Tech Is No Safe Haven in This Recession

Bloomberg
Qualcomm Shuts Down Hiring After `Dramatic' Order Contraction
By Ian King

Nov. 12 - Qualcomm Inc. Chief Executive Officer Paul Jacobs said he's stopped hiring and is eliminating some research projects after a ``dramatic'' contraction in chip orders from mobile-phone makers.

``We have basically shut off our new hiring growth,'' Jacobs said in an interview in New York today. ``Before it was, `let's let a thousand flowers bloom,' now we're going to do a bit of pruning. We've shut down some projects.''

Jacobs, who heads the biggest maker of mobile-phone chips, said orders dropped off in October because handset manufacturers cut back on their stockpiles of unused parts, a reduction that will last for about two quarters. Consumer demand for mobile phones with Qualcomm chips is holding up, he said. (Holding up what? Bonuses? - Jesse)

``The end market, while it's slowing a little bit, isn't that dramatic,'' said Jacobs, 46. Still, there is ``some uncertainty'' in the company's earnings projections. (If the manufacturers are slashing production you can bet their channels are stuff and crying "enough" - Jesse)

Revenue this quarter may fall as much as 6 percent from a year earlier, the first decline in seven years, Qualcomm said last week. Annual sales increased 22 percent on average in the past six years as Qualcomm benefited from increasing use of its chips in mobile phones that provide high-speed Internet access...

Nailing our Thesis on Inflation and Deflation to the Door

Apparently some people who divide the world into Inflationistas and Deflationistas took exception to the blog from yesterday which showed most of the usual money measures and noted that we are not seeing any real contraction yet, merely a slowing in growth in some measures.

We should add that we prefer to address inflation and deflation from a money supply perspective, fully acknowledging that there is a dimension called 'aggregate demand.' There is a qualitative difference between a general deflation caused by slack demand versus one caused by a contracting money supply, and vice versa for a general inflation.

It was particularly amusing to see the Adjusted Monetary Base attacked as a standard of the Inflationistas. It was included in our set of charts only because some of those promoting the deflation argument pointed to it as a sign of hoarding, and therefore having a negating affect on the other money supply figures. So we took a look at it both short term and long term. It is in the bounds of normality.

It is the hallmark of a dogmatic or fundamentalist mindset when the same data is used to both attack and defend the same proposition from completely opposite directions.

In a purely fiat regime, a monetary inflation or deflation is a policy decision. That decision may involve restrictions and limitations on the creation of money, a set of artificial boundaries, but that is the extent of it. It is a matter of resourcefulness and will.

You can't make the banks lend. Like hell I couldn't. They would lend or dry up if you used the right policy tools, and they know it. Its all of a choice. Its intent. Lending involves risk, and if you can make decent returns without risk and the policy wonks give you that choice you will take it.

Without a binding external standard the size of the money supply is bound only by the acceptability of one's currency by those with real goods to exchange for it.

Now, just because deflation in the money supply has not yet shown up does not mean it won't. Fiat decisions cut in both directions. As we stated, we know how to cause a deflation with some reliability.

Additionally the alternatives are not between deflation and hyperinflation. The opposite of hyperinflation is a hyper-deflation in which there is an undersized money money, most of it being held by a small oligarchy and is used to control the broader public.

There is a wide middle ground between these two alternatives that is much more probable.

To complicate things there are a number of exogenous events that may significantly impact the dollar in particular. Right now the US dollar is the world's reserve currency and many international trade arrangements, notably oil, are predominantly priced in dollars. This creates an artificial support and demand for the dollar. If this were to disappear, the demand for dollars would likely subside, placing a downward pressure on the optimal money supply levels. But keep in mind that exogenous events can cut both ways, for and against.

By definition exogenous means not able to predict reliably from the model. But this is one of those things we are watching and closely. Will there be a new formal Bretton Woods II? Will the key world players continue accept the Fed as its global currency administrator? One can speculate the possible outcomes and their implications, but not with certainty until something happens.

Having said all that, it would be less than straightforward not to note that inflation is the natural and most probable outcome for a fiat currency unconstrained by an external standard.

What tosses so many is the example of Japan and their persistent deflation following a real estate bubble. The cause of this is a series of continuing policy decisions. Discouragement of consumption, encouragement of exports, a static and aging population that is racially homogeneous and discouraging of immigration. A strong emphasis on savings at low rates. It has been and will continue to be a policy decision determined by one of the most powerful and entrenched bureaucracies in the developed world with a strong commitment to industrial policy and central planning.

We do not wish to be a deflationist or an inflationist: we want to be on the right side of the market as it unfolds. There are people we respect on both sides of the discussion from a theoretical perspective including the more extreme hyperinflation. Roubini and John Williams are at polar extremes for example. What does one do? Look at the data, the arguments and sort them out objectively. Even the great Roubini puts his pants on one leg at a time.

So, we'll try our best to stay out of the religious debates, long on rhetoric and short on thought. Its hard to be an agnostic amongst fundamentalists but its where the scientific method leads us for now.

Some comments from earlier this year on hyperinflation: Hyperinflationary Depression in the US in 2010 - John Williams

Is the Money Supply Contracting?

The bottom line is that although growth is slowing in MZM which is our preferred broad liquidity indicator, there is no indication that money supply growth is cntracting (e.g.negative).

Theories abound. We like to look at the data.

There are various interpretations and we look into almost all of them.

But we like to keep an eye on the data, and skip arguments that are long on rhetorical flourishes and short of hard analysis.

A monetary deflation is possible. A price deflation in response to slack aggregate demand is not only possible it is happening. We are in a recession. Demand is decreasing. And money supply growth should be decreasing in sympathy with that.

We could even tell you how to cause a monetary deflation, and are confident we could do it. Raising short term interest rates to 20 percent would probably do the trick pretty handily. Right now they are a negative number, however.

There are also theories that the banks are hoarding cash and the money supply figures are no longer valid. The money is flowing to Europe and not into the US economy.

Well, we can look into this, but it does not seem to be borne out by anything we have looked at in more than one dimension yet. We have an open mind.

But we're short on economic creationism and long on hard data and analysis in our book.

Thinking the Unthinkable: Are the Markets Warning of a US Debt Default?

As we have previously stated, right now the US is on the path to a devaluation and a selective default on its debt and currency. No one can say 'how and when' with certainty. But surely it seems probable that there is a stop and a stumble in the growth of this mother of credit bubbles somewhere ahead.

Perhaps it may be more credible if one reads a similar speculation in the financial magazine Barron's.

Some have suggested that devaluation no longer has meaning, preferring depreciation. Why? Because what would one devalue the dollar against, as it is tied to no external standard? The Dollar is its own standard as the reserve currency of the word.

A bit of a technical nuance perhaps, a holdover from when money was related to independent stores of value. But we think the dollar can be devalued against the expectation of the marketplace that the growth of the money supply will keep pace with the net productive output of the US, and real relative purchasing power, and represent a store of value with some small variance for inflation.

It is always a mistake to assume that there are no external standards, no dissenting views, that things are merely what we say they are and should be, for everyone.

The standard is the 'full faith and credit of the United States.' And if that confidence is broken, the reversion to fundamental 'external' values may be impressive.

Unthinkable? Every currency that has ever been has eventually been destroyed and undergone a transformation. Even the US dollar has undergone evolutions and incarnations.

But few things are inevitable. The world may choose to create a one world currency, under the control of the Fed and the Central Banks, which is a prelude to One World Government. This would be one way to extend the existence of a fiat regime. Kill off all the alternatives, by force. A regime of the will to last a thousand years.

In the short term we may again see rallies in the bonds and dollar because of a flight to quality and a short squeeze on dollars, particularly in Europe. This is due to lags in the effects of a credit cycle decline on its various components.

Demand for dollars spikes in a flight to quality and debt payment squeezes such as that being experienced by some European banks, and then declines more slowly than the supply of dollars can ramp up in a declining credit cycle, leading to a 'liquidity crunch.'

This is particularly confusing to most casual thinking on economics. It helps if you really think about what a dollar represents, what money really is, to someone outside the system holding 'real goods' for sale.

At some point the ramp up of dollars meets and exceeds demand, and the cycle of inflation begins again. If the situation is particularly dire, the currency may be devalued to speed its supply as the US did in 1933. But without a new Bretton Woods type currency fix an inflation alone is much more likely.

As an aside, we think the Europeans should declare a force majeure and allow all non-euro debts, even in private contracts, to be settled in euros as part of a formal rejection of the US dollar as the world's reserve currency.

But these are all exogenous developments. For now, within a degree of probability, the US is on the road to a significant failure of its currency and debt, most likely through a nasty bout of inflation, selective bankruptcies, and ultimately the reissue of a new currency.

Searching for relative safe havens of value for wealth, as it had been in the 1970's, may be the premiere investment theme for the rest of this decade, and some part of the next.

Barron's
UP AND DOWN WALL STREET DAILY
Uncle Sam's Credit Line Running Out?
By RANDALL W. FORSYTH
NOVEMBER 11, 2008

The yield curve and credit default swaps tell the same story: the U.S. can't borrow trillions without paying a price.

WHAT ONCE WAS UNTHINKABLE has come to pass this year: massive bailouts by the Treasury and the Federal Reserve, with the extension of billions of the taxpayers' and the central bank's credit in so many new and untested schemes that you can't tell your acronyms or abbreviations without a scorecard.

Even more unbelievable is that some of the recipients of staggering sums are coming back for a second round. Or that the queue of petitioners grows by the day.

But what happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?

American International Group which originally had to borrow what was a stunning $85 billion from the Fed to keep it from cratering in September, upped the total Sunday to $150 billion.

Monday, Fannie Mae reported a $29 billion third-quarter loss, far in excess of forecasts, raising the specter that the mortgage giant may need more money after the Treasury pledged to inject $100 billion in preferred stock financing in September.

Meanwhile, American Express received Fed approval to convert to a bank holding company, joining the likes of Morgan Stanley and Goldman Sachs, that have a direct pipeline to borrow from the Fed or the Treasury's TARP, the $700 billion Troubled Assets Relief Fund.

And, of course, Detroit is looking for a credit line from Washington. General Motors (GM) Friday warned it could run out of cash next year without a government loan. GM plunged another 23% Monday, to 3.36, as several analysts helpfully recommended selling shares of the beleaguered automaker that already had lost more than 85% of their value.

Visiting the White House Monday, President-elect Obama pressed President Bush to support emergency aid for GM and other automakers. The prospect for federal aid for GM ironically weighed on its shares as one bearish analyst said the price of the bailout could be a wipeout of common holders.

Be that as it may, it's all adding up. If the late Sen. Everett Dirkson were around today, he might comment that a trillion here, a trillion there and pretty soon you're talking about real money.

Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.

It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending -- positive in math terms -- because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.

If they expect yields to rise in the future, they'll want a bigger premium to commit to longer maturities. Otherwise, they'd rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today's yields for a longer period.

The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper. The spread is up to 250 basis points (2.5 percentage points, a level matched only in the past quarter century in 2002 and 1992, at the trough of economic cycles.

Based on a simplistic reading of that history and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors' anticipation of economic recovery. (LOL, nicely phrased - Jesse)

Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.

As with so much other things, something else is happening this year.

The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.

This link has been brought to light by Tim Backshall, the chief analyst of Credit Derivatives Research. The attraction of investors to the short end of the Treasury market is "juxtaposed with the massive oversupply and inflationary expectations of the longer end," he writes.

Backshall is not alone in this dire assessment. Scott Minerd, the chief investment officer for fixed income at Guggenheim Partners, a Los

Angeles money manager, estimates that total Treasury borrowing for fiscal 2009 will total $1.5 trillion-$2 trillion. That was based on $700 billion for TARP, a $500 billion-$750 billion "cyclical deficit," an additional $500 billion stimulus program and some uncertain amount for the Federal Deposit Insurance Corp.

Minerd doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet those government cash. That leaves the Fed to take up the slack; that is, monetization of the debt.

However it comes about, Backshall's charts of the yield curve and the spread on U.S. Treasury CDS paint a dramatic picture. Both the yield spread and the cost of insuring debt moved up sharply together starting in September.

Let's recall what happened that month: the Fannie Mae-Freddie Mac bailouts, the AIG bailout and the Lehman Brothers failure. The two lines continued their parallel ascent with the announcement and ultimate passage of the TARP last month. And evidence mounted of an accelerating slide in growth.

Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it's not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.

All of which suggests America's credit line has its limits.

At the beginning of the Clinton Administration in the early 1990s, adviser James Carville was stunned at the power the bond market had over the government. If he came back, Carville said he would want to come back as the bond market so he could scare everybody.

President-elect Obama may come to think Clinton had it easy by comparison.