David Kotok's Contributions

Since 2007, the world has worried about defaults. More accurately, the worry began in the summer of 2007, when Bear Stearns announced losses of a couple billion dollars from trouble in their hedge funds. They assured investors that the situation was under control.

I have been to Bratislava. You drive east from Vienna, across farmland and past windmills of the modern type, generating electricity for Austria. Instead of armed guards, searches, and moneychangers, you cross the open-border bridge spanning the Danube and enter Bratislava, the capitol of Slovakia.

By now, everyone between here and Mars knows about "Operation Twist." Simply put: the Fed is selling short-term securities and buying longer-term securities. The overall size of its portfolio remains the same. Markets reacted with a lowering of longer-term interest rates. The 10-year benchmark US Treasury note traded to a record low yield; it is currently 1.78%. The 30-year bond broke below a 3% yield and is currently at 2.89%.

So far, the August 9 intraday S&P 500 Index trading low has held. It was 1100. It has been tested twice in the futures market. In each case a sharply down futures price was reversed and the market closed up. Thus, those two tests do not appear in the trading records in New York. They do appear in Asian and European market trading.

After a brutal fight, the debt ceiling has been extended. From our perspective, there is some good news in this outcome, notwithstanding the vitriolic and distasteful exchanges that occurred in reaching this final result.

In the US, the debt markets have the support of the Federal Reserve. The US gets away with its approach because its central bank has a policy that retains an interest rate at zero. Meanwhile, the Italians do not have the ability to use this approach, because their construction with the European Central Bank has taken away the weapon of maintaining their own sovereign debt in their own currency. In the old days, when the Italians used lira, they too had the ability to directly finance themselves.

It appears that there will be no Greek debt default for now. The deal with Germany and France means the can is kicked down the road. Kicking the can means adding subsidy and postponing reckoning. As long as large powers agree to do it, “can-kicking” may persist for a very long time.

Stefan Ingves, Sweden's central bank governor, was asked how Sweden found the political resolve to respond to its financial crisis two decades ago. His answer was, "The honor of the nation was at stake." A simple statement carrying profound meaning.

There were big changes in portfolios last week. We downgraded materials and energy. Those accounts have moved to underweight from overweight. Healthcare was upgraded again and is now the most overweight. Consumer staples are also overweight. So is telecom. In addition, there is a cash reserve.

“Whitney Doubles Down” was the headline in Bloomberg BRIEF: Municipal Market. Meredith has dug her heels into the concrete with her December 2010 infamous forecast of “50 to 100 sizable defaults” that “will amount to hundreds of billions of dollars.” She gave the interview in December and answered “next year” when she was asked about timing.

Questions and answers that are specific to our articulated views about the FDIC and the Fed.

Epistemological questions may be answered with facts, examination, research, and experience. However, the United States has never engaged in monetary policies of the type presently underway. We have no experience to guide us. Has that led us to the error of the Greeks?

In Europe, the authorities of the European Central Bank incorporate food and energy into their inflation measures. In the United States we do not; we use something called core inflation. We determine that food and energy prices are the result of shocks that are beyond the control of the Federal Reserve and, therefore, are not reflective of central bank policy. The European Central Bank sees it quite differently.

Meredith Whitney broke the rule. This now haunts her to the point that she declined to appear before a Congressional committee that wanted to discuss Muni default issues. Nouriel Roubini is a skilled economist. He knows this rule. He, therefore, used modifiers to adhere to it.

The TV is crammed with industry folks and analysts calling for the oil price to fall $20 or $30 per barrel. They argue there is a geopolitical risk premium that is part of the current price. They may be right, BUT no one knows how to measure a "geopolitical" risk premium. We can only guess at it.

Markets cringe at uncertainty. It is the xenophobic-like, fear of the unknown-like response that triggers waterfall selling and massive volatility. We saw it demonstrated hugely with the Lehman-AIG five-week aftermath. We saw it recently in a milder version following the Egypt-Libya-Japan-Nuke-G7-No-fly sequence.

It is perfectly understandable that media focuses nearly exclusive coverage on Japan. TV works that way. We fully appreciate the concern about Japan. We have written about it several times. In addition, we have taken our Japan investment exposure to zero.

Risk management means sell now and then hope you are wrong. This morning we took Japan to zero weight. This is a huge step in view of the fact that the weight of Japan in global indices is 21%. We rarely go to an extreme like this.

Some folks look at the $100 oil price and conclude that it has stabilized and that everything will be okay. They argue one can now sell the oil stocks and go on to other sectors. They claim that Middle East and North African (MENA) problems are heading for the back burner.

This is nowhere near over. By “This”, we mean the regional contagion, spreading violence and rising geopolitical risk in the Middle East and North Africa. Reports say that Libya has stopped producing oil and that pipeline delivery to Europe (Italy) is interrupted. Libya seems headed for complete dismemberment and full-blown civil war.