6/29 Jokes and Blokes, Japan - Yin & Yen.

Written on June 29, 2010

G’day-

Thoughts from a dead Viennese economist - good Article in the WSJ yesterday: …powerful bureaucracies don't attract angels—they attract people who enjoy running the lives of others. They tend to take care of their friends before taking care of others. And they find increasing that power attractive. Crony capitalism shouldn't be confused with the real thing…

-Notable Keynes Hater and Nobel Laureate, Friedrick Hayek (Friedrich August von Hayek)

>>>Thinking about BP, can’t shake it...really bugs me<<<

Fun dinner last night, the Nerf arsenal was epic, the guacamole great, the wine was fine, the lasagna lovely and the key lime pie was killer…thank you Melissa and Clint! The entertainment really began when my buddy Ryan, (who plies his trade with a large unnamed company that managed to tip a little crude into a beautiful Alaskan inlet a few years back), put forth a heroic effort to explain how plankton would eventually eat all the oil at the bottom of the Gulf as they have done for millenia… how oil is a naturally seeping occurrence on the ocean floor...I like the idea and big splash of an underwater Exocet or Tomahawk missile better… and I don’t think anybody was really buying the whole crude oil being natural thing, but it was a great effort and I was tickled by it.

What is the difference, really? –

If a bank closed in the late 20’s or early 30’s, you lost your money. Too bad, so sad, thanks for playing.

Today, if your company is forced into bankruptcy by the US Govt., your stock goes to zero and you get no dividend.

Too bad, so sad, thanks for playing.

Either way, you end up without “your” money.

Problem. Federal (record), State (46 out of 50), County & City Governments and most US Households have all run up historic levels of debt.

Yin and Yang –

While "yin" would be dark, passive, downward, cold, contracting, and weak,

"yang" would be bright, active, upward, hot, expanding, and strong…

Employment now is artificially high (even at 9.7% headline unemployment) because so many jobs are already tax payer funded governmental overhead.

Below I have tried to illustrate how bad it really is in entrepreneurial, capital formation, business enterprise land as opposed to Governmental La La Land.

In the late thirties, after much fiscal hardship, the markets were poised to recover when the Germans and the Japanese started their rampaging.

1940-41 were rough years, however, the boom in industrial (war time) production led to large returns in the stock market in the 40’s.

I used $100 invested in stocks in 1928 and compared it to $100 invested in stocks in 1999. (The comparison is worse if I include dividends.)

I wanted to take a look at capital losses. So far the last 11 years are just as bad as those in the 30’s, but the debt levels currently are far worse.

	% RETURN				% RETURN
	Stocks				Stocks
1925	25.83			1996	23.06
1926	11.51			1997	33.67
1927	37.1			1998	28.73
1928	47.57	$ 100.00		1999	21.11	$ 100.00
1929	-9.46	$ 90.54		2000	-9.11	$ 90.89
1930	-22.72	$ 69.97		2001	-11.98	$ 80.00
1931	-44.2	$ 39.04		2002	-22.27	$ 62.19
1932	-5.81	$ 36.77		2003	28.72	$ 80.04
1933	56.79	$ 57.66		2004	10.82	$ 88.71
1934	-8.01	$ 53.04		2005	4.79	$ 92.95
1935	54.93	$ 82.18		2006	15.74	$ 107.59
1936	32.55	$ 108.92		2007	5.46	$ 113.46
1937	-32.11	$ 73.95		2008	-37.22	$ 71.23
1938	17.5	$ 86.89		2009	27.11	$ 90.54
1939	2.98	$ 89.48		2010	-3.6	$ 87.28
1940	-8.91	$ 81.51
1941	-9.09	$ 74.10
1942	21.74	$ 90.21
1943	23.6	$ 111.49
1944	19.67	$ 133.42
1945	39.35	$ 185.93

No offense but all of these guys are Ivy Leaguer “SMART GUYS”. So you know where this is going…

Seems to me that there are few in significant leadership positions in Washington that could hold a candle to Depression Era leaders.

Frankly, which would you choose in a crisis?

· Barney Frank Chairman of the House Financial Services Committee or Henry B. Steagall, Past Chairman of the Committee on Banking and Currency.

· Bill Clinton, George Bush, Barack Obama or Herbert Hoover, FDR or Harry Truman.

Not one of these guys was an Ivy Leaguer. They had no FDIC, no SEC and really had comparatively little to work with. They used government spending (for a time) to right the ship. The existing DC crowd seems to feel entitled to its citizens’ pocketbooks and have a firm conviction that they want to be re-elected by shooting at each other.

When all the SMART GUY “games” dwindle, I think leadership will be required again.

Financially we have all paid a price in our stock portfolios, the value of our homes and of late the rise in the unemployment rate.

Careful going forward…bank closures are clearly taking your money away. Taxes do as well and there will soon be a concerted bipartisan attempt to convince Americans higher taxes (read: jobs and pensions in government) are important to save instead of chopping government spending to the bone as is being done in Europe. Said another way “what you have is better off in our hands.” Whether they close the banks or they take it from you a little at a time, you end up eventually at the same place. The Congress Friday last enacted some rules that will curtail legitimate hedging and will likely make liquidity dry up further in the markets. I have not read the legislation yet so I cannot comment intelligently but anything that lowers volume will increase volatility in the market.

Spain in USD terms is down 30% and looking south. A good example that austerity programs do not help economic growth, employment or stock prices today but eventually the piper must be paid for his tune. Clever financial gimmicks are about to come to an end and tough times will call for tough (and often unpopular decisions) by those in leadership. Otherwise, (like the Japanese) we will lose decades, and we will still be wondering how bad it can get as we suffer from the existing undealt with fiscal problems well into the next generation….

… the Japanese printed a 5.2% unemployment rate this am, they are still finding out “how bad it can get” 20 year later.

Mark it down, blow it out, get the bad trades and mortgages off the books, pay down the debts…QUIT STALLING.

On to specifics…

RE: short position in Brazil, here is another idea…for a swift move down (by Sept).

I mentioned recently about buying the EWZ SEP/JAN $60 put calendar at (buying the Jan 2011 and selling the September2010)

This strategy will open up a trade between September and January should the EWZ fall.

If you got the Sep calendars on congratulations. Here is a way to add to the short position with just a little more money.

Buy EWZ 50.00 Put expiring 9/18/2010 @0.91

Sell EWZ 42 Put Put expiring 9/18/2010 @0.36

Cost here is $55 per spread with an $800 upside.

Almost time to head West…

Blessings,

Leon