3 Things I Think I Think…
My brain is operating at near full capacity so some thinking has been done. This is unusual so I jotted down 3 things:
1) I think it’s interesting how short-term the markets have become in recent years. I always adhered to the belief that the market doesn’t discount anything out more than about one quarter (my days trading earnings reports made this abundantly clear and anyone who understands the corporate earnings game can see how clearly true this is), but I am beginning to question whether one quarter is even long enough these days. It almost seems like the market is now trading every real-time data point and not much else.
One of the main reasons I was thinking about this was because the market seems virtually immune to the reality of this upcoming election. It’s looking increasingly likely that Obama will win. Intrade now has him at 70%+. Clearly, that’s not guaranteed, but there’s been a rather large swing since the conventions. The funny thing is that this is not a market positive. If Obama wins we’re going to see total gridlock in Washington. That means the risk of going over the fiscal cliff increases and it means that Obama is not getting any big stimulative measures passed any time soon. We know the House will remain in Republican hands and the Senate looks to be up for grabs. But all it takes is the House to shoot down any new spending measure. So an Obama win = 4 years of gridlock and repositioning for 2016. Is that bullish? Call me skeptical.
2) Speaking of how things are getting compressed – how about Europe? What we basically have in Europe is a whole bunch of countries living in very close proximity who are all economically dependent on one another in a world that is getting increasingly tiny. Globalization and massive technological advancements are making the world a very small place. And this is nowhere more apparent than it is in Europe where I think we’re literally seeing a forced integration due to this massive macro change. The thing is, there’s thousands of years of animosity between some of these countries and they’re being forced into the realization that they all live under the same increasingly tiny roof. So you have a situation where you live with someone you kind of dislike, but you can’t get away from them. The result is being forced to learn to live with them. And I think that’s exactly what we’re seeing occur in Europe.
3) I guess compression is on the mind this morning because the other big thing on my mind in recent weeks is the non-stop talk about Apple and the iPhone. I was once a huge proponent of the iPhone. When the original iPhone came out I was one of those nerds who just had to have it immediately and forked over the $XXX to have it. I did the same thing with the next 4 versions or however many they came out with. But the love affair ended when the 4S came out. I bought an Atrix 2 which was an admittedly inferior handset, but something very different was occurring there.
There was a time when, if you owned an iPhone, you literally owned a product that was light years ahead of the competition. But that’s not true anymore. In fact, the Android operating system has many features that are superior than the iPhone. And my new GS3 is arguably better than the iPhone 5 (though I haven’t used a 5 I do suspect it’s still slightly better). But we’re talking compression here and what’s being compressed is Apple’s differentiation to the competition. You could even argue that Apple’s competitive advantage on pure technological superiority is gone. Or at least it just doesn’t exist to the extent that it once did. And if you’re like me that makes the iPhone a lot less attractive. Especially if your life is increasingly integrated through Google Everything (as mine is).
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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61 Comments
These are always good. Thanks.
And the law of diminishing returns applies to phones as well.
Agreeing with you on all points here, but I wonder how well an inactive Congress will sit with the electorate in 2014. My pipe dream is that somehow between now and the fiscal cliff Boehner and Cantor leave office – so at least that disaster is averted.
Short of that miracle, events I suspect will play out much as you suggest. Not good.
I would also add that it is a sad day when there is more hope in Europe for progress (riots and all) than America. A very sad day indeed.
Hey Cullen, I slightly disagree with point #1. I’ve already seen a number of prominent Republicans on TV & Print backing away from no tax hikes and looking for common ground with democrats in the last couple of days. My opinion (and that all that it is) will probably end up with both parties moving towards the center after the election and we’ll see more of the 1990s then the last couple of years of gridlock.
We MIGHT get an extension on current measures, but there is no way new spending is coming. And remember, a 90′s repeat would be bad today since we’re in a balance sheet recession. A reduction in government spending leading towards something like a Clinton surplus would reduce income to the private sector and likely send us backwards.
Hey, I agree that we won’t be going back to the budget surpluses in all. I just meant that I think we’ll be going back to the time when the Congress was run by the Republicans, White House by the Democrats and they found enough common ground & comprises to get things done.
Lobbyists have come to power since then. Corporations are in the sweet spot right now. They dont want anything to change so gridlock is good…and $$$ get what $$$ want.
As I read through your comments, I expected the final sentence to read, “just kidding, crucifixion”.
I was an iPhone user from summer 2007 through iphone 4, like you.
A month ago I bought a GS3 as well after I had seen enough of the rumors of iphone 5 to know nothing had changed vs. the previous version.
I concur – GS3 beats the pants off iphone 5. I also think they’re in the process of getting the ecosystem right, the only disadvantage they still have vs. Apple.
I went into the Apple store on launch day last Friday and picked it up and laughed – you feel like you’re three years in the past when you use it after getting accustomed to the GS3.
They’re in the process of losing it, yet again, with Jobs not at the helm.
Can’t believe it took them two years to develop the same phone (oh, of course the head phone jack is on the bottom now and the screen is half an inch taller LOL)…
Sorry buddy, but see my response to Cullen below:
Cullen,
I’m sorry, but one of the most important aspects of a mobile phone should be the display and, as DisplayMate has proven through extensive tests, the Iphone’s display is superior and is currently the best on the market. The mobile phone market has become so extremely saturated that the differences between phones are small now, therefore, the most obvious and “in your face” factors should take front row in determining what phone is better. The display is much better on the Iphone 5, therefore, the Iphone 5 is better.
http://news.cnet.com/8301-13579_3-57519190-37/iphone-5-galaxy-s3-displays-go-head-to-head-iphone-wins/
http://www.displaymate.com/Smartphone_ShootOut_2.htm
Cullen,
As to your point #1, I share your view that Obama = gridlock, however, I was surprised to hear a quote from Jim DeMint yesterday saying essentially that if Obama wins by enough of a margin, that indeed the GOP will be forced to compromise regarding the fiscal cliff. That was not Olympia Snowe… that was Jim DeMint! Also, even if we get nothing but gridlock, perhaps that’s better than the alternative. As far as I’m concerned Obama could sell himself just by saying “Obama: He’ll veto austerity!” … because if the GOP gets there way, they’ll want to try austerity, which is EXACTLY the wrong way to go.
Short of a revolt against Cantor and Boehner that isn’t happening… but as I said above… I can dream, right?
Boehner has shown an ability for some compromise, but could not bring his party along. Cantor is hopeless.
Midas II,
I agree completely!
Also regarding Point 1) again, and the short term market. I believe John Bogle, retired founder of the Vanguard funds, has spoken and written extensively about that.
I’m not an american citizen but due to the importance of the country I’m spending more time trying to understan what’s happening in Washington than in Rome. I believe that the political world is so detached from the problems of Average Joe that something big has to happen, but it seems that in Rome, Paris or London it’s the same. When people loose faith in the institutions there are big troubles ahead.
I’m with you on that Alberto……
2.) With Spanish unemployment rates at 25%, the neo-Nazi Golden Dawn party making gains in Greece, the broke Greek government refusing a bilateral disarmament offer from Turkey, Northern European disgust with Southern Europe, and unelected technocrats being forced on Southern Europe to serve as their political leadership… I see a tinderbox getting ready to ignite.
And the Hungarian government now turning to that old bogey, anti-semitism.
I think that with the “browning” of America supply side economics and dog whistle politics have run their course. Republicans probably have to moderate and rebuild their platform. The next four might not be so contentious. I hope.
Here is a question for any political history buffs out there. Is there typically less gridlock in a President’s second term than his first? I would guess so. Afterall, the GOP’s only objective in Obama’s first term was to make sure he wasn’t re-elected. That will not be a concern in the second term due to the two-term limit. Therefore, perhaps the GOP will be more willing to work with Obama in his second term?
Or perhaps that is wishful thinking…
Not sure about gridlock but generally the second term does not fare so well on the POTUS: http://www.examiner.com/article/the-presidential-second-term-curse
I think from a financial standpoint, you stand a better chance of fiscal stimulus from a new president getting elected every 4 years because the new potus generally get’s a shot at his plan to save the world..urr I mean Jobz
So what yer saying is that Romney is going to cut taxes (as he’s promised) and borrow more for another stimulus. Sounds like a real deficit hawk to me.
The market you describe in (1) is a consequence of your other article on “optionality of cash”. Under ZIRP. and no economic growth, the noise traders amp each other up trying to win coin tosses against each other. These coin toss’s are the current events of the day, news noise, and other tea leaves reading (“but if the Indonesian CB balance sheet increases, and India rug prices are inversely correlated, we need to short lean hogs! Sell!”).
re: gridlock
One way that MR can help is to more clearly highlight that a segment of “government spending” (“fiscal policy”) is really “reserve management” for the economy. Thus, government spending should be divided into two buckets: (1) federal policy spending (e.g. we need an army, we need university educated people etc.), (2) “reserve management”. This might help Dems/GOP address in a more decoupled way: politics vs. economics, gov services vs. reserve management (esp. coordination with the Fed). For some odd reason, people don’t mind the CB B/S expanding by $4T, but if they spend $100M in Congress it becomes a massive political game.
Important to be clear on this point. Fiscal policy is not just “reserve management”. Monetary policy is reserve management. BIG DIFFERENCE. The Federal Reserve system exists to help facilitate the fund procurement process and the fund settlement process. For fiscal policy, the Fed system helps integrate the payment system thereby making this process cleaner. It helps the govt use the banks as their funding agents and helps the Fed oversee the payments system to ensure proper payment settlement. Congress enacts fiscal policy and the system is designed to make this process smooth and stable. But the Fed also exists to help the Fed enact monetary policy by altering reserves in the banking system. This is why MR says outside money exists merely to facilitate inside money’s existence. It’s important to be clear that fiscal and monetary policy are two different things and the Fed’s roles in these operations is very clear. One is enacted by Congress and the other is enacted by the Fed. Monetary policy is the primary reason for altering reserves in the banking system so that’s the primary purpose of “reserve management”. The relationship between reserves and fiscal policy is merely for smooth payment processing and is a facilitating feature of the system’s institutional design.
I’m also not sure that MR will necessarily make people feel better about govt spending because once you understand MR you understand that govt spending is a redistribution for public purpose. You can spin this reality any way you like. If you really understand MR you know spending during a balance sheet recession is a good thing. That’s the key in this environment.
I hope that helps clarify.
Sorry I wasn’t very clear on what “reserve management” meant. I meant something something akin to reserve management for banks, but applied to the wider economy. In the same way the Fed does reserve management to manage bank liquidity and money supply through the Fed funds. “reserve management” does that for the ex-bank sector. Maybe if I use an example of how the two are different in my mind.
Example: HP runs into financial trouble
A strategic investor comes in and negotiates: (1) an investment specifically to bring WebOS smartphone to market, (2) general working capital to keep the other cash cows going (ink); all other business must pay their own way and be cash neutral, (3) a deal with creditors to restructure debt, convert to capital, and solve general liquidity issues (and solve perhaps organizational issues such as cash trapped at a subsidiary etc.).
For an economy, bankruptcy is not an option. (1) and (2) is government spending and “investment”, (3) is “reserve management”.
Not all government spending is mere redistribution.
For example, when the government spent money on educating people that a red traffic light means you should stop, and enforces that rule it creates significant value. Or that one has to drive on the right hand side of the road. That rule, and enforcement adds huge value albeit primarily in creating an absence of negatives.
Another one: the government regulates power voltage and frequency and intermittency requirements. Imagine if every power producer produced its own voltage and frequency, and could cut out power whenever they felt like it.
I didn’t say govt spending couldn’t add value and create wealth. I said the spending itself is a redistribution. Meaning, the people who teach classes on educating things are being paid by moving resources from the private to public domain. Those people add value and can create wealth in various ways. They might also not increase the collective wealth of society. It depends. Some people mislead others on this point by implying that govt spending is incapable of creating wealth. That is categorically false.
” I said the spending itself is a redistribution. ”
Moving unutilized resources (the unemployed) to the public sector where they can actually produce something is not redistribution. It’s creating value where none existed before.
Again, I didn’t say anything about redistributing wealth. I said they redistribute funds in an attempt to create wealth. Sometimes the govt does. Sometimes it fails. But all govt spending is a redistribution of funds from some people to other people.
Like many others, gridlock concerns me too. My big concern isn’t just if the Republican House will work with Obama but will Obama be willing to work with the Republicans? There needs to be a willingness on the part of both parties to compromise and I just don’t see that as a likely outcome.
One of the causes of gridlock is gerrymandering. It makes districts “safe” for incumbents, because they are designed especially for incumbents. We all know the absurdity of some of the convoluted shapes. When your district is safe, you have little incentive to step across the aisle and try to strike a bargain.
Proposed, a Constitutional amendment:
“For any Congressional District, there will be an allowable *maximum* ratio of the longest distance from any vertex or from any non-linear border of the polygon to the centroid, to the shortest distance from any vertex or from any non-linear border to the centroid.”
Mathematically speaking, irregular polygons (what we’ve got, obscenely irregular in many cases) don’t have centers, but centroids, or “centers of gravity” if you will.
We probably could never get it through the very Congress that it would threaten, but we need to stop the redistricting bullshit once and for all.
These people are wasting OUR time (that most-precious of all resources, Cullen) figuring out more and more “creative” ways to make themselves less and less accountable.
My feelings on (1) are changing: I’m thinking Obama may be heading to a fairly decisive victory, which may save the Senate, reduce the Republicans’ edge in the House, and leave them somewhat chastened.
Moreover, I am also feeling that Obama may be growing into the job. Recent accounts confirm that he has been both deft and decisive on foreign policy, and I would hope he has gained some badly needed understanding and confidence on economic matters (he needs to replace Geithner – with whom could be a key).
And he has always shown political savvy: if the Pubs prove so recalcitrant as to send us over the ‘cliff’, he could take the gloves off and make them pay for it in 2014.
Yeah, that situation where the State Dept knew an attack was coming on one of our diplomats and ignored it until after the man was dead was particularly deft.
Then they leave the embassy unsecured for several days until CNN shows up and embarrasses them about it. Unparalleled competence.
Thankfully O was having his makeup taken care of at the View during this period.
There WILL be a war between Israel and Iran prior to 2016. This will more significant than any since WWII and will very likely include nuclear events.
While our president is beyond compare at making excuses, other skills will be required when this happens.
Aren’t we glad that a good man has died, so that we have another thing to blame Obama for.
Grow up.
I actually think that the markets would drop far harder (initially) after a Romney victory. He has stated that he’d get rid of Bernanke – that would be enough of an unknown to seriously rattle risk.
i think you need glasses……….
Ignore this comment
I’m amazed anyone thought a Romney victory was possible.
In the past 80 years an elected President has been voted out twice: Carter in ’80 and Bush in ’92. In both circumstances there was (a) a strong 3rd party challenge, and (b) a recession. Neither is present now.
I’m not making a political statement pro- or anti- Obama; I just don’t think people appreciate how difficult/rare it is to unseat a President. It’s the system, not the candidates.
Great points on I-phone. They can’t keep re-releasing i phone and i pad with these minimal change while everyone else catches up. The peak of i phone euphoria was recently pointed out by random New Yorkers who were interviewed by the Jimmy Kimmel show. Basically, they told showed people the old I-phone and pretended it was the new I-phone 5. The comments and interviews are hilarious. http://www.youtube.com/watch?v=rdIWKytq_q4
Reminds me of so many bubbles in the past!
Cullen,
I’m sorry, but one of the most important aspects of a mobile phone should be the display and, as DisplayMate has proven through extensive tests, the Iphone’s display is superior and is currently the best on the market. The mobile phone market has become so extremely saturated that the differences between phones are small now, therefore, the most obvious and “in your face” factors should take front row in determining what phone is better. The display is much better on the Iphone 5, therefore, the Iphone 5 is better.
http://news.cnet.com/8301-13579_3-57519190-37/iphone-5-galaxy-s3-displays-go-head-to-head-iphone-wins/
http://www.displaymate.com/Smartphone_ShootOut_2.htm
I am not saying the iPhone is not a better phone. I haven’t seen an iPhone 5, but from what I read from other people is a slightly better phone than the GS3 for instance. But we’re talking very marginal differences. And if you’re like me and you use google for everything and rely on really good GPS then the GS3 is actually a much more practical device. There was a time when I would sit in restaurants and people would see me with an iPhone and literally say “wow, I wish I had that”. The thing is, now, by owning an Android, anyone can “own that” or something extremely similar. The competitive advantage has dwindled down to virtually nothing.
I agree the competative advantage has dwindled. Kind of worrisome for Apple considering I read that 75% of their profits are from the Iphone.
Cullen, in fact, I’d like to say that it has moved from positive to neutral to downright negative. Nowadays those of us in the know (technologically speaking) would look at an iPhone 5-toting dork with a smirk. Apple’s lead on all fronts – iPhone, iPad (with the Amazon Kindle Fire HD) and iOS has been systematically destroyed.
It can’t be long before AAPL moves from a growth stock to a value stock and that could erase several % points from the stock-price.
I was myself waiting on the sidelines for this behemoth to change course, and have started dipping in on the short side now.
When I look at both Europe & the US then the words “”DIS-integration” and even “Falling Apart” come to mind.
“There was a time when, if you owned an iPhone, you literally owned a product that was light years ahead of the competition.”
Literally? LITERALLY? Cullen, I expect better from you.
I’m a youngin’ but I’ve noticed the macro discounting, too (last I saw, sector rotation was crushing it this year). Most wall st job openings these days are for quants, so shouldn’t be surprising. As a contrarian, I take this to mean that fundamentals will eventually outperform again.
I hadn’t remarked on “literally”, but now that you mention it this is quite funny. It reminds me of an English soccer announcer (Jamie Redknapp, for anyone who cares) who is renowned for his misuse of the word “literally.” As in, “he literally left the defender for dead”, or “the ball literally exploded off his foot.”
Tough crowd! I’ll werk on my righting!
Literally is apparently accepted as its own antonym (aka figuratively). I refuse to acknowledge this.
You remind me of the linguist who stated that “two positives can’t make a negative”.
The reply from the back of the lecture hall: “Yeah, right.”
Regarding Europe, as Krugman says, one of two impossible things have to happen. Either there is some kind of fiscal union or there is a break up of the EZ.
Of these two impossible options, it will be fiscal union (in some form) that will be attempted first. This in turn will make the impossible break up option seem a lot more possible..
thx Cullen….some very interesting thoughts….totally share your point 2 on Europe (french citizen speaking), hence my concern shortvterm as you cannot erase centuries of history in a few months. We’ll probably go through lots of others ups and downs before any true federalism move materializes (if it ever does).
Rem: Federal Spending is future Tax
If the Federal Govt STOPPED spending right now
The Fedreal Govt would not be able to pay of “The Debt”
Outcome =”Debt” does not matter or
Outcome = Were Greece,Spain,Rome,Zinbabwe –pick one
“The funny thing is that this is not a market positive. If Obama wins we’re going to see total gridlock in Washington. That means the risk of going over the fiscal cliff increases and it means that Obama is not getting any big stimulative measures passed any time soon.”
you´re right, but i disagree with the conclusion.
with Romney you would certainly see more austerity for the masses. the only stimulus he would provide would be in the form of tax cuts. but as he pointed out they wouldn´t work for 47% of the population. and with a giant deficit those tax cuts would have to be financed by spending cuts which would also hit the majority hence domestic demand.
also with an outspoken critic of QE the fed would have a hard time and would probably not be that loose.
as for the fiscal cliff – the market isn´t panicking yet because it knows that they will come to a last minute compromise. as they always do.
(and even if Republicans would want to continue to block anything they wouldn´t be allowed by their sponsors from wall street.)
Obama = Bernanke = QE+ = risk on/stocks!
Remember, Romney said he would get rid of generous Ben.
The issue with Europe is not one of questioning integration-if so why would so many Europe countries have joined the Euro in the first place?
The issue is one of debt politics and who pays,Old Europe or New Europe.
1) November 2012 will put the exclamation point on the implosion of the GOP, which probably started about the time of Dubya’s stolen election. If the best they can do is Mittens, whom neither moderates nor conservatives completely trust, that’s a Party in crisis. Two things will happen: Obama will take the gloves off, and obstructionists in Congress will have one eye on facing a hostile constituency come 2014. It’s why I’m hopeful that there will be less (though not non-existent) gridlock after this election. Republicans and the Tea Party have had to pander to each other to gain legitimacy, but I see the Grand Old Party beginning the tough work of rebuilding — probably in a return to fiscal conservatism with social moderation — while the TP becomes a historical footnote.
2) Totally agree with your comments on Europe, Cullen. When you consider how long the common currency has been in existence, the experiment has only been going on for a blip in time. Add to that the fact that the Euro is a defective currency, the vast social, cultural and geopolitical differences among the countries, and the challenge of sorting things out during a tough balance sheet recession, it’s no surprise that solutions will be slow to emerge. Europe needs to be careful to remain patient, tolerant and creative until they do.
3) Mobile communications have already reached the point where handsets are like so many boxes of cereal at the local supermarket. iPhones, Blackberrys, Androids … one will take video of an Occupy Wall St. protest while the other orders your pizza with a woman’s voice that (seriously) has a NAME. But on the whole, they do not distinguish themselves more but become ever-closer with each generation. It’s time for a real game-changer … something you can swallow to ward off cancer, or some such smash hit for Christmas-_-
1. I wouldn’t be surprised to see the House to move back to the Democrats. Mitt Romney had some kind of death wish picking Paul Ryan for VP. The base of the Republican vote is senior citizens (many of whom, ironically enough, don’t pay income taxes). The very last thing any Republican candidate should do is mess with Medicare. Romney is doomed and he’ll drag down a lot of GOP congressmen with him (even if Boehner keeps the Speaker’s gavel, the surviving Republicans will be chastened enough to be much more likely to deal).
2. Europe is hopeless. Germany has this deep-seated need to be hated by the rest of the continent. How can you expect them to fight that feeling?
3. Those Samsung ads mocking the Appledrones waiting in line are hilarious. I like the part where the Samsung owner is just there to save a spot for his loser parents.
)
4. [which Cullen neglected to include] Yes, Elon Musk’s Hyperloop does indeed sounds awesome.
)
http://www.businessinsider.com/elon-musks-hyper-loop-2012-9
Surprise Surprise (h/t Steve Sailer)
“Medicare working to boost Obama in swing states, poll finds”
http://www.washingtonpost.com/politics/decision2012/medicare-working-to-boost-obama-in-swing-states-poll-finds/2012/09/27/b8a53a0e-0822-11e2-858a-5311df86ab04_story.html?hpid=z1