Further Reading: Creole Gumbo Edition

Jim Hamilton looks at Joseph Kennedy’s claim that speculators are the cause of high oil prices.

meanwhile Venezuela under Chavez puts in place price controls to keep food prices down. Result? Food shortages. Who could have predicted that? The belief that price controls (whether floors or caps) on labor, capital, services or goods won’t cause shortages on one side of the equation or the other is frankly mind boggling, but nevertheless pervasive. Floors lead to shortages of demand (the minimum wage) caps lead to shortages of supply (food price caps.) Argue the benefits outweigh the costs (rarely true if ever) but it is foolish to deny the impact.

How Pixar almost deleted Toy Story 2


Education Is the Key to a Healthy Economy

Josh Brown sees a depressing pattern emerging:

Right about now is the time where the fabled Second Half Recovery™ shows signs that it’s not going to take place.  Right about now is the time when Wall Street strategists and economists begin ratcheting down GDP estimates and tempering their optimistic year-beginning calls with a dash of bitters and a dollop of doubt.

Just like last summer.  Just like the summer before.

Read the details, but we have noticed that analysts had earnings slowing (as was inevitable) and then showing a hockey stick like recovery as the year ended as well. We have seen mid and late cycle earnings hockey sticks before. As far as we recall they have never materialized.

Tyler Cowen looks at the problem of structural unemployment during the 1930′s. Krugman is likely unimpressed.

Over at Bloomberg Jonathan Weill finds Jamie Dimon’s ignorance of what goes on at his own bank scary. Maybe so, but let us be clear. Our financial difficulties partly stem from a gap between the finance geeks and the finance suits. The suits, of whom Dimon is an exemplar, do not understand what the geeks are doing or warning about. That isn’t their skill set. Frankly, when it comes to a bank like JPM, the true exposure and risk levels are beyond anyone’s real comprehension as I pointed out in the Fall of 2008 in JP Morgan, Lehman and Nightmares:

I am often asked about individual bank stocks, especially JP Morgan. Generally my answer is that Bank of America, JP Morgan and a few others look to be likely survivors, but how profitable they will be I am really unsure.

JP Morgan is a special discussion, because I point out a rather astonishing fact, they have a notional exposure to around 90 trillion in derivative contracts, or did last March (pdf.) 58 trillion of it swaps of some sort. Probably credit default swaps (CDS) are the majority. Which means…what? I don’t know, and frankly if anybody really does they aren’t telling me. In essence I am left telling people that I have to treat that as a “black box.” Not exactly confidence raising. Personally there are better ways to make money than hoping a company with 90 trillion in derivatives exposure has a handle on it in my book, but then again, I am admitting that I have no idea what I am talking about, and cannot find anyone else who does either.

Warren Buffet often speaks of defining a circle of competency when investing and staying inside it. It doesn’t matter how big the circle is, just knowing when you are inside it. Well, 90 trillion in derivatives exposure is outside of my circle of competency to assess.

The nightmare is what if it is outside of JP Morgans circle? I suspect it is, and the massive exposure of two other banks as well (Citibank and Bank of America have approx. 38 trillion apiece.)

James Montier gave a widely admired speech at the CFA conference on “The Flaws of Finance.” You can see the speech here and below is the accompanying essay:

Open publication – Free publishing – More capm

Jeff Matthews gives us his notes on the latest Berkshire Hathaway annual meeting.

We have been of the opinion that the risk of a significant slowdown in China was much higher than the consensus believed. Recent data is certainly not encouraging and Gavyn Davies for one is becoming more concerned, as are markets.

Of even more concern is we are not sure that official statistics in China remotely align with reality, and the Financial Times bloggers show why. Frankly, the official story out of China doesn’t add up.

Edward Harrison is convinced Greece will exit the Euro. The question is, “will it be a voluntary or involuntary exit?

The Economist’s Charlemagne’s Notebook likewise sees Europe groping towards Greece leaving the Euro. In the piece the current head of the Eurozone finance ministers makes the impolitic remark that Greek voters have a, well, vote:

We have to respect Greek democracy. I’m against this way of dealing with Greece, [which consists] in provoking the Greek public opinion and giving advice and indications to the Greek sovereign. Greece has voted, we have to take into account the result.

However, that has been our point (or at least one of two main points) all along when it comes to the Euro project. It is inherently incompatible with the idea of democratic freedom within a group of sovereign nations. If the market believes voters can thumb their noses and even vote to leave, then the market will price in the risk of default accordingly. As discussed previously we don’t have that issue here in America because we decided the issue of secession in 1865. Barring a wilingness to send in the troops to stop a Greek (or any countries) exit or the formal and irrevocable unification of the respective nations, currency unions are inherently unstable. Here is what we pointed out last Fall:

3. Full Fiscal Integration: Since all other solutions put in place circumstances that are unstable and merely kick the can down the road, the fundamental flaw in the Euro needs to be addressed. That is the lack of a unified fiscal policy. The answer then is the end of sovereignty, the creation of a US of Europe. An obvious objection is that Germany wants to be a sovereign nation. We’ll skip this niggling little detail, but even if they didn’t want to remain sovereign do they want to harmonize laws and economic policy with Greece and some of the other PIIGS? West Germany just  integrated with East Germany and the experience was traumatic featuring massive transfers to East Germans. The PIIGS will still not be competitive with Germany. That means internal adjustments (internal devaluation or austerity) to allow them to become more competitive for the PIIGS’ or massive transfers. Thus unifying the Eurozone under a single fiscal policy means massive transfers from Germany to the PIIGS to harmonize the welfare states and unify the debt and avoid austerity throwing the entire Eurozone into depression. Germans will pay for the debt in one fashion or another.

Cullen Roche points out that in the US we don’t worry much about the need for internal transfers between states to keep the system sound.  Today that is true, though it has led to large conflicts in our past, playing a role in civil unrest, uprisings, the conquest of a continent and near destruction of its former inhabitants and the Civil War. Our unity was easier to envision and still born of blood and tragedy.

I am not saying unification of Europe would lead to such tragedies and conflicts. However, we need to ask if Germany (or really all the countries) want to make the internal transfers that make such a system work? Germans would pay a great deal, Greece and the other PIIGS would suffer internal austerity to the extent that they contribute to the economic re-balancing. Do Europeans, or most importantly the Germans, view themselves as a people who will be responsible for paying all the bills to integrate the Greeks and others?

Are Europeans ready to think about their home countries in the same way Texans think of Texas? Their state, but completely subordinate to the US? Will they be able to secede? We answered that question in the US with a war of incredible savagery and destruction. My guess is a unified Europe would be far less stable. They will not choose a civil war comparable to the US, but instead countries leaving over time as well as never entering the union. That leaves us with all the problems we have now still being there. Without a European populace overwhelmingly in favor of a true union this will not work. We would be faced with a PIIGS like crisis with every election and the possibility of secession in each of the former countries.