Author: Seth Klarman

Key takeaways:

Klarman is called a classic value investor, a term that can be somewhat meaningless, as all investors are by definition seeking value. Nonetheless, he himself counts himself among this clan. In this book, he talks about his investment philosophy. This book is much like The Intelligent Investor by Ben Graham. His book has three parts.

Part I – Where Most Investors Stumble

He says that most investors are primarily oriented toward return—how much they can make, at the expense of little attention to risk—how much they can lose. Value investors, by contrast, have as a primary goal the preservation of their capital; they seek a margin of safety. He draws a line between investment and speculation, saying that investments throw off cash for the benefit of investor (speculations don’t), and that returns from speculations depend exclusively on the vagaries of the resale market.

He says that the market is generator of opportunities, and one of the many reasons is the short-term institutional bias of the Wall Street. He also adds that financial market innovations are good for Wall St but bad for clients. He emphasizes that Wall St is a dangerous places for investors to seek guidance. He also calls out index investing as mindless investing, and he says that more people do this, the more the market will become inefficient, reversing the whole reason indexing was invented to begin with.

He talks about EBITDA method, which he says is a flawed measure and one that leads to over-valuation. EBITDA was a short-cut to get the free cash flow of a company, and was originally done for leveraged companies that were candidates for a take-over. Availability of non-recourse financing changed things by making more cash available to a leveraged company, when compared to a firm that is not as leveraged. The assumption of no capex is also criminal.

Part II – A Value Investment Philosophy

It is very difficult to recover from even one large loss. This example genuinely surprised me – “An investor who earns 16 percent annual returns over a decade, for example, will, perhaps surprisingly, end up with more money than an investor who earns 20 percent a year for nine years and then loses 15 percent the tenth year.” Klarman says that we need to target the downside risk first and then the investment returns.

He says that three critical elements to a value-investment philosophy-

• Bottoms-up strategy (as opposed to top-down, which is vulnerable to error at each step)
• Absolute performance (not relative; requires tolerance of periods of poor performance)
• Risk-averse approach (target risk before returns)

Top-down investors attempt to time the market, which bottom-up investors do not to do.

Klarman says that there’s no one value of a business, as value depends on different expectations; instead we should look for a range. He recommends three methods: NPV, liquidation and relative valuation (as the last resort and useful in only a few cases). NPV method, of course, brings up the need to have a good estimate of discount rate. Klarman says that investors need to take into account his risk profile, riskiness of the investment, and returns available from alternative investments. At times, when interest rates are very low, very high multiples are justified, but valuation based on them is really a bet on interest rates. He says that businesses should be valued based on what oneself, not others, would pay to own.

Part III – A Value Investment Process

In this part, Klarman talks about specific areas that he finds interesting; these include thrift conversions and spin-offs. I don’t summarize them here. Klarman says that when buying a position, one should leave room to average down, when the price falls after the first buy.

Decision-making

Refrain from action until there’s a good reason and do so in an uninhibited way when you see the opportunity clearly (Soros and Paulson would agree). Price action affects emotion, so do not worry about that too much. Also, often people seek social proof; avoid it as much as possible.

Separate emotion from decision-making (obvious in some ways, but this is often attributed to money managers who use complex mathematical models to avoid emotion. Given that Buffett often makes decisions on buying a company within days, and at time hours, it tells that there’s a way to do so within our heads. I think it requires a special kind of intellect to be able to do so, and lesser investors like us will need to begin with models as a guides to ensure that we’re less affected by emotions).

Sign of a good company

When you forget price of the product. We remember experiences–good or bad, but forget prices over time.

When it has a product that you would walk across the street for.

When it has men hooked. According to Buffett, American men avoid making decisions, and if they find something that works, they simply stick to it.

What career to pursue

Do what you love (this one is obvious, but what is interesting is that Buffett replied with this answer when someone asked him what industries hold good prospects for young men and women today).

Go to work for someone you admire.

On his stand on tax policy

Historically, government spending has been 20-21% of GDP and income from taxes has been 18-19% of GDP, leading of 2% GDP deficit, which is easily sustainable. But, now, we spending going up to 25% of GDP (automatic stabilizers being a significant contributor), and getting only 15% of GDP in taxes. Spending needs to be cut down, yes, but income also has to rise back to 18-19% from 15%, and conversation on that seems to go nowhere.

Also, the often reported statistic that almost half the people don’t pay the income taxes is misleading. Income taxes account for $900bn of government’s income, and payroll taxes, which are rarely talked about, account for $800bn of government’s income. And, payroll taxes are paid by almost everyone, as are state, local and retail taxes.

Author: Raghuram Rajan

This is an easy book to love. Most of us have read several books on the 2008 financial crisis and why it came about (reasons abound from use of credit derivatives to lack of leadership). But, this book takes a slightly bigger sweep of history and talks about the underlying problems in the economic structure that caused the problem, and of course the ones that still remain. This quote in the book is key to the students of this crisis - “Somewhat frighteningly, each one of us did what was sensible given the incentives we faced.” Rajan shows that, as usual, reality is more complex, and there are few easy villains.

Why did the Fed keep the interest rate so low for so long?

Many people cite this as a big problem behind the subprime bubble and cite how Fed’s policy was out of step with the Taylor Rule. But, the rule is merely an estimate and the ideal rate is often a reasonable guess.

The ideal central-bank policy is to keep the economy perpetually at its potential growth rate. When the potential growth rate is reached, the economy is effectively at maximum sustainable employment, and any effort to further accelerate growth causes inflation. But, no one really knows what the potential growth rate is, though they have reasonable guesses. And this rate can change if the structure of the economy changes, for example, if the industries that are dominant in the economy change. The best indicator for a central banker is inflation. But, U.S. faced benign inflation. The Fed kept adding stimulus to a world economy that was growing strongly, with jobs being created elsewhere but not in the United States. Commodity prices around the world started a steady rise, suggesting that worldwide economic slack was decreasing. If the Federal Reserve, the world’s central banker in all but name, had been focused on sustainable world growth, it should have been tightening monetary policy by raising interest rates. But its mandate covered only the United States. In truth, the problem was that output growth had not resulted in job growth. And the Fed was focused not on output, as the Taylor rule would suggest, but on jobs.

One could say that the Fed should have looked at prices of financial assets and housing that were skyrocketing. But the orthodoxy suggested asset prices could be ignored. Greenspan learned this lesson when a 25bps rate increase led to mayhem on the street, and hence kept his foot on the pedal.

What did these interest rates do to international capital flows?

Even as the Fed pushed dollars out, central banks in developing countries pushed them back in. In a number of industrial countries, private entities recycled the dollar inflows: German banks and Japanese insurance companies bought seemingly safe U.S. mortgage-backed securities with the dollars their customers deposited. The money leaving the United States looking for riskier assets around the world thus came back to the United States, looking for seemingly safe but higher-yielding debt-like securities. In some ways, Federal Reserve policy was turning the United States into a gigantic hedge fund,

Why did the money come back to the U.S. and not someplace else?

In the 1970s and 1980s, Western banks, recycling the mounting petrodollar surpluses of Middle Eastern countries, assumed more of the lending to developing countries. In the 1990s, foreign arm’s-length investors such as mutual funds and pension funds increased their share of lending to developing countries by buying their government and corporate bonds. Thus foreign financing of developing countries became increasingly private and arm’s-length.

So what happens when arm’s-length, industrial-country private investors are asked to finance corporate investment in a developing country with a relationship system, as was the case in the early 1990s? Foreign investors who do not understand the murky insider relationships do three things. They minimize risks by offering only short-term loans so that they can pull their money out at short notice. They denominate payments in foreign currency so that their claims cannot be reduced by domestic inflation or a currency devaluation. And they lend through the local banks so that if they pull their money and the banks cannot repay it, the government will be drawn into supporting its banks to avoid widespread economic damage. Thus foreign investors get an implicit government guarantee. The threat of inflicting collateral damage is what makes arm’s-length foreign investors willing to entrust their money to the opaque relationship system.

It should come as no surprise, then, that a number of developing countries decided to never leave themselves at the mercy of international financial markets (or the IMF) again. Rather than borrow from abroad to finance their investment, their governments and corporations decided to abandon grand investment projects and debt-fueled expansion. Moreover, a number decided to boost exports by maintaining an undervalued currency. In buying foreign currency to keep their exchange rate down, they also built large foreign-exchange reserves, which could serve as a rainy-day fund if foreign lenders ever panicked again.

In the meanwhile, in the U.S., income did not rise with GDP in 90s and 00s. Thus politicians looked, or been steered into looking, for other, quicker ways to mollify their constituents. We have long understood that it is not income that matters but consumption. Therefore, the political response to rising inequality, whether carefully planned or an unpremeditated reaction to constituent demand, was to expand lending to households, especially low-income ones. Let them eat credit. And eat they did. This credit binge helped pull Japan pull out of its deflationary spiral, by exporting its way out of trouble.

But this does not seem like a good way to make public policy, does it?

The organizations and people the government uses to achieve its aims do not share them.

Long-term policies are often enacted under the shadow of an emergency, with the party that happens to be in power at the time of the downturn getting to push its pet agenda. This leads to greater fluctuations in policy making than might be desired by the electorate. It also tends to promote excess spending and impairs the government’s long-term financial health.

Why doesn’t China spend more?

China also faces a more traditional problem related to export-led growth strategies. As a proportion of the total income generated in the Chinese economy, household incomes are low. Wages are low because they are held down by the large supply of workers still trying to move from agriculture to industry. Household income is further limited because the subsidized inputs to state-owned firms, like low interest rates, also mean households receive low rates on their bank deposits. Moreover, a number of benefits such as education and health care are no longer provided for free by the state, eating further into discretionary spending. Finally, consumption may be low because Chinese households feel poorer than they actually are. State-owned firms do not pay dividends to the state and because households do not own their shares directly, they do not see the extremely high profits made at state-owned firms as part of their own wealth. Of course, in the long run, it is hard to believe that the wealth created by these state-owned firms will not be recaptured for the public good. For now, though, households believe they have no part in it, and they consume less than they might if they believed they were richer.

A government-directed, producer-biased strategy of growth tends to stunt the development of that country’s financial sector. Because banks are told whom to lend to, and because domestic competition among producers is limited anyway, banks tend not to seek out information or develop their credit-evaluation skills. The legal infrastructure to close down weak borrowers, or to enforce repayment from recalcitrant ones, is virtually nonexistent.

In October last year, the Congressional Budget Office (CBO), a non-partisan arm of the Congress, came out with a study saying that in the decade beginning 1997, income grew by 18% for the bottom 20 percent of households, and 275% for the top 1 percent (those who earn more than $250,000). On an inflation-adjusted basis, income of the bottom 20% declined. CBO also said that the share of transfer payments (also called entitlements) to the lowest-income households declined. Not surprisingly, the overall average federal tax rate fell during this period. These are pretty damning statistics that exhibit the growing income inequality in the United States.  This study, among other data-points, makes the ongoing debate about the need to increase taxes for households that make more than $250,000 seem almost an insult to arithmetic.

Yes, we need spending cuts from the government, but that cannot be the only solution to get America growing again. The current tax policy is unsustainable and if the representatives don’t address this yawning gap, sooner or later, the populace will ask harder questions from the gentry; Occupy movements are only the beginning. One would think that the leaders would be racing to address this severe fault line. Instead, we have prominent members of the Flat Earth Society coming out with proposals for a flat tax so that we can join exemplary economies such as Kazakhstan, Bosnia, Russia and Iraq—some of the odd 20 countries where presumably you can file taxes on the back on an envelope. But, I digress.

We hear some form of the following three objections to raising taxes on the top 1%. First, we hear that the higher taxes will dissuade job creation. Second, it’s said that the top-earners spend their money, which forces a trickle-down effect, in turn boosting the economy. And finally, there’s the made-for-cable “this is class warfare!” argument. Let us dismantle these in one fell swoop. It’s actually rather easy.

All of us can undoubtedly agree that the United States’ secular expansion that began in 1940s and continued through ‘80s was one of the best times for the country. The marginal tax rate for the top-earners today in 2010 was 35%. Want to venture a guess for the average tax rate of the top-earners from 1940 to 1980? 78%. Seventy-eight percent. Between 1951 and 1964, this rate stayed put at 91%. For these 40 years, no one stopped investing in America, no one needed the chimera of trickle-down economics, and jobs came by at a relative ease compared to the bleakness today’s graduates face. As for the class warfare argument, I think the CBO study says it all, if you really needed it.

Just for fun, want to guess what followed the last time this country lowered tax rates rapidly for the top-earners? It was the Great Depression (tax rate for the top-earners was lowered from 73% in 1921 to 25% in 1925). For the last three decades, we have seen a similar order of decline in the tax rate. The middle and low-income earners have survived due to increased use of credit and assistance from the Great Society programs, which were expanded by presidents Nixon and Ford. Now, as the citizens and the government begin to retire debt from these unsustainable levels, it is difficult to imagine continued economic growth without paring income inequality and return of taxation to the levels last seen during this country’s brightest days.

Continued spending cuts are proposed as the nirvana. I fully agree with the approach, but this is not enough to balance the budget and grow America sustainably. Your friends sit on boards of non-profits in the area as Johnson Board Fellows. They see first-hand what these cuts have meant to the community. More people with disabilities are denied service, victims of natural disasters such as the Owego flooding have less support to do repairs, and victims of assault find fewer doors to escape every-day brutality. The most vulnerable Americans have taken it on the chin. Do we want to double down on that? I’m certain that none of us want to be a part of a community that is unable to put resources behind its compassion.

Tax increases for the top-earners is a somewhat bitter but needed medicine.

Author: Michael Lewis

Key takeaways:

This is a story about Oakland A’s–an American baseball team, who performed immensely well in the late 90s and early 00s, despite having an incredibly small total paycheck. The story’s protagonist in Billy Beane, who brought a statistical approach to hiring and firing its players. I personally don’t follow baseball, and thus have likely missed some of the finer insights, but the following stood out for me.

• Process not outcomes: It is human to base decisions on outcomes, but it is better to develop a winning process and stick to it. In the book, when some of the Oakland’s players failed, the failure was not considered a failure of the selection process. Rather, it was considered a natural outcome of the probability and history-based process. Of course, on needs to assume that past is sufficiently repeatable. If not, an axiomatic pattern needs to be detected.
• The simple rule above is very hard to follow: Billy Beane, knowing and believing the process-based decision process, found it hard to stomach when the process was in play. He found it hard to watch games, and used to work out in a gym when his team was on the field. For an investor, this is like watching the ticker–very hard to do when the investment strategy is blowing up.

He says – “The big difference between a eurozone CDO and a subprime CDO is the the nature of the backstop. When the eurozone CDO fails, there are no governments that can bail it out because the governments themselves are already the equity holders of the system. This leaves the European Central Bank as the last man standing.

But the whole idea of setting up a eurozone CDO is to avoid this outcome. If you wanted an ECB-backed solution, you could simply grant a banking licence to the EFSF, which would make it eligible as an official central bank counterparty.“

It’s scary out there. No one will need fake ghouls this Halloween. All we need is the other Wolfgang, Wolfgang Schaeuble.

Author: Timothy Lewis

The title uses a famous quote from (John Maynard) Keynes, who said- “The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.” Keynes, of course, is a proponent of an active role by government in economy, especially in crises–something that has been discussed ad nauseum in the 2008 and the 2011(?) recessions.

But this is not a book about theory of Keynesian economics. I picked up this book as it offers a parallel between the current state of United States and Canada’s fiscal state in late 1980s and 1990s. Unemployment around 10%, stagnated personal income (0.5% total growth between 1989-98), 30% of employment in nonstandard work, more than 70% Debt to GDP ratio: these were as true for Canada as it is for the US today. Canada walked back from the brink, albeit earlier than US is willing to, where Debt to GDP has crossed 100%.

Are deficits bad?

All deficits are not created the same. Short-run deficits are welcome, as they are a counter-cyclical response to economic under-performance. Governments with their relatively unconstrained balance sheet (in the short-run), can issue more debt and undertake more spending to smooth the business cycle. Automatic stabilizers, which are pre-legislated, also lead to deficits. These are good deficits, as the government becomes the only actor that can support the economy in a recession. But, structural deficits are a very poor bargain. Not only are they fiscally unsustainable, but they also limit the ability of government to undertake more debt in midst of trough of a business cycle (Current American federal government being a case in point).

Deficits may be bad, but what forces governments to change it?

As we all know, just because something is bad doesn’t mean that governments will not do it, if it helps get votes (or, in times of hubris, suits the ruling party’s ideology). Case in point: Iraq war. In case of deficits, what really forces the government to make change?

To answer that, we need to look at the internationalized trade and financial markets. Capital and corporations cross national boundaries, and are bound by multilateral institutions such as GATT and WTO. The state hasn’t disappeared, it has become internationalized. Today, when capital is not bound by regulation, it can turn the supranational governance structures to its own end, disciplining states and societies. (case in point: Greece and Ireland). Anti-globalists have long argued that globalization of trade and finance is serious threat to sovereignty and equality, and they have been proven right on several occasions. I don’t claim this view to be correct, but it is worthy of debate as these fears have come true for the periphery European states.

Globalization certainly hasn’t been the panacea the proponents have argued. It is worth remembering that the world was more globalized before the first world war, thanks to Britain’s economy. Many countries became colonies of this capitalist enterprise. As a citizen of India, where colonization began by intrusion of a global corporation–East India Company, and where economic revitalization accelerated due to globalization of services labor, I am more than conflicted. Like always, “the truth” lies somewhere in the middle. But, we are getting away from the topic at hand.

How long did it take Canada to control its deficits?

It took almost 10 years, and contrary to potential preconceived notions, the Liberals were in power when the rubber met the road. Brian Mulroney’s Progressive Conservative party, who took power in ’84 started the conversation, presenting deficit finance as an enemy of good economic performance, and it was the Liberals, who were elected in 1993, with Chrétien as the PM and Paul Martin as the finance minister, who eventually put the concepts to work. This shouldn’t be taken as a rebuke to Mulroney, as it takes very long to change the notion of role of state in the economy. The shift from liberal capitalism to neo-liberalism, which suggests that state’s priorities ought to included markets before protection of society and economy from its worst tendencies, is significant. There was opposition to this approach, arguing against erosion of social justice, but that argument lost because it wasn’t pro-growth, and presumed that Canada was independent of the world. It only offered a critique, not no alternative solution.

First steps

If people have been following the current debate of US federal budget, this should come as no surprise, that one of the first fixes considered was the MacEachen tax refrom, which would close tax loopholes for the wealthy and the corporations. NEP, or the National Energy Program, was a also a part of the first steps, but this was a curiously Canadian concept, led more by provincial politics than fiscal deficits. As one can see, these steps aimed to increase the revenue base, as it was still hard for the governments to sell the concept of cutbacks in services provided by the government.

Stealth fixes

Social groups are rarely marginalized enough that they can be attacked head on. Arcane technical amendments are used to chop off benefits, proposed modification of inflation indexing in US being a perfect example. Apparently, this is not a new trick. Canada, for example, de-indexed benefits such as family allowance, children’s tax exemption, refundable tax credit and the personal income tax system. It also clawed back security for high-wage earners by ending universality for social programs such as Old Age Security. This is not yet done for Social Security in the United States, but we rest assured that such an amendment will make its way through Senate, if Congress manages to pass this.

Only after these stealth cuts have been passed, will we see a more direct attack on the society’s safety net. Not only is this more politically expedient, but also allows for fiscal restraint to become more popular. In Canada, this fixed the operating deficit while Mulroney was still in house, but the overall fiscal deficit remained in place.

1990s

The fixes before helped the fiscal house, but took a toll on the economy (US in 2011, anyone?). When the federal government cuts back in a recessionary environment, GDP slows down, unemployment climbs, real rate of income growth stagnates and inflation goes as monetary policy tries to fill the gap, including trying to fend off deflation. The metrics that I mentioned in the introduction applied to this era.

Tea Party of Canada

Politics of insecurity, whether it be economic, social or simply fear of a Socialist Muslim Kenyan (italics standing for the Sarcasm font), leads to formation of ideological parties or factions within parties that align themselves to take advantage of public insecurity. This also leads to rightward shift of the liberals also. In Canada, Reform Party  formed to take the role, and won several seats west of Ontario. This is very reminiscent of the Tea Party’s success in the last Congressional elections.

At the first blush, it makes little sense that Tea Party populace, which is usually economically less well-off, stands up against the welfare state. But, there are two underlying reasons that this happens. First, the individuals feel that they cannot afford the welfare state. Second, they believe that the welfare state will not exist, and thus it makes no sense to pay premiums.

Win The Future

How many times have we heard this from President Obama and his team, only to cringe, as it seems a little hollow. Well, he may be picking it from Paul Martin, Chrétien’s finance minister, who repeatedly mentioned of ‘securing the future’.

If Martin’s playbook is any guide, deficit elimination in the US will be an exercise in strategic withdrawal of the state as opposed to a fiscal retrenchment. Role of the state as a counter-cyclical stabilizer will remain, but the benefits will be less generous. Corporations and consumers will be weaned off subsidies. There will not be across the board cuts, but specific cuts to make the government leaner.

In the latter half of 1990s, Martin made broad cuts in the government spending. There were some tax changes, but spending items such as business subsidies, defence, transport, and public employment were pared at a rapid rate. The playbook seems to be that the state will cut back spending where it will take the least heat from its constituents.

What comes first? – Deficit Reduction or Growth

This is often a point of consternation between the left and the right. Right often portrays deficit reduction as a precondition of growth. But, Paul Martin asserted that deficit reduction is a product of growth, rather than a precondition, and made growth central to the fiscal strategy.

We don’t know how the budget will be balanced in the United States, but given how close the current government has followed Canada’s playbook till now, and how similar the two economies and democracies are, I believe that the eventual result wouldn’t be very different. The US harbors a stronger individualistic trait and hence, the cuts in state spending would probably be more savage. The next few years would be very interesting.

We live in interesting times.

The freedom concept is often invoked when state’s actions are feared to have implications that are not ideal for corporate financiers, providers of capital and subsequent beneficiaries. But, one ought to ask, free from what? Often, people say that markets should be free from state intervention. This presupposes that markets exist exclusively from the state, that in some way markets’ existence is inevitable. Their is another hidden argument in there that suggests that options other than markets are inconceivable, but we won’t go there.

I would say that the markets do not exist despite the state, but because of the state. Markets exist because arm’s-length transactions are possible. If arm’s-length transactions were not possible, capital will flow through bank-loans, and not markets. Bank loans as a primary means of financing may seem antiquated and a bastion of developing countries, but it helps to remember that more than half the financing in Japan is relationship-based, flowing from coffers of banks, and not the bond market.

Without state support of property rights and market stability, financial markets would cease to exist. Markets run according to rules and laws, which are legislated by the state. Market stability would be absent without existence of an entity that boasts relatively unlimited liquidity and an unconstrained balance sheet in the short-run.

Sorry if this seems to be a rant, but I am tired of hearing the free markets argument as if contains its own proof. I would like to see a well-functioning market that does not have state actor behind it. But, until then, perhaps those shouting from rooftops about the axiomatic nature of free markets should feel less smug. It would also help them to find out that who is paying them to shout (most often, in a form of a state-sponsored currency).

Where have I heard this news before? Oh, yes, in October ’10, when China bought Greek bonds. See http://www.reuters.com/article/2010/10/02/greece-china-wen-idUSATH00570720101002. Lot of good that did to Greece, which is now almost certain to default.

So, why are the Chinese doing this? I have no idea.

But, Cullen Roche at Pragmatic Capitalism has a thought. See http://pragcap.com/the-irony-behind-chinas-european-bond-buying

Update: As expected, China expects concessions for their bond-buying, but well beyond what Cullen Roche expected.

But the premier appeared to draw a direct link between providing more help and investment and Europe’s decision to grant China full market economy status. Under World Trade Organisation rules, China is expected to be granted this status automatically by 2016.
“If EU nations can demonstrate their sincerity several years earlier, it would reflect our friendship,” Mr Wen said, adding that he was hoping for a “breakthrough” on this topic at a scheduled meeting with EU leaders in October. Source: http://www.ft.com/intl/cms/s/0/b234ad8a-de98-11e0-a228-00144feabdc0.html

Equities rallied by ~3.6% over the first 3 days of this week on basis of 3 pieces of backward looking data, plus hope and prayer. Market has moved up citing news about decent Consumer Spending, ADP Employment Report, Factory Orders. I believe that each of these reports hide problems within such as inflation, data volatility and easy comparisons. There has also been talk of QE3 after talks about further easing in FOMC meetings, which I think is rather wishful. QE2 was not sailed to fuel risk-appetite, but to defend against deflation, which central bankers simply can’t have. We don’t have deflation. CPI is picking up. How do people expect market to do another round of easing, when QE2 did nothing for the dual mandate of the Fed, is beyond me. This makes Rick Perry’s prayer rally look more sensible.

On the other hand, forward looking data has continued to come out negative. Consumer Confidence is down to 44.5, when consensus was 52.5. This is the lowest it has been since April 2009. The forward looking pieces, notably New Orders, of ISM signals a contraction. MBA Refinance and Purchase Applications are down by 10%.

Outside US, Canada GDP turned negative.In Italy, Berlusconi stepped back from the promised austerity programs, which was the condition for ECB bond buying program. The situation in EU is not going to improve easily as EU has become a dysfunctional family with Papa France and Mama Germany. This drama will continue because growth is nowhere to be found. Eurozone ISM recently dipped below 50. Korea ISM also dipped below 50. GDP growth in South Africa and India has slowed down. Brazil unexpectedly cut its interest rate as it expects lower growth. In China, inflation hit a peak and the government authorities are trying to control lending, which is happening from off-balance sheet, as required reserves in China is already 21.5%

None of this bodes well. I don’t expect another 2008, but it is becoming harder to deny a double-dip.

In company news, we saw a $3.2bn deal between Exxon and Rosneft. I think this bodes well for shale exploration is US, as this shows how desperate Big Oil is to invest anywhere that may lead to a sizable expansion of capacity. We also saw problems with the $39 bn deal between AT&T and T-Mobile. DoJ doesn’t usually file suits, so this bodes poorly for the acquisition without significant and speedier steps.

On the government front, White House is proposing a $50bn Infrastructure Bank. Given the partisan environment in DC, I doubt there will be any direct spending, but a compromise could be Federal government backstopping munis and state bond issuance.