Paul Kedrosky's Infectious Greed

The Japanification of the West continues — high debt, low growth, and low yields — as treasuries plumbed record lows this week. Felix Zulauf weighs in on same in Barron’s, saying the following:

Providing liquidity isn’t the solution, but if we don’t do it the system will break down. Providing growth is a difficult task. I don’t know how to do that. Long-term, we have begun the Japanification of the Western World. If we are unable to bite the bullet, our problems will grow bigger. Eventually, after many years, some central banks and governments might lose their nerve and go completely in the wrong direction, ending up like Zimbabwe.

As circumstances would have it, Richard Koo of Nomura has out a new report on Japanification. Here is a residential real estate graph from Koo’s report:

Thoughtful new interview with gambler, professor, investor and quant godfather Ed Thorp. There are many nuggets in this interview, so this is just an excerpt:

Edward Thorp: I think that the opportunities for quantitative investing are likely to get better, simply because markets are becoming larger and more interconnected and the tools the quants have continue to improve. So that’s one side of it. The other side is there there can be a disconnect between the models that the quants build and the real world, and that disconnect can lead to serious trouble, for example the mortgage pool models or the Long Term Capital Management approach to doing things with super-high leverage, assuming the world is Mediocristan rather than something else.

Lots more here, all of which is worth reading.

This is all kinds of a wonderful for a Friday:

Long new profile of GMO investor Jeremy Grantham in the weekend NYT Magazine. His views are well known here — limits, resources, etc. — and so this is mostly to provide background and context. He is smart, a nuanced thinker, and a graceful writer, all of which come through in the piece.

Some will immediately say, of course, that this marks the end of the current commodities cycle. Others will simply nod in agreement. Either way, it’s worth a read.

Grantham’s quarterly letters often do make predictions about how the market will perform in the near future and recommend moves investors can make right now, but there are plenty of other authoritative voices telling us whether the recovery will continue or how the S&P will do this year. What sets him apart is what Ritholtz calls “the view from 40,000 feet up.” Grantham, the public face of a company that manages more than $100 billion in assets, the very embodiment of a high-finance insider in blue blazer and yellow tie, has serious doubts about capitalism’s ability to address the biggest problems facing humanity. When he reminds us that modern capitalism isn’t equipped to handle long-range problems or tragedies of the commons (situations like overfishing or global warming, in which acting rationally in your own self-interest only deepens the harm to all), when he urges us to outgrow our touching faith in the efficiency of markets and boundless human ingenuity, and especially when he says that a wise investor can prosper in the coming hard times, his bad news and its silver lining come with a built-in answer to the skeptical question that Americans traditionally pose to egghead Cassandras: If you’re so smart, how come you’re not rich?

via Can Jeremy Grantham Profit From Ecological Mayhem? – NYTimes.com.

Good look at the pressures faced by hedge fund manager John Paulson as he raises assets in the face of outflows:

Maybe no one single trade has come to symbolize Paulsons bullishness on the U.S. economy more than Bank of America. By August 9, the troubled lenders shares were down 43 percent this year, reducing the value of the 124 million shares Paulson owned as of March 31 by $784 million. Paulson is believed to have sold some of his Bank of America shares as the stock has plunged toward the $7 mark, but the firm has refused to comment on its current position.

The picture isnt much prettier for Paulsons large share holdings in Citigroup, Popular formerly Banco Popular and SunTrust Banks. The value of Paulsons equity stake in those three banks, assuming the funds havent sold any shares since March 31, would have declined by more than $800 million over the past four months.

And then there is Sino-Forest, the troubled Chinese forestry company. Paulson absorbed a $500 million loss on the stock in June after allegations of accounting irregularities at the Hong Kong-based company surfaced earlier in the month.

The series of missteps is tarnishing the near god-like status the former Bear Stearns trader has earned over the past few years.

via Special report: The perils of Paulson | Reuters.

Handy and thought-provoking chart from JPMorgan making the case that quantitative easing has had roughly the same effect on income as raising effective taxes by one-third for the average upper-middle-class family with $300k in savings. The euthanasia of the rentier continues.

The cover of next week’s TIME:

Cute: Using Nobu prices to do cross-currency comparisons.

Black cod w. miso, dollar-adjusted local price

Russia: $66.03
Great Britain unweighted average: $57.09
South Africa: $54.29
UAE: $50.37
Australia: $44.61
China: $43.53
Hong Kong: $41.00
Hungary: $40.89
Japan: $39.26
Bahamas: $29.83
United States unweighted average: $26.38

via FT Alphaville » Introducing: the Black Cod Index.

• As a clapping obsessive, I love this: Cultural differences explain synchronized clapping's incidence. http://bit.ly/r4aAt6 ->
• I've never been part of a discussion involving "smell tests" where metaphorical utility trumped my squeamishness. ->
• With Citi's Willem Buiter speculating today that all G7 countries will lose their AAA ratings, does that not mean AA is the new AAA? ->
• My favorite pleonastic email subject from a nitwit brokerage exec today: FRENCH RUMOR..REPEAT RUMOR. http://on.wsj.com/mOCaZM ->

I’m not sure what to be more chagrined about in this interview with a Silicon Valley econo-undertaker, that he anticipates so few assets in upcoming bankruptcy sales, or that those assets mostly include patents and IP.

In terms of the younger companies, what do you have to unwind exactly? What sorts of assets do they have to sell off?

Things have definitely changed. I remember in 1999, 2000, I would sell a used server for $35,000 and I had a line of people wanting it. Today, a server is $5,000 and you can get an okay server for less than $2,000. [In the meantime], we’ve probably become one of the largest sellers of [intellectual property] in the country. We sell tons of IP, and as you know, the IP wars have started, so we play with the big guys, the little guys, and the in-between guys.  During the last bubble, there weren’t as many patents. It was more ideas and URLs.

via peHUB » Silicon Valley’s Undertaker: ‘We’re Anticipating a Major Fallout’.