy underpriced debt that's issued during the restructuring.
Interview with Martin Mayer
Stay tuned for an interview I did with Martin Mayer, to be published later this week. Conversations he's had with Greenspan and Volcker indicate what we have suspected all along, that the Fed has no solution to the problem of managing the asset bubbles that result from injecting liquidity into the economy following market corrections that threaten the real economy. Also, that central bankers lie. Surprise!
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Copyright © iTulip, Inc. 1998 - 2006 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/forums/../GeneralDisclaimer.htm)
No one talks about the peace dividend (http://www.investorwords.com/3644/peace_dividend.html) much anymore, "the reallocation of spending from military purposes to peacetime purposes, such as housing, education, and social projects." The term was coined at end of the Cold War in the early 1990s, when many Western nations significantly cut military spending.
Cutting military spending is never politically expedient, so to make the political price pay a good return, here in the US Clinton cut a deal with Greenspan at the start of his first term, as documented in Bob Woodward's account in The Agenda (http://www.amazon.com/gp/product/0671864866/ref=ase_wwwitulipcom-20/002-7133889-3673616?s=books&v=glance&n=283155&tagActionCode=wwwitulipcom-20), wherein low interest rates and ample liquidity were guaranteed in return for a return to fiscal discipline via deep defense spending cuts. It played out like this, as reported in January 1993 (http://www.iht.com/articles/1993/01/29/usec_4.php):
"In past recoveries, government spending has helped push growth to double the present recovery rate, but such options are not open to Mr. Clinton. Government purchases declined in the final quarter by 1.7 percent as defense spending continued to contract, and any attempts to force-feed the economy will run smack into demands by the financial markets and the Federal Reserve Board to cut the U.S. budget deficit."
"Thus Mr. Clinton's meeting with Mr. Greenspan was the monetary front of his effort to keep from turning into a pumpkin. On Wednesday, Democratic congressmen tried without success to corner Mr. Greenspan into committing the central bank to cut interest rates and take up the slack in the economy if they vote to trim the deficit by limiting spending and raising taxes. As one Democrat said, if they did the right thing they did not want to be left 'twisting in the wind' by rising interest rates."
Speaking like a pre-Reagan Republican, Clinton describes the linchpin of his first term economic policy: "When deficits disappear, capital, more than $1 trillion so far, is liberated to create wealth and jobs and opportunity at every level all over America," Clinton stated earlier this year. "The less money we tie up in publicly held debt, the more money we free up for private sector investment. In an age of worldwide capital markets, this is the way a nation prospers . . . by saving and investing, not by running big deficits." Subsequently he pledged to "make America debt free for the first time since 1835," and argued that "fiscal discipline has widened opportunity and created hope for all working people in our country."
Most didn't think the policy of deficit reduction could work, including Clinton himself (http://www.newamerica.net/index.cfm?pg=article&DocID=273). He had to take Greenspan at his word. "Everyone present assumed that raising taxes or cutting spending would, at least in the short run, dampen economic growth. White House economists gave serious consideration to the possibility that their plan would throw the economy into recession. The only way to avoid this dismal fate was if the Federal Reserve or the bond market would lower interest rates to spur economic activity and make up for the depressing effects of deficit reduction. According to Bob Woodward's account in The Agenda, Clinton replied to this news in a half whisper: "You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of ****ing bond traders?"
That was more than a decade ago. Now the US is fighting terrorism, two wars and appears likely to get dragged into a widening regional conflict as Israeli tropps today enter Lebanon (http://www.teluguportal.net/modules/news/article.php?storyid=8079) in search for 12,000 missiles that remain hidden in thousands of basements, attics, auto repair shops, and so on, perhaps 8,000 of which were gifts from Tehran (http://news.scotsman.com/international.cfm?id=1033212006). Word over the weekend (http://tinyurl.com/pp6sh%29) is that more sophisticated missiles that can really do some damage are ready for launch, likely in the next three weeks before the Hezbollah runs out of food and fuel.
The Clinton era policy of declining deficit spending and falling interest rates is now upside down. The US is running large and growing deficits and interest rates are rising. Unless energy prices decline, rates will continue to rise for years, mostly staying a point or so behind the rate of inflation, with the US economy hanging on the hairy edge of recession along the way. Any fast moves in the wrong direction, in oil prices or interest rates, and the US will find itself in an intense inflationary recession that will be very hard to manage from a policy standpoint. Pouring liquidity into a recessionary economy that's already experienced energy price induced cost-push inflation may send US creditors running to Asia and Europe for cover and US interest rates through the roof, and stimulus from additional tax cuts and expanding deficit spending even further is likely to be marginal.
Under these conditions, it's not surprising that hedge funds are buying Dec calls on $1,000 gold (http://tinyurl.com/rteuy).
Are we in a private equity bubble?
Asks the NYTimes today (http://www.nytimes.com/2006/07/16/business/yourmoney/16advi.html?_r=1&oref=slogin) (subscription required). The short answer is that we are and have been for years. Like every bubble, the private equity bubble is reaching its nadir six months or so after the participants privately acknowledge it as such and a year after the Fed started serious efforts to get the debt markets -- that are driving the bubble -- back under control. I know several in the private equity industry who told me six months ago that the debt markets were out of control, the deals are getting bigger and sloppier, so I suspect we are three to six months from the end.
Unlike the NASDAQ bubble, where we had negative index funds like USPIX available to make money off the bubble's demise, there is no obvious way to profit from the inevitable collapse of the private equity bubble. One can short the stocks of companies that have benefitted from the loose credit quality standards and excessive engineering that enabled the public company deals, but the last deals in a bubble are usually the worst from a value standpoint and therefore more short-worthy, but as they are as in the case of the $20M Kinder Morgan deal, private companies so maybe the only way to participate is to wait for the companies to go bankrupt in the next recession and buy underpriced debt that's issued during the restructuring.
Interview with Martin Mayer
Stay tuned for an interview I did with Martin Mayer, to be published later this week. Conversations he's had with Greenspan and Volcker indicate what we have suspected all along, that the Fed has no solution to the problem of managing the asset bubbles that result from injecting liquidity into the economy following market corrections that threaten the real economy. Also, that central bankers lie. Surprise!
Join our FREE Email Mailing List (http://ui.constantcontact.com/d.jsp?m=1101238839116&p=oi)
Return to iTulip.com (http://www.itulip.com/forums/../)
Copyright © iTulip, Inc. 1998 - 2006 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/forums/../GeneralDisclaimer.htm)