What I’ve Been Reading

Part of my morn­ing com­mute usu­ally involves catch­ing up on Twit­ter and most recently the finan­cial infor­ma­tion com­ing out of Zero Hedge along with a cou­ple of other sources from Maudlin Eco­nom­ics. Many of these arti­cles prob­a­bly don’t war­rant a full blog post but I thought I might start aggre­gat­ing them on Sun­day morn­ings with any thoughts I had. This has the poten­tial to hap­pen only this Sun­day but it’s good to have goals.

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Mara has appar­ently been read­ing every arti­cle on the Atlantic lately based on my inbox but this one caught my eye. A cer­tain fac­tion of con­ser­v­a­tives, namely goody goody two shoes in Nebraska and Okla­homa are fight­ing Colorado’s mar­i­juana legal­iza­tion say­ing that the states have no right to pre­empt fed­eral drug laws, the irony being that it’s almost always the con­ser­v­a­tives who yell the loud­est about fed­eral encroach­ment on their rights when it comes down to health care, wel­fare or any­thing else that might help peo­ple who actu­ally need it. In this instance, the issue is being fought brought by law and order type con­ser­v­a­tives who don’t like that cit­i­zens of those two fine states are going to Col­orado to buy their pot. The issue here that the arti­cle high­lights is that the states are under no oblig­a­tion to enforce fed­eral laws passed by Con­gress that are too sweep­ing for the feds to enforce on their own.

Fed­eral drug law has always relied on the states for enforce­ment because the feds don’t have the man­power to enforce it. States go after lit­tle deal­ers in the sys­tem (which is why our incar­cer­a­tion rate has quin­tu­pled since Reagan’s mis­guided and dis­as­trous drug war went into effect. States throw peo­ple in jail for non-violent pos­ses­sion crimes while the Feds can go after the traf­fick­ers. How­ever, the states are under no oblig­a­tion to actu­ally do this and in the case of states like Col­orado, can actu­ally pass laws that are incon­sis­tent with that. Think­ing of it another way, if Con­gress passes laws that are too broad in scope, the states are in no way oblig­ated to fill in the gaps. This is actu­ally a good thing for democ­racy as it keeps an impor­tant check on fed­eral power. It will be inter­est­ing to see how the suit of Nebraska and Okla­homa against Col­orado pro­ceeds. If the con­ser­v­a­tive side wins, we will have set a prece­dent for remov­ing one of the last checks on Fed­eral power and take a big step far­ther down the path of cen­tral­ized government.

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This week, the Swiss National Bank (SNB) decided to end its 3 year old cap on the franc to the euro and let the mar­ket move freely in rela­tion to the franc’s value. In response, the franc soared in value related to most major cur­ren­cies, the euro being the biggest move where it appre­ci­ated 17% or so. The cap was orig­i­nally put in place back dur­ing the last finan­cial cri­sis when the SNB decided to limit the volatil­ity of its cur­rency. And so for years, the franc has been excep­tion­ally sta­ble against the euro. The mech­a­nism for how this was done is beyond the scope of this post but the short ver­sion is that the Swiss would print francs and buy Euros to sup­port the cap. By doing this they acquire lots of Euros in their for­eign asset fund which seemed like a good idea at the time because the Euro was one of the strongest cur­ren­cies around.

Fast for­ward to 2015 and sud­denly the Euro is a mess. We’re talk­ing more and more about a Greek exit from the euro which is a total unknown. Defla­tion is sweep­ing Europe which is a BAD THING in the grand scheme of things for an increas­ingly indebted world. On Thurs­day, the Euro­pean Cen­tral Bank (ECB) will almost assuredly begin its own qual­i­ta­tive eas­ing where it floods the mar­ket with Euros to fight the defla­tion. All signs are point­ing to a weak­en­ing Euro and there is no end in sight. Imag­ine you are the SNB hold­ing a buck­et­ful of Euros and you might see why they want to bail out on drag­ging their own cur­rency down with the Euro. Of course, this move has lots of impli­ca­tions. On a imme­di­ate level, allow­ing the franc to appre­ci­ate is bad for Swiss exports. In the ongo­ing cur­rency wars, coun­tries try to improve their economies by weak­en­ing their cur­rency which typ­i­cally increases exports. So why would the Swiss do some­thing to actively hurt their own exporters? For one, they may have decided they don’t export that much stuff to the EU any­more and in fact they don’t. With the excep­tion of Ger­many, the only coun­try in the EU doing well (also a topic for an entirely dif­fer­ent post), Euro dom­i­nated coun­tries don’t account for a big chunk of Swiss exports. Instead, economies like Japan, the US and China are the ones buy­ing expen­sive Swiss watches and fancy cheese.

Because Switzer­land never joined the EU, they now have the flex­i­bil­ity to pivot their econ­omy and make it less depen­dent on the dis­as­ter that is unfold­ing across Europe. That is what they are prob­a­bly doing. One of the inter­est­ing side effects of this move is how it can roil mar­kets. That’s because in our over lever­aged, low inter­est rate finan­cial sys­tem, investors are always reach­ing for yield. One strat­egy is to trade in a cur­rency that has low volatil­ity like the franc. Firms were happy to loan francs to day traders at highly lever­aged rates (loan­ing 50 francs with only 1 franc as col­lat­eral is lever­age). They could do this because over the last two years, the franc had an aver­age volatil­ity of .1 per­cent. It seemed totally safe. Until it wasn’t when the franc got really volatile this week. Ever­est Cap­i­tal, a hedge fund in Miami, shut down a $830 mil­lion fund that hem­or­rhaged cash. Other hedge funds are in the same boat.

The take­away from all this is that times, they are a changin’ in 2015. The dol­lar looks to get stronger as the EU begins fight­ing defla­tion. Even in the US, prices are falling and retail sales aren’t too great. In look­ing at retail sales, if you remove auto sales, this Christ­mas sea­son was the third worst this cen­tury mean­ing only the Christ­mases of 2001 and 2008 were worse. Mmm, that doesn’t sound like a recov­ery to me. That sounds more like the US con­sumer is con­tin­u­ing to delever­age in an attempt to get their finan­cial house in order. And when the US con­sumer doesn’t buy cheap Chi­nese crap, China’s econ­omy gets slug­gish. And when that hap­pens, well, who knows what the end result is.

If you have a per­verse affin­ity to mon­e­tary pol­icy and its effects on our global finan­cial sys­tem, it should be a fun year.

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Appar­ently the peo­ple who lived in our house for the last 50 years didn’t ever want a back yard and had no fence. With a road behind us that cuts through from one major street to the other, it felt like we lived next to a free­way at times. This week, we had a fence put in which has also allowed the garage to be cleaned out since it was hold­ing all the lawn fur­ni­ture. It’s start­ing to feel more and more like we don’t live in a home­less shelter.

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Easy Summer Breakfast

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Consistency Is Hard

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Falling Out of Rhythm

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Rain

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