Karzai and the CIA

http://www.nytimes.com/2009/10/28/world/asia/28intel.html?em

Whenever I talk to anyone who has had interactions with high level officials in foreign lands, they are always quick to mention who is on the CIA's payroll. At first I was skeptical. Having seen time and again those rumors and gossip statements ultimately proved correct, I conclude that the CIA is only covert in one country -- the USA.

He's Hot

I have a man crush on Martin Wolf:

http://www.ft.com/cms/s/0/9165b8b0-b82a-11de-8ca9-00144feab49a.html

I wish the US had just one MSM finance/economics writer with as much perspicacity. Lewis comes close, I guess.

But, to discuss Wolf's argument, he seems to suggest that nations should better utilize the Special Drawing Rights (or some other basket of currencies) for the purposes of international trade and reserve holdings. Makes sense. If the IMF governs the basket, it could be reweighted quarterly or annually to reflect changes in GDP. Hmm, the more I think about it, the more I like it.

Gold

I almost feel bad for the gold bugs. Don't they know they're riding high on a commodities bubbles fueled by Chinese stockpiling? Once the market discounts the inevitable Chinese pullback from minerals, gold will take a major hit.

So many of the gold bugs are buoyed not by market fundamentals, but by market principles. They mistake their politics for the way of the world. Sorry, fellas, they ain't gonna end the Fed. They ain't gonna go back to the gold standard. And, eventually, the hyperinflationary threat will be quashed and the dollar will find footing because America's capital markets will still be attractive.

Yes, I know, I've been saying it myself: the dollar will lose strength against most currencies. So what? Could be worse. Wait til the commodities bubble really bursts, then you'll see a lot more currency pain.

Deflationary Threat

Remember, here's the game. The financial system is on life support. We won't know the extent of the damage for at least two more years. Until then, the government will be lending free money to the banks (whether through the discount window at the Fed, or through purchases of agency debt -- which provides liquidity to the lending market). That's just how it's going to be.

To prevent dollar destruction, we will see propaganda against oil and we will see continued worry about deflation.

How to invest in this climate? Don't. If you must, just go beta.

See Mishkin's take:
http://www.cnbc.com/id/33308407

It's Not You, It's Me

Enjoyable op-ed on the potential fallout from red versus blue state health care debates:

http://finance.yahoo.com/insurance/article/107941/let-the-red-states-secede.html

Though it is a stretch to suggest that health care could be solved by dissolving the polygamous marriage of 50 states, the thinking is not reductio ad absurdum.

Some food for thought:

But America is starting to resemble those other countries where two or more
"nations" coexist unhappily within a single state -- like the English and the
Scottish, the Spanish and the Catalans, or even the English-speaking Canadians
and the Quebecois. In most cases, greater autonomy for the two halves usually
has been found to make both sides happier.

Bloomberg Editorial

Worth a quick read, but stick around for the punchline:

http://www.bloomberg.com/apps/news?pid=20601039&sid=aBG26d6aO25U

Money

Ambrose Evans-Pritchard has been blogging with ferocity lately. Common sense dictates that the dollar is facing a huge decline, and many important actors are positioned for such an eventuality.

One would think that the Federal Reserve would be listening to this and tightening up QE and interest rates.

But you have to think bigger before blaming the Fed. Assess these facts:
1. The finance industry is profitable only because of low interest rate borrowing.
2. The finance industry is stabilized because of phony accounting standards, meaning we won't know the true extent of loan losses for at least 2 more years.
3. The finance industry is buoyed by Agency and Treasury debt, much of which is being bought by the Fed. The Fed's purchase of these securities allows FNM and FRE to buy more mortgages and convert them to taxpayer-backed securities, which creates some fine collateral (currently trading at more than par -- if you can believe that).
4. The price of oil will determine the speed of economic recovery.

How do these facts fit together? It means two things. The Fed has to continue QE to keep the finance industry afloat until the loan losses from the subprime/Alt A fiasco can be realized. This means there has to be a justification for continued money printing, which can only come from a perceived deflationary threat. It also means that the dollar has to continue to remain strong in order to keep oil down. QE and strong dollar don't match, you might say. And you're right -- but only over the long term.

Expect this: continued talk of deflation, continued Fed purchases of T-Bills and Agency MBS, and lot's of propaganda about increased supply of oil and larger than expected oil inventories. We will see inflation, and it will be painful, but it will not come for at least two years.