Volatility Selling

The Swiss national Bank (SNB) recently announced it will seek defend the 1.20 level in the EURCHF to stem the strength of its currency by buying unlimited quantities. Upon further information, it seems has though they are selling options volatility as a means to defend that significant level. A central bank engaging in option vol selling sounds like a disaster to me. The question I have is what will happen when the plan backfires or they run out of bullets? Seems like to me that a BRIC country running surpluses and room for reserve growth will come to the rescue. The price; high. I bet it will be in the form of the SNB's 1,041 tons of gold as the continued wealth transfer to the eastern economies from the western accelerates.

This is not 2008...

...it's a potential continuation of the events started in 2008 as the system continues to be sick and is seizing up again. Maybe the resolution is closer than we all think. With that said, some questions I am asking myself as we inch closer to fall:

1. Has the U.S entered a new recession?

a. Did oil over $115 or gas over $4.00/gallon get us there?

b. Was it the sovereign crisis in Europe that pushed us over the edge?

2. What effects will the "proposed" austerity in the U.S. have on global growth?

a. After a brief respite, has Washington D.C swung back to the epicenter of the crisis?

3. How much will recessions in the U.S and Eurozone effect demand for Chinese goods and in-turn Chinese accumulation for global assets (namely USD and UST's)?

4. If we have indeed entered a new recession or on the verge of one, can the U.S afford it?

a. Running approximate budget deficits of 8% of GDP (down from 11% in 2008) can the U.S step up and pump fiscal stimulus for the 3rd time in 12-years?

b. What happens if they can't?

I maybe early on this trade, but I think the gold/bond futures is the chart that will give us clues on the level stress in the system:

Cultural Trends

In 2007, Tishman Speyer bought New York City's iconic Stuyvesant town for an ungodly price of $5.4B. Their plan was to take the former MetLife buildings built for returning servicemen from WW2, revamp them, and turn the residences into luxury condos.

Four years and a handful of heavyweight investors (Bill Ackman, etc) later, Stuytown remains the same grounds it has been for years. What these high-powered investors with the deepest pockets did not realize was that they were fighting one of the strongest cultural trends I have ever seen: New York City frugality.

From an investment perspective, fighting cultural trends must be considered. These trends can shift over time, but they are like the titanic heading towards an iceberg, they take time to turn. I don't know how Stuytown plays out, but I can guess 10 years from now, it will look very similar as it does today.

I enjoy thinking about the cultural implications of any situation. Whether it is geographic, demographic, or psychographic they all must be considered, especially when investing in new ideas and trends. I am keeping my eyes open for new cultural trends and will write as I see them.

Picture: Original 1947 Stuyvesant Town

Live Music's Turn

I came across a new live music venue yesterday. It is the size of a living room, has the acoustics of Carnegie Hall, and can be seen by million of viewers (if not more). This location, TRI Studios, has been debuted by Bob Weir from The Greatful Dead. I've been told by a family member that there are more studio's like TRI around and there will be to come, but either way, the model has serious potential.

Traditional live concerts with finite seating capacity and old cost structures rely on cheap energy that allow consumers to travel long distances to see their favorite performer or group. Now, for a fraction of the price, music patrons can watch these live events from the comfort of their own home or office. Home audio and visual technology creates an even better experience. Listening to music on a computer or TV with HDTV or 3-D technology makes the whole live feed concert equation viable.

From an investors point of view, TRI has unlimited operating leverage built into its model. It seems as though the costs involved with putting on the show (booking the talent, operating the location, studio rental, data feed, etc.) will be incurred whether there is one subscriber or ten-million. Those are the kind of business models and numbers we like: each additional dollar in revenue is extremely high margin. Think about it, as the studio operator, how does 5 million $5 tickets sound vs. 20,000 $80 tickets? This setup means money will flow into the sector, most likely from big media starving for growth.

Everyone I talk to says live concerts will never go away, people want to experience the music and the atmosphere. Those people are probably right. Still, I think these live studio concert feeds have a chance of being a major disruptor. It hits on a few key macro themes: high energy prices, proliferation of high quality (cheap) home entertainment, and the growth of online video consumption. In 5 years will we see some of the worlds biggest acts going this route?

The Individual Producer

Welcome back to Sensical Gibberish. I'm back with more gibberish and hope to post once a month going forward. To follow-up on my last post on the once quaint tradition of doling out gold Rolex's upon retirement, I'd like to develop the thought a little deeper: The Individual Producer.

Advances in technology along with the myriad of issues facing today's labor force are allowing (forcing) individuals to become productive. Quick example -- at one point in time if a journalist wanted to get their voice heard it entailed looking for a job at major newspaper and using that outlet to disseminate their work. Now, that same journalist can start blogging in a matter of minutes, distribute using social mediums, and generate income using advertising and subscriptions.

The theme: forget the days when individuals had to rely on large entities with deep pockets and technological know-how as portals to reach and acquire customers. The return to production is something I have been thinking about for a long time. Today someone passed this article on to me: How E-Books Are Changing the Economics of Writing. It demonstrates how technology is providing individuals amazing tools to harness their abilities.

The article quote from J. A. Konrath caught my attention:

"I have an acquaintance who is a New York Times bestseller," he notes. "She got a great advance. But I'm on track to earn $200,000 this year on e-books alone, and the e-book market is still in its infancy. If she'd kept the rights and self-published her e-book, I bet she would have earned more money in three years on her own than she will with her publisher."

There you have it. Technology is making it attractive for individuals to move away from big firm dependence and give it a shot on their own. As the article points out, there are some hurdles that face all individual producers (in this case self-published e-book authors) such as marketing and distribution to name a couple. Of course, when aren't there problems with a new business model?

I have faith in two things. One, entrepreneurs will continue to come along and enhance the individual producer ecosystem by providing individuals the tools to market, distribute, and solve any other future hurdles (think Etsy.com as a strong ecosystem for small artists and producers). Two, technology will continue to make it easier for individual producers to create and distribute whatever they are good at. I'm talking broad spectrum; from investing advice to farming -- harnessing any act using technology. It can only get more interesting and I'm excited to see whats next.

Gold Rolex?

The monthly US employment report was released yesterday (Friday May 7th) and two internals continue to catch my attention. The first, U-6 measure of unemployment. Some regard U-6 as the true rate of unemployment as it accounts for the unemployed looking for work, those working part-time that would accept at full-time position, and finally those unemployed whom are discouraged and no longer looking for work. This broad unemployment measure is stubbornly high at 17.1%, resisting to come down even though we have now seen four months of positive jobs gains. The second internal, duration of unemployment continues to suggest the long-term unemployed are not finding new jobs. The average duration in weeks rose from 31.2 in March 2010 to 33.0 in April 2010. Seasonally adjusted, those unemployed for 27 weeks or more is 46% of the total 15.3 million jobless Americans.

These two statistics signal that the US unemployment situation is structural by nature. By defining unemployment as a structural issue, this means who lost jobs in the financial, insurance and real estate industries are now without the proper skills or opportunities to find new work. This will keep the unemployment rate stubbornly high.

What I would like to focus on is that new trends will be born out of such a structural problem, not the problem itself. Will work be redefined in such a way that Americans will be forced to occupy multiple jobs? Maybe these jobs will target productivity as opposed to the paper shifting industries which have become so prevalent over the last 30 years. At the same time, inadvertently such a shift would, in my mind, target the psychological multitasking nature of our society.

At one point in America's corporate history, employees with a certain duration of service to one company received a gold Rolex upon retirement, now they may receive a more productive fulfilling lifestyle.

Where does all the dough go?

As the US bond market struggles to find a bid, it's time to ask where does all that money go once it has fled from the risk free asset known as US Treasuries. Conventional thought would say yield chasers find their way into various other bonds (i.e safer sovereign debt or US corporates) and/or dividend yielding equities.

But, what if unconventional is the way to go? What if that income producing capital finds its way into assets that do not produce any income, assets necessary for daily life such as oil and foods? Oh, and lets not forget gold and silver.