EASTO
ON’S POIN
NT CAPITA
AL
Timothy von
v Fuelling Strraus 11/19/20
007
Bein
ng a contr
rarian on the deck of
o the Tita
anic may have brou
ught brieff
ps
sychologiical relief,
f, but it did
d not chan
nge the ulltimate ou
utcome.
Being a marrket contrariian, we havee learned
f
from
our ow
wn experiences, has ma
any times
r
resulted
in a pattern of successful in
nvesting,
although prroper timin
ng is obviou
usly still
essential. Pyrrhic
P
victo
ories can ultimately
b satisfyin
be
ng, but deevastating to
t one’s
w
wealth.
I believe
b
we arre on the Tittanic but,
t
this
time around, therre are plentty of life
b
boats
availab
ble.
There will be many conttrarian oppo
T
ortunities
f the nim
for
mble, as thiss time the ship
s
will
settle slowlyy—but this iss a time of significant
systemic rissks to almo
ost all assett classes.
T iceberg has been vissible for man
The
ny, many
m
months,
butt few wanted
d to pay heeed to the
w
warning
signs of the ap
pproaching ice.
i
How
b the gash
bad
h in our hulll will be is yet
y to be
determined,, but mark my words—
—there is
m
more
hidden
n ice damage ahead. It is
i not the
end of the world.
w
Greeater, more powerful
ships will be built, but this ship is listing—
hange this fa
act.
and to deny it will not ch
c
be few fields of human
h
ende
eavor
"There can
in which
h history co
ounts for so
o little as in
n the
world of
o finance. Past expe
erience, to
o the
extent that
t
it is part of mem
mory at all,, is dismisssed as the primitive
p
r
refuge
of th
hose
who do not
n have th
he insight to
o appreciate the incred
dible wonde
ers of the present.”
p
John
J
Kenne
eth Galbraitth, "A Short History of Financial
F
Eu
uphoria" 1990
An eco
onomy on
n the brin
nk of snapping
18/11/200
07
n said that the road to every reccession is signposted
s
"soft landin
ng". The en
nd of
“IIt has been
even if th
th
his econom
mic cycle lo
ooks like being
b
no exception,
e
he terminollogy is slig
ghtly
diifferent. Th
his year's wishful
w
think
king is dresssed up as Goldman
G
Sa
achs's "happ
py handove
er" or
th
he ubiquitou
us "decouplling".
EASTO
ON’S POIN
NT CAPITA
AL
SAM ZEL
LL: Flashbacck Februaryy 7, 2007
Blacksto
one's Equitty Office de
eal OK'd
one increas
sed the per share
s
value
e to $55.50 in
i cash from
m $54. Exclluding debt,,
Blacksto
the deal is estimate
ed to be worrth about $2
22.3 billion..
Whenn
this trade
e occurred the signs were
w
alread
dy very app
parent that the real estate
e
bubblle had burs
st, and thou
ugh the sub
bsequent months
m
wer
re filled witth voices cr
rying
aloud
d “containm
ment” and th
hat “it is diff
fferent this time” and that the bu
ubble was “o
only”
in the
e residentia
al housing market—th
his “new er
ra” thinking
g once agaiin totally belied
histor
ry and put a blind faith
h in the new
w paradigm of the globalized and decoupled
d
B
BRIC
driven
n perpetuall growth machine.
m
A
Anyone
who
o disparage
ed this her
rd thinking
g was
consid
dered to be
e trapped in
n the minds
set of “the primitive
p
r
refuge
of th
hose who do
o not
have the
t insight to apprecia
ate the incre
edible wond
ders of the present”,
p
in
n the so eloq
quent
words
s of John K.
K Galbraith
h. All of whiich is simplly being pro
oven wrong
g. Also cons
sider
this a fine examp
ple of the PE
E acquisition
n frenzy tha
at allowed Wall
W
Street to
t lose whatt will
end up
u being 10
00’s of billiions of dollars and sttill have pa
artners wallking away with
massiive bonuses
s for jobs well
w
done. Ta
alk about a top tick, th
his was sim
mply classic. And
comm
mercial real estate has a long way to
t go as it now
n
follows the continu
uing deflatio
on of
the re
esidential market.
m
“Recen
nt disturba
ances in the sub-priime mortg
gage
industrry are mod
dest in relation to th
he size of our
econom
my”
EASTO
ON’S POIN
NT CAPITA
AL
he CMBX-N
NA-BB-3 close
c
today
y (up is sprea
ad deteriorattion)
Th
A
AAA-
This chart is the
t
ABX-HE
E0
07-2
close today
t
Housingg Market Ind
dex
(Seasonnally Adjusted)
2006
20007
Apr May
M Jun Jul Aug Sep Occt Nov Dec Jan
J Feb Mar Apr May Juun Jul Aug Sep
S Oct Nov
51
46
42 39 33
30 311 33
33 35
3 39 36
33
30
28 24 22
2 19 19
20
Comm
mercial Propeerty Now Un
nder Pressurre
WSJ
November 19, 200
07;
The value of commercial
Th
c
real estate, which nearly doubled in the past seeven years, is
i now startting to
deecline due to
o the credit crunch,
c
acco
ording to a report
r
set to be released
d today by Moody's
M
Inveestors
Seervice.
Th report found that thee value of co
The
ommercial prroperty decllined 1.2% in
n Septemberr from the prrevious
m
month.
Particcularly hard
d hit were ap
partments in
n the West and
a office prroperty in most states otther
th
han Californ
nia.
Th report is an early sig
The
gn that the co
ommercial-p
property secctor is being
g dragged do
own by the growing
g
reeluctance off lenders to extend
e
creditt for anythin
ng related to
o real estate,, which in tu
urn could creeate a
neew drag on the economy
y and additiional probleems for invesstors. Declin
ning commercial-properrty
va
alues could lead
l
to an in
ncrease in deefault rates on commerccial real-esta
ate loans an
nd on commeercial
m
mortgage-ba
acked securitties.
(Thiis will becom
me more seveere—add in leverage
l
and
d CMBS willl add to
th
he credit/liqu
uidity erosio
on a few$ billlion at a tim
me)
EASTO
ON’S POIN
NT CAPITA
AL
I for onne continue to be confounded by thhe “it’s diffeerent this tiime crowd”” and the “doo not
worry, China willl bail us ou
ut” argumen
nt, as it is so obvious
sly dangerou
usly fragile
e and
withoutt any previo
ous precede
ent. How ca
an we even remotely
r
ju
ustify the ec
conomics off this
belief—particularly
y when it is increasin
ngly obviou
us that China is now
w seeking to do
whateve
er it takes to
t control itts runaway economy. A total crediit freeze is a rather dra
astic,
but obv
viously to th
he Chinese,, necessary step—whic
ch along witth rapidly slowing
s
dem
mand
from th
he US and Europe
E
for Chinese
C
goo
ods runs th
he risk of da
ampening our
o
econom
my far
more dr
rastically th
han anyone
e of the “dec
coupling” new
n
age pun
ndits seems
s to be willin
ng to
admit. However, as the ch
harts above
e would ind
dicate, histtory shows a rather clear
c
pattern
n—recession
n is far and away
a
the lik
kely future for
f the US ec
conomy.
I was burned
b
once
e by overco
onfidence in
n the “new age” parad
digm of the tech boom
m and
bust…p
perhaps I am
m tainted, and
a
history is
i not, as Sa
antayana sa
aid, to be re
epeated by those
t
who ha
ave not lear
rned from it. But I will
w
place my
m chips on
n history—itt is showin
ng its
presenc
ce everywhe
ere.
EASTO
ON’S POIN
NT CAPITA
AL
“The investting public is fascinate
ed and capttured by the
e great fina
ancial
m
mind.
That fascination
n derives, in
n turn, from
m the feelin
ng that, witth so
m
much
money
y involved, the mental resources behind the
em cannot be
b less?
O
Only
after the
t specula
ative collapsse does the
e truth emerrge. What was
w
t
thought
to be
b unusual acuity turn
ns out to be
e only a forttuitous and
d
u
unfortunate
e associatio
on with the assets." John
J
K. Galb
braith
I am not personally
p
y prone to make
m
analo
ogies to the period th
hat led to the big cras
sh in
1929 and
d subsequen
nt depress
sion, but where
w
the parallels
p
to
o prior histtorical per
riods
are at lea
ast worthy of
o mention
ning it is ce
ertainly off intellectua
al interest to take note of
them. Fr
rom 1927-1928 the big
g real esta
ate speculattive boom of that tim
me collapse
ed as
Florida an
nd Californ
nia saw a rapid
r
defla
ation of wh
hat was eve
en by curre
ent standar
rds a
period off powerful animal sp
pirits. It wa
as then, as
s it was re
ecently, a housing
h
dr
riven
boom pe
eaking a full
f
year before
b
offiice buildin
ngs follow
wed the sa
ame trajec
ctory
downwar
rds, althou
ugh as I exp
pect today,, with a tad
d less weallth destruc
ction. As we
w all
know, wh
hen one boom
b
burs
sts and another is sttill gaining
g momenttum, capital is
further drawn
d
to th
he remain
ning specullative mark
ket like moths
m
to th
he candle liight.
This time
e reverse the order. The
T
equitiies specula
ative frenzy
y, based in
nitially on new
technolog
gies and revolution
nary new paradigm
m thinking
g, occurred
d first, to
o be
followed by one of the most orchestrate
o
ed preconc
ceived boo
oms in histtory. Drive
en to
frenzy by
y the easy money
m
pollicy of the Federal Reserve
R
and
d further fed
f
by mas
ssive
imbalanc
ces in the excess
e
savin
ngs of the oil
o produc
cing states and Asia, the
t
specula
ative
boom occ
curred wh
here it afffects the greatest
g
nu
umber of Americans
A
s, the hou
using
market. Its
I demise will be a drawn
d
out affair,
a
it ha
as already been going on for ov
ver a
year.
cial real es
state will fo
ollow, and so will a very
v
seriou
us recession
n—one tha
at we
Commerc
can only hope is ha
andled witth more fo
oresight tha
an in the 1930s.
1
How
wever, to truly
t
believe that
t
we have
h
elimiinated the
e risks off errors in
n monetar
ry, fiscal and
geopolitic
cal polices
s that, in a dynamic
c complex adaptive system,
s
ca
an easily ca
ause
unintend
ded and un
nexpectedlly serious consequen
nces, is to
o put too much faitth in
scientific
c rationalitty. The wo
orld has be
ecome ever
r more com
mplex, the dynamics and
interrelattionships deeper an
nd harder to determ
mine—such
h that subs
stantive po
olicy
shifts pra
actically an
nywhere in
n the worlld can hav
ve knock-o
on effects that
t
under
r the
powerful laws of co
omplexity and
a
chaos theory
t
are virtually im
mpossible to model.
Speculation buys
s up, in a very
v
practiical way, tthe intellig
gence of tho
ose involve
ed."
John
n K Galbraiith
EASTO
ON’S POIN
NT CAPITA
AL
Ch
hart of Intterest on Housing
H
from the Dallas Fed
d:
EASTO
ON’S POIN
NT CAPITA
AL
EASTO
ON’S POIN
NT CAPITA
AL
Why is
s there a general con
nsensus th
hat we wiill see a so
olid housin
ng bottom
m in
Ju
une of 08?
? It may be
e, but I ca
an assure you
y
that
the
e recovery
y is a long way off!
are. They sa
alt the hum
man story. The
T hallucin
natory type
es are
"Masss delusionss are not ra
well known; so
o also is the
e sudden variation
v
ca
alled mania
a, generally
y localized,, like
the tulip
t
mania
a in Holland
d many yea
ars ago or the
t
common
n- stock ma
ania of a re
ecent
time
e in Wall Strreet. But a delusion afffecting the
e mentality
y of the entiire world at one
time
e was hitherrto unknown
n. All our ex
xperience with
w
it is orriginal.
Thiss
is a delussion about credit. And
d whereas from
f
the na
ature of crredit it is to
t be
expe
ected that a certain line will div
vide the vie
ew between
n creditor and
a
debtorr, the
irrattional fact in this casse is that for
f
more th
han ten ye
ears debtorrs and cred
ditors
toge
ether have pursued
p
the
e same dece
eptions. In many wayss, as will ap
ppear, the folly
of th
he lender ha
as exceeded
d the extravagance of the borrow
wer."
"A Bubble
e that Brok
ke the Wor
rld”, Garett Garrett, 19
932
EASTO
ON’S POIN
NT CAPITA
AL
Rema
arks by Chairm
C
man Alan
n Green
nspan
Reflectiions on cen
ntral bank
king
Federall Reserve Bank
B
of Ka
ansas City, Jackson Hole,
H
Wyom
ming
August 26, 2005
me extent, th
hose higherr [stock ma
arket and housing]
h
vallues may bee reflecting the
“To som
increased
d flexibility and resilien
nce of our economy.
e
B what [in
But
nvestors] perceive as neewly
abundan
nt liquidity can readily disappear.
d
An
ny onset of increased
i
in
nvestor cautiion elevates risk
premium
ms and, as a consequence, lowers assset values an
nd promotess the liquida
ation of the debt
d
that supp
ported higheer asset prices. This is th
he reason th
hat history has
h not dealtt kindly with
h the
aftermath
h of protractted periods of
o low risk premiums."
p
“Histtory has no
ot dealt kiindly with
h the afterm
math of pr
rotracted periods
p
off low
risk premiums.
p
.” What hiistory is th
he former Fed
F
Chairm
man talkin
ng about in
n his
swan
n song spee
ech at Jack
kson Hole? The “histo
ory” that he
h must be referring to is
the sa
ame one th
hat has the current Ch
hairman sttaying up at
a night, a history tha
at he
wrote
e a book about,
a
thatt “history”
” being the
e Great De
epression.. I am no
ot an
alarm
mist, the world
w
is dr
ramatically
y differentt, but at th
he same tiime extrem
mely
more
e complex and more
e integrated. As his term
t
was winding down,
d
and this
Chica
ago Schoolled Ayn Ra
andian refllected on his
h years att the helm
m of the Fed
d, he
clearlly became
e concerne
ed over wh
hat he he
elped to cr
reate. This
s concern has
becom
me more evident in the subsequen
nt years—
—yet temp
pered by the
respo
onsibility of
o the man
ntle of his former
f
offi
fice. What he truly be
elieves he may
not be in a posittion to say
y—even now
w.
No
ouriel Rou
ubini: Systeemic Finan
ncial Melttdown
"I now see the risk off a severe and worse
ening liquid
dity and crredit cruncch leading to a
ge
eneralized meltdown of the fina
ancial system of a se
everity and
d magnitud
de like we have
ne
ever observ
ved before. In this extreme scena
ario, whose likelihood is increasin
ng, we could
d see
a generalized run on so
ome banks; runs on a couple
c
of weaker
w
(non--bank) brok
ker/dealers that
m
may
go bankrupt with severe an
nd systemicc ripple efffects on a mass of highly leverraged
de
erivative in
nstruments that will le
ead to a seizure of the
e derivativ
ves marketss (think of LTCM
L
to
o the powerr of three);; a collapse
e of the ABC
CP market and a disorrderly colla
apse of the SIVs
an
nd conduitss; massive losses
l
on money
m
mark
ket funds with a run on
n both thosse sponsore
ed by
ba
anks and th
hose not sp
ponsored by
b banks (w
with the lattter at even
n more sev
vere risk ass the
re
ecent effecttive bailoutt of the forrmers’ losse
es by theirss sponsoring
g banks is not
n availab
ble to
th
hose not be
eing backed
d by bankss); ever gro
owing defau
ults and lossses ($500 billion plu
us) in
su
ubprime, ne
ear prime and
a
prime mortgages with severre knock-on
n effects on
n the RMBS
S and
CD
DOs markett; massive losses in co
onsumer cre
edit (auto loans,
l
credit cards); severe
s
prob
blems
an
nd losses in
n commercia
al real esta
ate and rela
ated CMBS; the drying
g up of liquidity and crredit
in
n a variety of asset ba
acked securiities putting the entire
e model of securitizati
s
ion at risk; runs
on
n hedge fun
nds and other financiall institution
ns that do not
n have acccess to the
e Fed’s lend
der of
la
ast resort su
upport; a sh
harp increa
ase in corpo
orate defau
ults and cred
dit spreadss; and a masssive
prrocess of re-intermed
r
diation into
o the bank
king system
m of activiities that were
w
until now
alltogether se
ecuritized.
EASTO
ON’S POIN
NT CAPITA
AL
When a yearr ago this author warn
W
ned of the risk of a sysstemic bank
king and fin
nancial crisiis, a
co
ombination of global liquidity and solven
ncy/credit problems like we ha
ad not see
en in
de
ecades, tho
ose views were
w
consid
dered far fe
etched. The
ey are not that extre
eme anymorre as
to
oday Goldm
man Sachs iss writing on
n the risk off a contracction of cred
dit of the staggering
s
o
order
off $2 trillion
n dollars in
n the next few years, causing a severe crredit crunch
h and a serrious
re
ecession. Ass I will flessh out in a forthcomin
ng note the risks of su
uch a generralized systtemic
fiinancial me
eltdown are
e now rising
g. Hopefully
y by now, some
s
folks at the New
w York Fed
d and
th
he Fed Boarrd are starting to thin
nk about th
his most dan
ngerous sysstemic finan
ncial crisis that
co
ould emerge
e in the nex
xt year and what to do
o to prepare
e for it."
‘Insa
anity in in
ndividuals
s is somet
ething rare
re - but in groups, parties,
p
nation
ons and ep
pochs, it is the rulle."
Frie
edrich Niietzsche (18441900))
Gise
ele Bundch
hen, seller of
of th
he world se
eems to be
e
toug
gh act to fo
ollow.
dolllars. The rest
r
takiing her lea
ad…
D
Dollar
Cris
sis: Econom
mic Pearl Harbor?
H
“If China abandons
“
a
the
t
dollar for
f
the eur
ro, America
ans will su
urely suffer
r. So far, that
p
prospect
ha
as sparked mainly
m
U.S. indignatio
on.
EASTO
ON’S POIN
NT CAPITA
AL
For the Uniited States,, a Chinese
F
e decision to
o abandon the dollar would be tantamoun
nt to
P
Pearl
Harb
bor withoutt the war. It would represent a challeng
ge to the world's
w
bigg
gest
e
economy
by
y the worlld's fastestt growing economy. Millions
M
off people would
w
see th
heir
s
standard
off living suff
ffer as a res
sult, and American se
elf-confiden
nce, already
y shaky, wo
ould
c
crumble
eve
en further. The United
d States wo
ould suffer a serious blow
b
on its very own turf,
t
t economy
the
y.
And for a sobering
g perspectiive on wh
hat the dollar declin
ne has don
ne to fore
eign
h
holders
of US assets from
f
the Economist
E
t:
“The dolla
“
ar's decline already amounts to the biiggest defa
ault in his
story, hav
ving
w
wiped
far more off the
t
value of foreign
ners' assets
s than any
y emerging
g market has
e
ever
done."
Secretaary Paulson
n said the U.S.
U
contin
nues to hav
ve a “strong
g” dollar policy
p
and the
t
value off the dollar
r will ultim
mately refle
ect ‘strong’’ economic
c fundamen
ntals
YET , th
he chart of the dollar index, cov
vering periods where
e the US eco
onomy was
s
strong and,
a
more recently, when
w
it was
s “strong”
”…pray tell what will happen
when th
he US econ
nomy is adm
mittedly “w
weak”?
C
China
voice
es alarm at dollar
d
weak
kness--- FT
DUBAI, Nov
D
v 19 (Reuter
rs) - United Arab Emira
ates policym
makers kep
pt up pressu
ure for a rev
view
o Gulf Arab
of
b dollar peg
gs on Mond
day and cu
urrencies ra
allied across the oil-exp
xporting reg
gion
o a signal that Saudi Arabia
on
A
may
y be willing
g to discuss reform
EASTO
ON’S POIN
NT CAPITA
AL
Iran
n presiident calls
c
U
U.S.
do
ollar 'w
worth
hless'
OPEC members
m
consider
c
converting
g cash rese
erves into non-dolla
ar
Dollars no good
g
forr the Ta
aj Maha
al
Foreign tourists
t
vis
siting man
ny of India
a's most famous land
dmarks will no longe
er
be able to
o pay the entrance
e
fe
ee in dollar
rs, the government says.
“W
What the Un
nited State
es owes to foreign co
ountries itt pays — at
a least
in part
p
— with
h dollars that
t
it can simply
s
issue if it cho
ooses to,” barked
b
Fre
ench presid
dent Charlles de Gau
ulle in a la
andmark press
p
confe
ference
in February
F
1965.
“Th
his unilater
ral facility
y contribu
utes to the gradual disappeara
d
ance of
the idea that the dolllar is an impartiall and inte
ernational trade
med
dium, whe
ereas it is,, in fact, a credit ins
strument reserved
r
fo one
for
statte only.”
I
Industrial Prod
duction De
ecline Broa
ad and Une
expected
· Industriall producttion declin
ned
d
during
October
versus
a
C
Consensus
expectatio
on for a 0.1%
0
u
uptick.
The
e decline was the first
f
s
since
Janu
uary and it was the
la
argest m/m
m in two years.
y
Beca
ause
o modest 0.2% gain
of
ns during the
p
prior
two months
m
the
e three mo
onth
g
growth
in in
ndustrial output
o
fell to 0
0.7%
(AR),, its first time
t
nega
ative
s
since
early this year.
Factory outtput also was
F
w down and
a
p
posted
a 0.4%
0
drop
p, its seco
ond
0
0.4%
decliine in th
he last th
hree
montths. These declines felled
f
the three mon
nth growth
h rate to -2.7%,
its first
f
time negative
n
siince late la
ast year. (Haver An
nalytics)
EASTO
ON’S POIN
NT CAPITA
AL
Mar
rkets po
oised forr severe
e fall, sa
ays King
g
nk of Engla
and Govern
nor has iss
sued an exttremely un
nusual war
rning on
The Ban
world sttock marke
ets, indicating that sh
hares may
y be headin
ng for a majjor fall.
n King said the full im
mpact of the
e credit cru
unch had not yet been
n felt on eq
quity
“Mervyn
markets in the Wes
st and in dev
veloping cou
untries, say
ying that the
e possibility
y of share price
p
re one of the
e biggest ris
sks facing th
he world eco
onomy.
falls wer
ricing of risk
k hasn't rea
ally fed thro
ough to equiity markets,, and if ther
re were to be an
The repr
adjustment of risk premia
p
in eq
quity marke
ets with a fa
all in asset prices
p
then that
t
could have
h
t world ec
conomy. ... “
a bigger impact on the
“Wall Street’s ge
enius is tak
king simple,, transpare
ent and liqu
uid tradablle instrumen
nts
and tu
urning them
m into opa
aque and illiquid
i
derrivatives, while
w
makiing money by
overprricing the em
mbedded op
ptions.”
Formerr Goldman Sachs
S
Executtive
EASTO
ON’S POIN
NT CAPITA
AL
1) Th
he dollar may
m rally fr
rom an exttreme cons
sensus bea
arishness, but
b the sec
cular
tre
end is dow
wn, perhap
ps signific
cantly furtther. Feeblle, unfortu
unately alm
most
co
omically, sa
ad caricatu
ures of ou
ur Washing
gton financ
cial leader
rship voiciing a
“s
strong dolllar” policy only does
s more har
rm than go
ood—it is obvious to
o the
wo
orld that the
t
fate of the dollar
r near term
m is beyon
nd mortal control.
c
Pllease
du
ust off you
ur history of the po
ound crises
s in the ea
arly 90s. Former
F
Pr
rime
M
Minister
Da
ame Marga
aret Thatc
cher warne
ed John Major
M
thatt “to buck
k the
m
market,
wou
uld result in the ma
arket buck
king back even
e
harde
er”. With $3.5
triillion slosh
hing aroun
nd on inte
erbank wir
res daily, even
e
the most
m
conce
erted
in
ntervention
n by the ce
entral bank
ks of the world
w
will fail to ste
em the dolllar’s
de
ecline. This is a uniq
que period
d for the US
U and the
e dollar. There
T
are now,
n
un
nlike earliier period
ds, liquid and deep
p currenc
cy choices
s available
e as
altternatives. This did not exist during
d
the dollar cris
ses of the mid
m 1980s. We
ar
re losing a power we
e never sh
hould have
e had, the power of seniorage that
Ch
harles De Gaulle ra
ailed abou
ut back in
n 1965. Ov
ver the sh
hort term the
de
estruction of foreign
n wealth in
n the US an
nd in US dollar
d
hold
dings from
m the
do
ollar’s fall is very, very
v
substtantial and
d extreme
ely danger
rous for many
m
re
easons—fro
om protec
ctionist res
sponses to
o competittive devalu
uations. Th
hese
ris
sks will on
nly be magn
nified by th
he coming
g US recess
sion and gllobal econo
omic
slo
owdown.
2) Oiil. The priice of oil is
s now gettting to the point of being
b
a ser
rious econo
omic
iss
sue—obvio
ously more
e so for Am
mericans buying
b
in dollars
d
than
n others using
u
ap
ppreciating
g currencie
es. The Ar
rabs must migrate
m
to
o an altern
native curre
ency
pe
eg and pric
cing mode
el. Oil will exacerbatte the risks
s to the do
ownside in
n the
we
eak US eco
onomy ahe
ead. But on
n more en
nergy depen
ndent natiions, emer
rging
ec
conomies and
a
those countries
c
t
that
the “n
new paradiigm” decou
upling pun
ndits
ha
ave placed
d their faitth in as a savior of the
t
US an
nd OECD economies,
e
, the
im
mpact could
d be unexp
pectedly sev
vere. This will cause a feedback
k loop thatt will
ex
xacerbate the econo
omic weak
kness in the US and
a
Europ
pe, potenttially
da
angerously
y so.
IMF Re
eport out tonight:
t
worthwh
hile readin
ng –charts
s and all
http://w
www.imf..org/exter
rnal/pubs
s/ft/survey
y/so/2007
7/res1120a.htm
That saidd, the recentt oil price surge
s
will liikely boost headline
h
infflation in the months ahhead
(headlinee or total infflation incluudes volatilee food and energy
e
pricee componentts, whereas core
inflation typically ex
xcludes them
m). The dirrect effect of
o the recentt oil price rise
r
on headdline
inflation in the United States is estimated to
t be aroundd ½ percentaage point byy the end off the
year.
The impact in otherr advanced economies will
w likely be
b smaller because
b
reliiance on priivate
h
risen less in other currencies.
c
H
However,
cenntral
transporttation is lower, and becaause prices have
banks may
m find thatt they have less room to maneuveer in respondding to weaakening dem
mand
caused by the recent financial tuurbulence, giiven that higgher fuel cossts could havve second-roound
effects onn other pricees and wagess as well.
EASTO
ON’S POIN
NT CAPITA
AL
Overheaating pressu
ures
The situaation is partticularly chaallenging inn some emerrging markeet and develloping counntries
where ovverheating pressures
p
aree of greaterr concern, annd rising fuuel and foodd costs mayy put
pressure on househo
old budgets and
a externall balances. In
I particularr, for many low-income oilimportingg countries, the recent oil
o price incrrease will raiise their impport bill and could put sttrain
on fiscal positions.
h market connditions so tight,
t
any siignificant suupply disrupption could push
p
Looking ahead, with
n particular, spare produuction capaciity remains below its hiistorical com
mfort
prices higgher still. In
zone, andd the majoritty of it is sour crude froom Saudi Araabia, which is difficult to
t refine intoo the
low-sulfuur distillates demanded by
b OECD coountries.
Accordinng to most oiil market forrecasters, thiis situation is not likely to
t improve anytime
a
soonn, as
limited new
n explorattion opportunities will constrain suppply. Assuming that stroong GDP groowth
continuess in emergin
ng market coountries, highh and volatile oil prices could becom
me the norm
m for
some tim
me.
3 The US
3)
S consumer
r is going to
t slowly die
d on the vine. The propensity
y to
save over consum
mption will become a panic.
4 The US
4)
S, and like
ely Europe
e to follow
w, will fall into a recession. The
T
threat of a seve
ere econo
omic contr
raction in
n the US is becom
ming
singly likely
y and the Fed
F may be
e powerless
s to preven
nt it.
increas
5 The risk
5)
ks are incr
reasing daiily that som
mewhere out
o there lu
urks a Cre
editAnstalt bank or financial
f
i
institution
n failure th
hat will be
e unexpectted,
dramattic and eitther be th
he last sho
oe to drop
p to cleans
se this cre
edit
cathars
sis out or th
he start off a leg that results in a true pan
nic. Panics can
happen
n. Look no
o further th
han London
n’s Northe
ern Rock. The idea that
t
it cann
not happen
n here is an
a expression of hu
ubris bord
dering on the
irration
nal.
6 This co
6)
ould all be a bad dre
eam or it could
c
unfo
old in slow
w motion with
w
plenty of time fo
or restruc
cturing of the globa
al credit and
a
monettary
regime…
….or natio
ons might respond
r
as
s nations have
h
since borders were
w
defined
d by commo
on heritage, languag
ge and the centralized
c
d allegianc
ce of
the pop
pulation so defined. Human na
ature has not
n changed.
7 The US stock mar
7)
rket does not
n come close
c
to refflecting the
ese risks—a
and
for thos
se who believe the on
nly refuge is
i in China
a or other BRIC
B
mark
kets
let me ask
a you thiis—when th
here is a fllight to liqu
uidity and a generaliized
worldw
wide rise in
n risk avers
sion, are you
y
really so
s confiden
nt about th
hese
“safe ha
avens”?
EASTO
ON’S POIN
NT CAPITA
AL
Despitee all of this gloom an
nd doom, there
t
is a reasonable chance we
w will hav
ve a
Santa Claus
C
rally
y over the next
n
few weeks
w
that will
w make these
t
thou
ughts look like
l
the rav
vings of a madman.
m
H
However,
t
the
chances are less than
t
50%.
It reallly needs to
o be unders
stood that I am by nature a roa
aring optim
mist and have
h
been siince the fa
all of the Berlin
B
Walll. That is, until the end of last year whe
en I
realize
ed that the
e globalize
ed event I always fe
elt was co
oming as the
t
inevita
able
outcom
me of the dialectical
d
nature off capitalism
m’s evoluttionary nee
eds, was very
v
likely unfolding.. This is a result of
o the intternal intr
rinsic flaw
ws of fina
ance
se flaws we
w have sim
mply contiinued to “paper”
“
ov
ver with more
m
capitallism. Thes
credit and more debt. Tre
ends that are
a
unsusttainable en
nd. We ar
re at, or very
v
near, th
his end.
EASTO
ON’S POIN
NT CAPITA
AL
If
the
ere is a ra
ally, sell in
nto it and raise cash
h…if you are
a
by deffinition a fully
f
inves
sted player
r, use the opportunity
o
ty to build a defensiv
ve portfolio
o, one thatt you
believ
ve will do well in a domestic
d
re
ecession accompanie
a
ed by very
y disappoin
nting
globa
al growth over
o
the next 1-2 year
rs.
Over the past ye
ear I have described these unfo
olding even
nts as those that coulld be
poten
ntially far more dram
matic and painful th
han most, except th
he most ardent
bears
s, have bee
en discussin
ng.
• That the technologi
t
ical, geopo
olitical and
d socioeconomic lan
ndscape wa
as in
the proce
ess of a per
riod of “pu
unctuated equilibrium
e
m”-an acce
elerated pe
eriod
of evolutiionary cha
ange that occurs unde
er pressure.
n a rapid relative decline
d
an
nd that ho
ow this na
ation
• That the US was in
ed to it wou
uld determ
mine the ulltimate sev
verity of th
he transitio
on; a
responde
possibly painful transition
t
from being the so
ole domin
nant econo
omic
wer; and th
hat a nece
essary aspe
ect of this would be the
t
end off our
superpow
unique capacity
c
t print money
to
m
to pay our bills with
hout restr
raint
(seniorag
ge).
rld has never
n
exp
perienced a globa
al realignm
ment in the
• The wor
socioecon
nomic and
d political landscape
l
such as th
his one cou
uld turn ou
ut to
be witho
out seriou
us dislocattions. We are only
y now ma
aking the true
transition
n into the
e 21st centtury. I hope I am wrong.
w
I have
h
certa
ainly
painted myself
m
into
o a corner—
—but to pa
araphrase what
w
Lord
d Keynes sa
aid—
if the circ
cumstance
es change, I will gladlly change my
m beliefs.
EASTO
ON’S POIN
NT CAPITA
AL
EASTO
ON’S POIN
NT CAPITA
AL