The Big Picture |
- Draghi? Draghi. Draghi!
- James Bond and His Female Costars
- Music Industry Predictions
- 10 Weekend Reads
| Posted: 04 Jan 2015 02:00 AM PST Draghi? Draghi. Draghi!
A German newspaper reports Mario Draghi's denial of interest in Italian politics as a major story, which then makes its way to the financial news in the US. Really? First, it is appropriate for the president of the European Central Bank to say that he wants to avoid politics in his home country of Italy. Anything else would be inappropriate. Next, he chose a German newspaper, Handelsblatt, as the conduit by which to reinforce the message that he is facilitating the introduction of huge additional monetary stimulus, which the Germans have opposed. Draghi is really telling them, "I'm going to be here." With the expansion of the Eurozone to include Lithuania and with the new composition of the Governing Council, the odds of additional stimulus in the Eurozone have improved immensely. On top of that, deflation risk is rising in Europe. The economies of Europe are on a very flat growth path. They have high unemployment, large structural impediments, no apparent inflation, and either extraordinarily low growth or actual shrinkage, depending on which country we examine. The tool of European fiscal policy is hampered by huge deficits and lots of unfunded social liabilities. Monetary expansion is the only game in town. Interest rates have already fallen to levels below zero in some shorter-term instruments and near zero in others. We expect a large monetary stimulus to originate from the European Central Bank as early as the end of this month. Markets are building this expectation, which will mean a huge market disappointment if the ECB does nothing. But what if the ECB actually takes a larger quantitative easing (QE) action? Where does the euro go versus the dollar and other currencies? There are lots of estimates floating around, but we think it is important to reflect on history. Let's take a look. The Maastricht treaty took years to negotiate. When the first exchange rate setting was implemented in 1998, and the initial 11 countries formed the Eurozone, the estimated US dollar value of the newly launched euro was $1.32. The virtual euro was introduced in 1999. Paper currency came three years later. During the introduction of the virtual euro, the range went from the pre-virtual $1.32 at Maastricht rate-setting time to $1.17 at the opening of trading. During the virtual period the euro hit a low of $0.83. Yes, the euro lost one-third of its initial value during its rollout as a virtual currency. Subsequently the paper currency replaced the franc, peso, D-mark, and others. The new euro was quickly and fully accepted. Ultimately the success of the euro and the optimism behind it brought it to a level above $1.50. That's right, the $1.32 treaty price estimate became a virtual euro at $1.17 that fell to $0.83 and then recovered to a full-fledged euro that rose above $1.50. So we observe that the 16-year volatility range of the dollar-euro exchange rate has run from about an $0.80 low to a $1.50+ high. Today we are at about $1.20. Now we are about to see the widest policy disparity to date between the US central bank (the Fed) and the ECB. These are the world's two largest central banks. Together, they influence the pricing of between 80% and 90% percent of all world reserves. They are about to go in opposite policy directions. The Fed has moved from quantitative easing to neutral. It is setting up to raise interest rates in 2015 and to start the process of exiting itself from years of QE. There is now a vast policy chasm between the Fed and the European Central Bank, which is at zero interest rates and looking for ways to embark on additional QE in order to take its balance sheet size above €3 trillion. In the US we have an expected growth rate for 2015 of about 3.5%. Our economy is doing better. Our inflation rate is low. And we will move away from the distortions of zero interest rates by the end of 2015. In Europe, the picture is the inverse of what we see in the United States. The result is that the dollar could be surprisingly strong during the course of 2015. It has emerged and validated its worldwide reserve currency status. And its strength is further validated by the activity in Japan. At Cumberland, our strategies are designed to capture the benefits of a strong dollar as well as the benefits that may flow through from weakening currencies like the euro and yen. The disparities in policy between the Fed on the one hand and the ECB and the Bank of Japan on the other mean that volatility will increase substantially and with results quite different from those we have seen in the past seven years. Investors will learn that volatility is bidirectional. Add currency exchange rates to asset prices, and the situation gets very interesting. The path is geometric, not linear. It's 2015. The horses have broken from the starting gate. Mario Draghi is now the lead jockey, the track favorite – but will his horse fade in the stretch? And is Mark Carney's British pound a dark-horse long shot? ~~~ David R. Kotok, Chairman and Chief Investment Officer |
| James Bond and His Female Costars Posted: 03 Jan 2015 05:00 PM PST
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| Posted: 03 Jan 2015 09:00 AM PST 1. The major labels will only get stronger. We live in an a money economy and the only ones willing to invest in artists are the labels. Furthermore, they've got the relationships at radio, which are key to developing acts. The players want cash, the major labels have it, no one else will get involved because the returns are so bad, the majors have gotten a second wind, they've adapted to the internet, all the hogwash about disruption was just that. (P.S. This isn't forever, but it's certainly for now.) 2. The Apple Watch will be a success. First, because it's Apple. Second, because wearables will become important, they're already here with fitness trackers. You don't want to pull your phone out of your pocket a hundred plus times a day, that's inefficient. Will the expensive Apple Watch or cheap one sell? It's too soon to know, but once again, a company with an integrated approach triumphs. Apple was not the first in MP3 players or smartphones, but it was the one that blew up the market. People love to hate on Apple, especially those not addicted to the brand. The noise level creates dissonance in the marketplace. But the truth is the press gave a pass to Google Glass and it failed, it's skeptical of the Apple Watch, but it will win. Once again we're moving towards utility as opposed to show-off status. If it doesn't do much, if it doesn't work right, we don't want it. 3. The concert business will burgeon. We're in the midst of a long journey from ownership to access, concomitantly people want experiences more than ownership of status items. Once you've got an iPhone 6, you're covered, there's no $5000 model. If you're buying a fancy car to impress people, if you're all about acquisition, the millennials are laughing at you, you're branding yourself a baby boomer. This is an important change in our country. Virtual goods have value. 4. There are only three news outlets in America, the "New York Times," "Wall Street Journal" and "Washington Post." Their only challenge is securing their power. No one else has boots on the ground. TV news is a joke. If you turn on the television to find out what's going on you've probably got an expensive automobile in the garage, trying to impress those who don't care. Television news has no reporters. The aforementioned print publications do. As well as Bloomberg, that's the x-factor here. He who controls the news controls the dialogue. Hits matter, but Buzzfeed, HuffPo, et al, are sideshows. There has always been gossip. There will always be listicles and link-bait, but don't confuse them with the genuine article. 5. Twitter might not be doomed but it is challenged. It's just too hard to use. How about the ability to just subscribe to a news feed of topics you're interested in, maybe even curated by experts in the field? But the Twitterdomos won't do this, because they're too impressed with the service. They know there's a problem, but to admit it would be to acknowledge the service is less than perfect, which it is. Meanwhile, Wall Street already knows, the stock has tanked. We want real time news, we don't want it quite like this. 6. Snapchat. Evanescence is the new trend. Driving people to see something now before it disappears. It's kind of like sports. It's meaningless tomorrow. Only in this case, it doesn't exist tomorrow. 7. There will be a left field, artistic success in the music business. The public demands it. Despite all the hype for stars of the moment, there's a hunger for that which feeds the soul, that we truly can't shake off. This new act will be comprised of very skilled players, who are not beholden to the usual precepts or partners. The hipsters will laud them, but then the press will put them over the top. 8. The mainstream press and the owners of this country are doing their best to keep down lower class agitation, i.e. protestation against income inequality. The tragic shooting of New York policemen has been utilized to silence stories of protest and unrest. But income inequality is the story of the year, which will be amplified by the Republican Congress. Not everybody can pull themselves up by their bootstraps. Self-reliance only goes so far. Expect further conflagration, you can only keep people down so long. 9. Ignorance reigns. Misinformation is king. This is a cancer upon our society. Special interests spread falsehoods, or shade the truth, and the public picks it up and we've got an entire nation that can't agree on the facts, never mind where we're going. This is an exponent of bad leadership, or the lack of any leadership at all. Sometime in the future we'll all go to one place to get our news. But unfortunately, that's not imminent. Artists have the power to spread the truth, unfortunately artists are so interested in money, truth takes a back seat. 10. Mobile won. Even more so around the world. Think of the handset, not the desktop. 11. Streaming won. Vinyl is agitation against a disconnected society where we have no way to display our identity. If it were really about sound, people would be gravitating to Deezer Elite and Tidal. But they're not, because they don't want to hear better sound, the want to own something. This sounds like a contradiction to the new non-ownership society, but really it's about the non-identity society. In a world where we all have the basics, the aforementioned smartphone, et al, how do we distinguish ourselves? People always want to distinguish themselves. Vinyl is a ripple on the ocean. And streaming sound quality will improve. 12. The movie business is headed for turbulence. Ticket sales are down, theft is high… The "Interview" revolutionized the business, not because of the hack, but because it went live in theatres and online day and date. This is the future. And until you can see all movies at one low price in one location online, expect theft to continue. That's right, the movie business thinks it's smarter than the music business, but nothing could be further from the truth. 13. Curation will rule, but not in 2015. We're still in a streaming turf war. Songza was a joke. Playlists have been around for over a decade with little impact. The people talking about curation don't care about it, they just want to sell you their scaling streaming service, which is why it won't work. Curation works in radio because everyone agrees on the same songs. This will happen in music too. Making the blockbusters even bigger. But it won't happen this year. 14. Baby boomers will continue to run the music business. No significant change will happen until they retire, which is at least a half decade off. 15. The American Dream is alive and well in the mind of the consumer, if not the true statistics. Everybody's got an idea, everybody wants to get rich. Now, the focus is primarily on tech and "Shark Tank" products, they scale better, you can get rich easier. But people still believe they're entitled to music success. But the truth is the most successful people are those with wealthy parents who send them to the best educational institutions wherein they make life-long relationships that pay dividends in their endeavors. That's right, they were born on third base and the rest of you are outside the stadium, and most people don't even know it. The poor have no idea of the advantages of the rich. Despite all the hoopla about wealth, if the general public had any idea how rich the rich truly are, the lifestyle they live, there would be spontaneous revolution. Meanwhile, they're kept busy perfecting their dreams, which rarely come to fruition, they participate in the sideshow. Furthermore, the best and the brightest don't go into the arts, the odds are long and the rewards not only elusive, but relatively scrawny. Expect no change here this year. The progeny of the rich are too anxious to take a risk. I'd like to say change is coming from the artists, but you're better off looking to "Vice." That's the story of the age, the power of news, not art. Create an alternative news site and you've got power. But people don't want power, they want money. Not realizing that power is the trump card. He who reaches the most people and controls the dialogue wins, especially in 2015. I've about given up on the artists taking a stand. Mark Zuckerberg is more powerful than any musician. But it doesn't have to be this way…
~~~ – |
| Posted: 03 Jan 2015 04:00 AM PST Good Saturday morning. Pour yourself a hot cup-o-joe, settle into your favorite easy chair, and enjoy our longer form weekend reads:
Whats up for the weekend?
U.S. Muni-Bond Market Is on a Tear
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