Friday, April 25, 2014


It was last week I guess when the Head of the Banque de France announced that the crisis of the Euro and of Euroland was at an end.  I think at the time I expressed some skepticism.

I have been watching the close of the stock market and the commentary of the talking heads.  It hasn't been a good week, that's for sure made worse by the deepening morass that the standoff between the Ukraine and Russia is becoming.  It seems that after weeks of attempting to downplay the global nature of these goings-on--especially by the Euros who absolutely do not want to know--people suddenly took notice today when the Ukraines began to fight back and killed a few people.  Russia of course reacted and started flying jets and moving tanks all over the place but what really got people's attention was VISA's announcement that its quarterly earnings were going to be hurt because of a sharp down turn in Russian revenue.  My reaction was you have got to be kidding me.

About 10 years ago I got into a discussion with a very, very smart guy with whom my son worked. Despite the fact that he holds a Ph.D in Political Science from one of the world's great universities, I ventured to warn him that Russia needed watching.  Nah, said he, a has-been power, never to be a real threat.  In every aspect he was correct and I acknowledged such except that I suggested that they were armed to the teeth with strategic weapons and their leader was a nut.  Putin is still a nut, but a corrupt, criminal nut as well.  It is always about the people, never the metrics in whatever business or political clime one finds oneself.

I bring this up only to point out that risk is where one finds it but you have to look for it for it to be found.  The risk of Putin has been ignored simply because it was convenient and profitable to ignore it and only now when the threat has become apparent to a five-year old, has the world become concerned.  Make no mistake, if this thing escalates, there is going to be dramatic economic repercussions as yet unidentified.  Oh, I'm not talking about theater hostilities because if that happens, the point of discussion is over, but economic sanctions in which even the Euros will have to participate leading to a huge global recession.  I mean, VISA?  Who would have thunk it.

No doubt, Russia is the risk de jour but, keeping in mind the session I attended in New York, what else is out there that for which we are not really not looking?

On a global political front, The Leader is wandering around Asia seeking to define what his "pivot" means and getting the Chinese God-awful pissed off when he clearly backed Japan's play over a bunch of rocks in the middle of no where.  We are bound by treaty you understand which is a bit more than drawing a red line but one must ask if we had an administration that had any foreign policy in place for six years, would it have come to this.  Had we understood that the trade-off in China was the ability to consolidate power which meant an even more powerful positioning of the PLA now with highly sophisticated toys with which the heads of this mob are just dying to play, maybe the present and the future of that part of the world might be different.  Let's hope this turns out for the better.

To the seeming mundane, people who know about these things keep telling me that the hedge fund guys are in a bit of a panic because everybody is under water and nobody can get out of the pool.  Of course, one can simply sit still and not do anything, but then questions start getting asked about why am I paying you 2 1/2% a year to underperform and the meal ticket heads south.  Unfortunately, the solution in times like this is to take the exact opposite tack and increase the risk to increase the returns. We create "bubbles" in things like real estate…can one say, "London"…or high-yielding assets like Greek bonds (is 5% really high-yielding given past history?), or mortgages.  The geniuses at Wells Fargo (hey! that's what the Street thinks they are) announced the other day that they are back in the sub-prime market which is just fine I guess as the FHA seems to be willing to guarantee everything in sight.  Now here's how this thing goes:  somebody looks up and says, "Hey, look what Wells is doing and everybody knows they are the smartest guys in the room.  Shouldn't we be doing some of that?"  If the guy asking the question is sufficiently senior, the answer will invariably be yes, but as the returns are good the "some" will become "a lot."  How do I know this?  It's an old movie.  I've seen it once or twice.

Of course, all of this is greatly enhanced with free money and there appears to be no end to that phenomenon.  Janet & Co. are all in with the belief that the Fed can really manage this economy to the upside and oh, if you can supply the same to a government that appears to be absolutely in no way inhibited in spending more money on stuff that hasn't worked yet, that's fine too.  Problem is, when one side of the equation written by the hedgies hits a wall and the rich aren't getting richer, problems emerge.  Same thing is the nuts of the world begin to be found out as being nuts.  When happens then is all the Risk management guys discover risks about which they had no clue and decide that they must be mitigated.  They all decide this at once, you see, and they all head for the door at once.  It is a narrow door.

Have a great weekend.

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