Monthly Archives: August 2012

Poland’s Strategy

Poland’s Strategy

August 28, 2012 | 0900 GMT


By George Friedman

Polish national strategy pivots around a single, existential issue: how to preserve its national identity and independence. Located on the oft-invaded North European Plain, Poland’s existence is heavily susceptible to the moves of major Eurasian powers. Therefore, Polish history has been erratic, with Poland moving from independence — even regional dominance — to simply disappearing from the map, surviving only in language and memory before emerging once again.

Stratfor: Debate Between George Friedman and Robert D. Kaplan on Forecasting

George Friedman and Robert D. Kaplan on Geopolitical Forecasting (Agenda)

August 31, 2012 | 1925 GMT

Stratfor’s CEO George Friedman and Chief Geopolitical Analyst Robert D. Kaplan debate the challenges of forecasting global events.

Flash Point: How to Spot Hyperinflation

We maintain that hyperinflation is not just a case of large-scale price inflation but essentially, a loss of confidence in the currency causing holders of currency units to immediately convert them into hard assets. This creates a positive feedback loop that exacerbates the runaway price problem (our use of the term ‘positive feedback’ is the correct usage and counter to how most pundits use the term. See Negative Feedback, theTragedy of the Commons, and Complex Systems).

The economic measure of this is called the “velocity of money” or the number of times it changes hands in the economy. If the velocity grows sharply then we should become concerned that we may be on the edge of hyperinflation. So where does the US stand? Consider the following graph:

Figure 1. Velocity of the M2 money stock. Click to open in a new window.

For the broadest measure of the money supply, M2’s velocity has been decreasing since the late 1990s and is currently at record lows for the period the available data covers. Velocity is a calculated rather than a measured quantity and is the ratio of nominal GDP to M2. The interpretation is that the money supply has been growing faster than GDP since the late 1990s. Or in the interpretation of velocity, the rate of circulation of available money in the economy has been slowing. Should this begin to show a large sharp increase (upturn in the graph) then we would want to look for signs that hyperinflation might be emerging.

The Dilemma of the Impatient Trader

In this essay, we want to argue a result of any market that individuals trade in. We recognize that such markets are dynamic or complex adaptive systems and as such we lack the tools to effectively determine quantitative results. We use a very simple case to derive our arguement from but we feel that contained within the simplicity is a kernel of truth. Our argument is that in any market, impatience costs money.

Flash Point: A Point No One Is Making

In 2005, Katrina, a category 5 hurricane devastated new Orleans. A primary cause of the damage was the fact that many of the levees protecting the city were breached. Seven years later, New Orleans is hit by Isaac which appears to be either a tropical storm (not a hurricane) or a category 1 hurricane at most. Yet we read: Hurricane Isaac: waters top levee near New Orleans.

The point we haven’t heard made is that after seven years of preparation, New Orleans still cannot take even a category 1 hurricane without levee problems. The questions this raises are when will it be able to withstand a hurricane of any size and will it ever be able to?

Flash Point: A Little Hasty Maybe?

From Stratfor,

Venezuelan firefighters on Aug. 28 put out the fire at the country’s largest oil refinery, Amuay, Reuters reported. The refinery should restart within two days, Energy Minister Rafael Ramirez said.

That is, this refinery:

We believe the Venezuelan government. Don’t we?

Midnight Musing: Can the US End Up Owning Itself?

We have been pondering the Fed’s control over interest rates, why it is possible and more importantly, what are the limits.

The Policy of Doom

We’ve finally found the long-awaited (due to a browser refresh issue?) Hoisington Investment Management Quarterly Review and Outlook, Second Quarter 2012. As usual, Dr. Lacy Hunt has produced a 4-page newsletter based on solid economic theory but written in a manner that a layman may understand. This one is centered on Interest Rates and Over-indebtedness. He is basing his discussion on three recent papers, especially research [that] includes the first systematic evidence of the association between high public debt and real interest rates. As he states:

both low long [bond] rates and the stagnant economic growth [the current US ‘recovery’] are symptoms of the excessive indebtedness [current sovereign debt levels] and/or low quality debt usage [government spending].

Although he relates the studies to the interest rate on the long bond, an important issue for investors, especially pension funds, there are more important broader implications for Western economies in general.

Flash Point: PMI Blues

Continuing the decline globally of PMI data noted in June, PMI PMS, and continuing in July, PMI Update: Dark Clouds and Risk of Rain On Our Parade, we have reports of further declines for August in China, China Flash Manufacturing PMI at 9-Month Low, New Export Orders Plunge at Sharpest Rate Since March 2009, and the eurozone, Eurozone PMI Declines 7th Month; German Private Sector Output Falls at Faster Rate; New Business Declines 13th Month.

Of the eurozone, Markit’s flash August reading edged slightly downward. Markit commented: The August Markit Eurozone Flash PMI reinforces the prevailing view of the economy dropping back into recession during the third quarter of 2012. The direct implication is a continued decline in economic output or GDP, notably in manufacturing. The broader implication is a global economic slowdown that is moving into a recession.

Quote of the Day: 20120823

Distributing insolvency only destroys the last remaining islands of solvency in a bankrupt world.

— Charles Hugh Smith in Spreading Insolvency Around Does Not Create Solvency

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