In Search of the Perfect Investment

British businessman, Simon Wolfson, has offered a 250,000 pound prize to the person who can come up with the most convincing explanation of how an orderly exit from the single Euro currency is possible.

The Euro is like the roach motel.

You can check in. But you can never check out.

There has been a rumor  that they were going to print oodles of Euros and bail out Greece and Italy, etc. with brand new money.

Investors don’t like that. It leads to inflation. Some still remember Germany in the 1920s. Hence gold has rallied strongly in the last few days. And should continue to rally.

It hasn’t rallied enough to bring it back to earlier highs. But… here’s hoping.

Risk on the rise as political leaders give in to mob rule by Ray Dalio in the Financial Times (the pink paper). This is a good summary.

We are in the midst of a deleveraging, we are nearly out of ammunition and we are at each other’s throats. Being in a deleveraging and nearly out of ammunition is a very difficult position to be in. But, being at each other’s throats is our biggest problem.

Our character and our political and social systems are now being tested in ways that have typically been tested in past deleveragings. In deleveragings bad economic conditions typically lead to emotional reactions, social and political fragmentation, poor decision-making and increased conflict. When this occurs in democracies, the checks and balance system, which is intended to yield the best decisions for the whole, can stand in the way of thoughtful leadership and lead to ineffective “mob” rule. This dynamic can lead to a self-reinforcing downward spiral.

Frustrations increase, the established ways of doing things come under attack and frustrations over the ineffectiveness of government creates the perceived need for someone to gain control of the mess. Plato spoke of this dynamic. It was the reason Hitler was elected in 1933.

In our opinion these types of risks are now emerging and should be taken into consideration when trying to figure out what may lie ahead. Rather than trying to resolve disagreements through thoughtful discourse, people are now trying to grab power to beat and suppress their opponents. Tensions between the rich and the poor, capitalists and socialists, those in and out of power and different factions in each group are now intensifying in a manner that is classic in deleveragings. Politicians who are fighting for power in a political year are fanning the flames and are increasingly willing to do risky things (like shutting down the government) in pursuit of their missions and popular support.

This growing populism will have important implications for monetary, fiscal and trade policies and will significantly increase risks of a markets downturn and a global depression.

Regarding monetary policy, the mob is at the gates of the Federal Reserve and wants to grab control while those on the inside are in disagreement about what should be done. Fed chairman Ben Bernanke and those who helped him save the country from depression are now under siege. These challenges are being faced in different forms by most central banks at the same time as they are nearly out of ammunition – i.e., their capacities to ease are very limited because they cannot stimulate private credit creation and because they cannot get money in the hands of people who will spend it. For these reasons there is greater risk that central banks cannot save us as they have always saved us in the past.

The battle between the left that wants to tax the rich more and the right that wants to cut entitlement spending is at a fierce stalemate that is likely to intensify in more scary ways. As a result, fiscal policy is unlikely to be supportive to economic growth.

With high unemployment and growing anger, the “mob” is blaming the foreigners who “took their jobs,” especially the Chinese who they say are “manipulating” their currency to “compete unfairly”. And since politicians want popular support, they are navigating this issue to gain political benefit (e.g., to put the US President in the position of having to choose between the political suicide of vetoing Senator Charles Schumer’s currency bill and clashing with China) rather than to approach this difficult issue calmly and analytically. Trade flows and capital flows are increasingly being looked at by all sides as possible weapons in an economic war. As a result, the risks of bad surprises in trade and capital flows are heightened.

Mobs are at the doors of bankers and others in the financial system, screaming to politicians to put these people in jail while the vote-seeking politicians are fanning the flames rather than reminding people that the legal system is the way these people should be judged. Since banks are levered about 15 to 1, it doesn’t take much of a debt problem to cause them solvency problems, and since in deleveragings debt problems are big, there is significant risk banks will run out of equity again and the fury against them will intensify. For these reasons risks to the global banking system are much greater than normal.

While we hope that most people and their leaders will approach these difficult challenges calmly and collectively, we would not be meeting our fiduciary responsibilities if we bet on this happening without clear evidence of it. We are not alone in having and expressing our concerns in what has come to be known as “risk-on” and “risk-off” market movements.

If we calm down and work together to properly manage this difficult situation – for example, if we can properly distribute both the austerity and the increased efforts that are required to manage our debt burdens – we can get through this deleveraging without great pain. If we can’t, we may experience an economic, social and political collapse.

Ray Dalio is founder of Bridgewater Associates

Cockroach stocks and industries. We ought to keep a list and keep updating it every day. I’m looking for contributions. Add a comment below or send me an emai.

Today’s list:

+ Amazon
+ Netflix
+ Solar companies, including First Solar.

Mortgage REITs trade by appooinment — well almost.

In contrast, yesterday’s volume in Citigroup was 65,217,168 — i.e. over 65 million.  I continue to hold MITT.  It’s new. When it’s fully invested, it will pay a higher dividend and the stock will bounce back.

Meantime all mortgage REITs’ earnings are under pressure because of likely earnings declines for reasons we’ve talked about. As they decline, they’ll become even greater dividend yielders.

OWS’s Beef: Wall Street Isn’t Winning – It’s Cheating from Rolling Stone

Matt Taibbi says the Wall Street protesters don’t hate the rich – they hate that the rich are gaming the system. “The idea that masses of people suddenly discovered a deep-seated animus toward the rich – after keeping it strategically hidden for decades – is crazy.”

Read more »

Sprint is very slow:

Computerworld – Slow performance on the Sprint network with the new iPhone 4S has led customers to consider returning the Apple devices before Friday, when Sprint’s early termination fee of up to $350 will take effect.

For more »

But AT&T’s PR is even worse.

I email them,

Dear Ellen Webner,
I’ve been very positive in the column about the iPhone 4S.
Presently, I personally only have an iPhone 4.
Is there some way you can help me upgrade?
Best wishes,
Harry

They reply:

Dear Mr. Newton: I’m handing this off to my colleague Robin Verges from Rubenstein- copied on the email, who handles media inquires in NYC.
Best,
Ellen

I reply:

Can you kindly give me Robin Verges’ contact information, please?

They give it to me. They reply:

Hi Harry:
I’ve had connectivity issues but am usually reachable at rverges@rubenstein.com
If a member of our staff has not contacted you , please let me know asap.
Thank you.

I let them know. But I hear nothing. I love the idea of AT&T Wireless’s PR department having “connectivity issues.”

I am amused by such small things.

Harry Newton who loves this email from a reader who wishes to remain anoynmous (because he’s in the industry):

Harry

Here’s one that with your wicked sense of humour might love:

CNBC had on as a guest this afternoon the Citi analyst Mark Mahaney who covers Internet stocks for his salesforce.

Mahaney UPGRADED Netflix (NFLX) in May in the mid-200s to a “Buy”, according to the interview. Today, on the Bubblevision show, he DOWNGRADED it after a one day decline of 42, to a HOLD at 77.

OK, so we all make mistakes. Then, he announces that his second favorite stock in the whole wide world is AMAZON (AMZN) with a price target of 280. It closed last nite at 237. It is down while he is talking by 10. Then, after the close they report numbers and the stock trades at 195 in the aftermarket.

That means that anyone who followed this guy last evening (not to mention the 148 points or so since May in Netflix alone), and owned 100 shares of each of his faves, lost $8400 today. Is that Guiness Book worthy?

Some analyst. Even more amazing (no pun on Amazon) that CNBC could not fill its “content” better.

Youd think with the 20 million or so unemployed, thered be one guy or gal out there who could do better. But then, we wouldnt have the chuckles, would we?

Regards

Jaguar (a non de plume)