Sunday, January 25, 2009

Zimbabwe - Numbers You Do Not See Often

Another update in Zimbabwe's saga of suffering. Quote: "To get a true sense of the economic problems facing Zimbabweans Professor Steve Hanke from the CATO Institute developed a hyperinflation index that puts the annual inflation rate at around 6.5 quindecillion novemdecillion percent - that is 65 followed by 107 zeros. He noted that prices of basic goods double every 24.7 hours, and this is the reason why shops are refusing to accept Zimbabwean dollars."

This is not a typo, the math actually works: 2^(365/(24.7/24))=5.7817E106.

As I said
here, Mugabe needs to pay an elite list of his supporters in foreign currency, but there is not enough of it to pay every ZANU-PF thug. If you - the dictator - do not pay your constituencies, you get unrest. Quote: "Last year saw a number of unprecedented riots involving soldiers, who looted shops and attacked foreign currency dealers after not being able to access their money from cash strapped banks. The past few weeks have seen more spontaneous protests across the country by angry and impatient soldiers, raisings fears of a possible mutiny." Oops. Another quote: "...a separate uniformed gang ... raided a farm belonging to Reserve Bank Governor Gideon Gono and forced farm workers to load their truck with chickens." Oops again. Have the chicken come home to roost?

So what will Mugabe do to get to the diamonds the needs to stay afloat for just a little longer? Try shooting to death of villages from helicopter gunships and torture, including rape and abduction, on a 'massive' scale. I must admit that I have some doubts about the veracity of the gunship claim, since gunships are expensive to obtain and maintain. For the price of one gunship, which I estimate at ballpark $20mln, you can equip 5,000 soldiers with $150/pop AK-47's, and pay them $100/month for 3 years, with enough left for ammunition. There is no need to substitute capital for labor when labor is this cheap, and many fewer than 5,000 soldiers can wipe out an unarmed village without firing a single shot - machetes and fire do just fine.

I re-iterate my call for weapons drops in Zimbabwe, plus potentially a bounty on a few leaders (instead of the hilarious travel restrictions against them in place).

Monday, January 19, 2009

Euro(pe) Burning

Ambrose Evans-Pritchard has an blood-chilling article.

The Euro is the cause for a lot of pain in Europe. To have a single currency makes some sense when you have a relatively homogeneous economy, with high mobility of capital (check) and labor (NO check). Even then, central bank fine-tuning of macroeconomic parameters has failed spectacularly historically, but it is at least defensible theoretically. Europe, however, despite the wishful thinking of its leaders, is not a country. Its populace speaks numerous languages, has vastly differing cultures, and is thus mostly immobile - how often do you see a Maltese living and working in the Netherlands? The US adopted its constitution in 1787, and a lasting central bank only in 1913. The first attempt - First Bank of the United States - was aborted in 1811, the second - in 1836. From 1862 till 1913, there were SEVERAL national banks. And even when the Federal Reserve in its modern form was created, it was far from non-controversial - Milton Friedman did blame it for the Great Depression, and Ben Bernanke did agree. Europe, however, has a central bank without even having a constitution. How about a single central bank for Guatemala and Papua-New Guinea?

While I am not terribly bullish on the US dollar, I cannot help but be very bearish on the Euro. A short ETF (such as DRR) may not be the best instrument for this, sadly, since it sells the Euro against a broad basket of other currencies, but should be good enough because of the leverage it provides, and because it is hard to think of a good long pair anyway. The Swiss frank comes to mind, but Switzerland is in the heart of Europe, and thus economically very much linked with the European economy, and also under increasing pressure to align its laws and policies with the Euro-diktat.

Saturday, January 17, 2009

Destruction in Gaza

An AP article on the "damage" to infrastructure in Gaza by IDF's operation. Quote: "Israel's fierce assault on Gaza's Hamas rulers has destroyed at least $1.4 billion worth of buildings, roads, pipes, power lines and other infrastructure in already impoverished territory, Palestinian surveyors estimate."

At least $1.4 billion worth to whom? Would any informed and willing buyer pay that much for infrastructure that is used as a launching pad for missile and mortar fire against the most formidable military in the Middle East (except Turkey's, if one wants to consider it part of the region)? One has to assume they mean "It will cost $1.4 billion to rebuild it for Arab and European governments, who are the only economic agents dumb enough to pony up for such an exercise in futility." You could build a road or a pipeline on a military test site, and it will cost you $X, but it is absurd to claim that it is worth $X - after the next test it is likely to be worth close to nothing. Simply put, the $1.4 billion number does not include a significant Hamas risk discount, and that discount should (but will not) be included in the decisions whether to (re)build.

Two counter-intuitive, but plausible corollaries:

1) If (unlikely) Israel's operation were to eliminate Hamas from Gaza, or even credibly render it impotent for a prolonged period of time, the increase in value from the reduced Hamas risk discount on remaining Gazan infrastructure would more than offset the loss of some of it - i.e. the bombing would have made Palestinians as a whole better off.
2) The fair market value of a good is what a willing and informed buyer would pay for it. I would surmise that the average Gazan resident would pay to get out of Gaza, even if in the process he or she were to relinquish any claims to property left behind. Thus, if you ignore loonies who would rather die than abandon Palestine and the fight (for both nationalist and religious reasons), and thus assign infinite value to staying, the fair market value of Gaza plus Hamas is negative.

Monday, January 12, 2009

California's Muerte Anunciada

One of those stories that leave a lot unsaid.

The number of people leaving California for another state outstripped the number moving in from another state during the year ending on July 1, 2008. California lost a net total of 144,000 people during that period — more than any other state, according to census estimates. That is about equal to the population of Syracuse, N.Y. ... California's loss is extremely small in a state of 38 million. (emphasis mine) And, in fact, the state's population continues to increase overall because of births and immigration, legal and illegal. But it is the fourth consecutive year that more residents decamped from California for other states than arrived here from within the U.S.

Ahem, maybe so, but the only 4 years ago, a $6.7 bln deficit was considered "deceptively difficult challenge" there, and now they are talking about $41.6 bln. Cutting spending just does not happen over there, taxes are already the highest in the US, and businesses are running for the border because of regulatory overkill.

Furthermore, when a state or country begins to lose people because of high taxes, the first "refugees" tend to be the wealthiest and the most mobile - because they stand to lose the most, and can move with the least amount of disruption to their lives and careers. Those same "refugees" contribute disproportionately more taxes - as California is discovering now (to wit, California charges a 1% additional tax on incomes over $1 mln - with the proceeds used for... mental health services; maybe they need to charge 2%, given the number of mental cases in their government ). Those with AGI over $200,000 accounted for 4% of filers, and 65% of personal income taxes paid, as of 2006 - approximately 582,000 thousand taxpayers. Thus, even though the 144,000 people who left California are a tiny portion of the population, they are very likely about 58,000 (assuming 2.5 persons per household - grown-up children, couples filing separately, etc.) households, and (again, my guess) disproportionately in the $200,000 AGI group. If only half are indeed in that group, then California lost in one single year almost 5% of those filers, and thus over 3% of its personal income tax revenue. I have thrown in a lot of assumptions, but they do not appear very unreasonable, and I am aiming for a ballpark number anyway.

How unreasonable is it to expect that this flight will not only continue, but also accelerate, especially as taxes are further raised to make up for revenue lost? You decide. If you want to invest conservatively for retirement in the relatively near future, short California bonds and buy just about any other bonds you can think of - okay, not New York or New Jersey, maybe. Socialism failed everywhere else, it'll fail in California too - and California cannot print money, only bonds.