The great thing about running an online newsletter is that it is not only self-correcting, it is self-enhancing. Whenever I make a mistake or state a factual error, my inbox catches on fire when corrections, additional data, and chastisements. Ditto when I exclude some key points to bolster my own arguments. So I thought I would publish a letter I received from a reader from the subcontinent regarding yesterday’s piece on “India is Catching Up With China”.

“Dear Sir,
I am surprised in your comparison with China because you have missed several important points. India is a democracy. It does not have a Ponzi/mafia political party which focuses on looting the nation. Check out the number of billionaires in the Communist Party of China. Patents are relatively much safer in India. The press is free and vibrant. There is no “mad” overcapacity in anything like empty buildings/cities and the like.

The Indian judiciary is slow and generally very fair. India does not have problems of one child policy. Air pollution in Indian cities is probably lower. Most importantly: the fundamentals of the Indian economy in many ways are better than the Chinese. India does not control its currency artificially. There are fewer Indians trying to run out of India than Chinese trying to run out of China. In fact, most Indians can take foreign currency outside the country up to a limit. Few do it in China.”

Regards,
Kshitij Gupta

Here’s the Better Bet

“The number one performing stock market of the past ten years in nominal terms has been Zimbabwe. But if you bought equities there you lost all your money because the ZWD$3 trillion you made now buys you three eggs,” said Kyle Bass of hedge fund, Hyman Capital.

“The number one performing stock market of the past ten years in nominal terms has been Zimbabwe. But if you bought equities there you lost all your money because the ZWD$3 trillion you made now buys you three eggs,” said Kyle Bass of hedge fund, Hyman Capital.

First there was your grade point average, then your SAT score, followed by GMAT and LSAT scores, and finally your FICO. Now there is a new metric with which you will be judged, your “Influencer” score.

A new breed of marketing research firms are using data from social media sites, like Facebook, Linkedin, and Twitter, to rank members according to their ability to spur their friends to action. Companies like Klout, Peer Index, and Twitter Grader are using complex algorithms to mine their data and rank members. This is far more than just a simple listing of “friends.”

Scores range from 1-100, with a major league socializer achieving a 40 ranking, and someone like Bono or Martha Steward coming in at a godlike 100. These scores will be made public and could have a major impact on you career prospects, your credit rating, and even your sex life. I can hear this conversation coming already: “Thanks for the invitation to the opera, honey, but I have a better offer from an 80 to go to the Giants game.”

Do you like your new BMW, American Express card, or Rolex watch and are talking about it with your friends? Advertisers are willing to pay big bucks to get to know you. Last year, Virgin America airline offered free tickets to Los Angeles and San Francisco to highly ranked influencers, while Audi made available special discounts for a new car. Las Vegas casinos are giving away weekends with complimentary show tickets and generous room service tabs.

I have to tell you that I am looking forward to the new system. I just passed 1,000 friends on Facebook and have a massive Twitter following. My website gets 30,000 hits a day and is read in 125 countries, so I should score pretty highly. I understand that Maria Shriver has recently become available. Hey, Maria! Want to check out my 90? I’ll even fire my cleaning lady!

Will a 90 Tickle Your Fancy?

“For the president to not focus on the financial industry in the wake of a financial crisis, he would have to be blind,” said former Federal Reserve governor, Paul Volker

It seems that all you hear about these days is deflation. That is certainly what the bond market is telling us, with my screen blaring at me a miserable 1.58% yield for the ten year Treasury bond.

But there is a new definition for this economic malady that applies to we hapless consumers. In the new deflation, the value of our income falls, while the prices of things we need to buy are going through the roof. It is a particularly pernicious form of deflation, as it is burning our candles at both ends at the same time.

Take a look at the chart below, showing the cost of college tuition versus the consumer price index and home prices. This hits home particularly hard, as I have just put three kids through college, and am reduced to riffling through the sofa cushions looking for spare change or washing windshields at street corners on weekends in order to meet the bills. When I graduated from the University of California in the seventies the tuition was $3,000 a year. Today it is $16,000, and climbing at a 20% annual rate.

The saddest part of the story is that rampant wage deflation means that recent graduates have a grim choice between taking a poorly paid job, or no job at all. That leaves them woefully unable to repay the student loans they ran up to obtain their rapidly devaluing diplomas. The $1 trillion in outstanding student loans is begging to become the next subprime crisis.

And if you were planning on becoming a teacher, forget it, unless you want to move to Saudi Arabia, Russia, or South Korea. After watching tens of millions of jobs get shipped to China over the last decade, did you expect anything less? Just add this problem to the ever lengthening list of ways we are getting screwed.

Deflation Can Be a Bitch!

“For the last 20 days, I feel like I have played psychologist more than I have played money manager,” said financial talk show host, Kyle Harrington.

The wild whipsaw movements in the markets on Thursday reminded us once again how dependent they have become on monetary stimulus from central banks. As if we needed reminding. Almost simultaneously, officials from the US, Japan and the UK hinted at a coordinated move at this weekend’s G-20 meeting in Cabo San Lucas, Mexico.

Let’s hope for the sake of global financial stability that no one eats a bad taco down there. And say “Hello” to Miguel for me at the notorious drinking establishment, The Giggling Marlin. Just make sure he doesn’t pick your pocket when he hangs you upside down by your ankles with a block and tackle to give you a tequila shot.

The rumors were enough to cause me to cover my sole remaining short position in the S&P 500 (SPY) and bat out some additional shorts in the Japanese yen, which would go into free fall in such a scenario. If the rumors are true, they will take the (SPX) up to 1,400 and I will make a killing on my hefty long positions in (AAPL), (HPQ), (JPM), (DIS) and shorts in (FXY) and (TLT). If not, then the large cap index will revisit 1,290 one more time and I will be left looking like a dummy while posting an embellished resume on Craig’s List.

To see how closely risk assets are correlated with quantitative easing, take a look at the chart produced below by my friend, Dennis Gartman of The Gartman Letter. It graphically presents the market response to QE1, QE2, and Operation Twist, which are highlighted in green. In fact, quantitative easing has become the on/off switch of the financial markets. Hence, we get “RISK ON”/”RISK OFF” gyrations in spades.

While on the topic of monetary policy, let’s consider the implications of a Romney win in the November presidential election. The former Massachusetts governor and son of a Michigan governor has said that he would fire Federal Reserve Governor, Ben Bernanke, on his first day in office.

Well, he actually can’t do that, although it is great fodder for the faithful on the hustings. What he can do is appoint and anti QE, pro-austerity replacement when Ben’s second four year term is up on January 31, 2014. At the top of the list of replacements are Stanford University’s John Taylor of Taylor Rule fame and sitting non-voting board member, president of the Dallas Fed, and noted hawk, Richard Fisher.

How would the financial markets react? Much of the recent buying of stocks and other risk assets has been on the assumption that the “Bernanke Put” would kick in on any serious selloff. No Bernanke means no Bernanke put. I can already hear portfolio managers thinking “What, you mean there is risk in these things?” and heading for the exits as quickly as possible. The resulting market crash could make 2008-2009 look like a cake walk. Your 401k would rapidly shrink to a 201k, and your IRA would become DOA. So be careful what you wish for.

That is unless you are a reader of this letter and a subscriber to my Trade Alert Service. Such a market meltdown would be one of the great shorting opportunities of the century. But to follow the game you have to have a program.

Time for Another Shot of Monetary easing