Thursday, June 12, 2014 - The Beautiful Game

The Beautiful Game 

by Sinclair Noe

DOW – 109 = 16,734
SPX – 13 = 1930
NAS – 34 = 4297
10 YR YLD - .05 = 2.59%
OIL + 2.51 = 106.91
GOLD + 12.70 = 1274.30
SILV + .34 = 19.63

This is a big day for sports fans. In the US, many fans are thinking about the NBA playoffs or the start of the US Open golf championship, but those games are small potatoes compared to the World Cup. Over the next month, the World Cup will attract about 4 billion television viewers, maybe more when we consider all the digital devices that can replay the games; that’s more than the 3.6 billion viewers who watched the Beijing Olympic games; more than the 3.2 billion that watched the 2010 World Cup. By comparison, the Seahawks-Broncos Super Bowl managed a record 111 million viewers. The cumulative viewership for all the matches over the next month might top 35 billion. It’s a corporate marketing bonanza.

Over the next month, there will be countries across the globe that will quite literally shut down for 90 minutes intervals. Courts will delay hearing cases, hospitals will not schedule surgeries, offices and retail outlets and factories will shut down, the crime rate will drop, the streets will empty with almost zero traffic, planes stop flying, and trains stop running. I’ve seen it happen; and because I am blessed to be married to a lovely Brazilian woman, I have been caught up in the madness.

If you are still unclear, and most Americans are unclear on this subject, I’m talking about the beautiful game, futebol, or what we call soccer and the rest of the world calls futebol. The World Cup is the global championship in soccer and this year it is being played in Brazil, which is the greatest soccer team in the history of the World Cup. The first game was just a little earlier today, Brazil beat Croatia 3-1.

The whole thing was once strange to me as well, but I have a friend, Charles Oelfke, the Honorary Brazilian Consulate in Arizona; he is also an American married to a Brazilian, and when I talked with him about this World Cup thing, he pulled out an article he wrote back in 1994; that was the year the US hosted the World Cup; that was also the year Brazil won its fourth championship.

Here’s what I learned from Charles’ Gringo’s-eye view of the World Cup Extravaganza. Because of my marital affiliation, I will be required to watch all games involving my adopted country every four years. It’s a cultural thing. I will be required to record every game. I will be required to call Brazil immediately after each game to discuss why, for example, a 0-0 tie was such an exciting, logical, tactical display, clearly proving Brazil’s world dominance in the sport. I will be required to replay each game at least 3 times that same night, then twice weekly for the next four years. And apparently it also involves turning the TV room into a green and yellow shrine to Brazilian futebol.

I still don’t really understand the game and the rules, but Charlie explained that there is a certain methodology of the 22 men in plastic shorts and long hair who run around like decapitated chickens for 90 minutes making life miserable for the goleiros (the goalkeepers) who wear oversized sticky gloves while flying horizontally through the air. The goleiros can’t win games, but they’re so often blamed for losing them that volunteers for this position on the team are scarce and they are often hired from other countries.

Next question: just how large is a soccer field? I’ve learned from experts (of which Brazil now has more than 200 million) that it’s… oh…maybe… uh 70 or 80 meters wide by about maybe…, 100 meters… uh.. maybe 110 meters long; something like that. The regulation probably reads “the dimensions of which depend upon space available.” You have to respect the degree of precision in the world’s most popular sport.

My own travels in Brazil reveal that futebol, at least on the amateur level, can be played on almost any stretch of open field, or a street without too much traffic, or the beach, or even on a volleyball court. The only requirement is a ball, or something that looks like a ball.

I asked about the 1994 World Cup, which was in the US but for some reason I have almost no personal recollection of it. It was supposed to be the games that introduced soccer to the US, and the US to World soccer; but mainly it proved that we weren’t quite ready, with the possible exception of our ability to grow and mow grass.

And then I asked about the actual final, the championship game from ’94. Charlie explained that back then he and his wife Josefa had been inviting friends to watch the TV broadcasts at their home, and this usually involved a lot of yelling and screaming and copious overeating (and I’m guessing quite a few cervezas and caipairinhas), but the numbers grew too fast, and they ran out of chairs for everybody, and they had to set up in a restaurant (a steak house, of course) for the final game. About 300 Brazilians showed up, and about 3 very foolhardy Italians; and there was a lot of cheering and dancing and singing. It’s a cultural thing, he explained.

And about that final game in 1994, he said: “It was Brazil’s destiny. Everyone agrees, Brazil was the best team and I believe that, but…” the final of 52 games, of an every four year event, the showcase, the championship of the world’s most popular sport, between two tri-champion teams, the most important athletic competition in the universe with billions of spectators around the world ended in a 0-0 tie. And after 30 minutes of overtime, still a 0-0 tie.

So then it was decided by penalties, a shoot-out, a lottery. Why not just give the goleiros a last cigarette, put a blindfold on them? And … 4 years of preparation and 52 games and it all came down to individual luck. The experts called it a great game, a real cliff hanger, and justified the Brazil win because Brazil had 22 shots on goal compared to Italy’s 8.  That’s like saying Michael Jordan had a great game because he shot 22 air balls. Still, it will go down in history as Brazil Campeao 3-2 over Italy. It was also the first championship to be decided by penalty kicks. Something that still upsets Charlie 20 years later.

Brazil is the undisputed greatest national team in the history of futebol. They have 5 championships; their closest rivals have 3. And this year, Brazil, the most futebol crazy country in the world, is the host country for the World Cup; and most of the experts are picking Brazil as the favorite to win a sixth championship. This would seem to be a perfect, futebol dream come true. Not so fast.

Many Brazilians are angry about how much was spent preparing for the Cup and how the country still struggled to be ready. Anger about broken promises and the ballooning cost of soccer venues contributed to widespread protests that drew over a million Brazilians into the streets last year. Detractors say the World Cup has done more harm than good by taking funds away from social programs and investment projects. The Brazilian government has spent an estimated $11 billion on the World Cup, while protesters say the money should have gone to low income housing, hospitals, better roads, and better schools.

And as the games start today, Brazil is ill-prepared, with many projects over budget and behind schedule. The government spent nearly $300 million for a stadium in Manaus, a city that doesn’t have a major league soccer team, and is deep in the jungle along the Amazon River. It’s expected that after the World Cup, the stadium will sit empty for the most part. Building materials were shipped in by boat because you can’t drive to Manaus.

And to add insult to injury, the ticket prices for most games will price average Brazilians out of the stadiums, and the profits from the games don’t go to Brazil, they go to FIFA. And part of FIFA’s deal is complete tax exemption on all profits. Toss in some charges of bribery and FIFA is being compared to the mafia.

Part of the preparations for the World Cup involved what is known as pacification plans for the favelas, the massive shantytowns that are home to tens of millions of the urban poor. The police move in and after they enforce order, they are supposed to upgrade hospitals and schools. So far, it has been a police invasion without the benefits.

Last year, Brazil hosted the Confederation Cup, a trial run for the World Cup; that led to riots, and protests that drew hundreds of thousands to the streets. The protests continued today, with subway workers on strike in Sao Paolo, and protest camps set up just out of sight from the stadiums.  Two days ago, Joseph Blatter, the President of FIFA, the international football association that arranges the World Cup, kicked things off in Sao Paulo. Brazilian celebrities including President Dilma Rousseff as well as the governor of the state of Sao Paulo and the mayor of the megacity stayed away from the event. They didn’t want a repeat of last year, when Blatter and Rousseff were booed off the stage. Blatter’s solo performance in Sao Paulo speaks volumes about the mood in the country. The World Cup may be a fiasco, but if Brazil loses the World Cup Championship it could be a disaster for the government.

Brazil is the 5^th largest country in the world; it has the 6^th largest economy; Sao Paulo and Rio de Janeiro are major cosmopolitan cities with massive favelas; it is the 17^th worst country when it comes to inequality. When millions live in poverty, and corruption is rampant, and basic public services are denied, a sports extravaganza seems inappropriate, even if it is futebol on Brazilian soil. And so they play. Maybe this is Brazil’s destiny. 

Tuesday, June 18, 2013 - The Fed, and the Brazilian Protests

The Fed, and the Brazilian Protests

by Sinclair Noe

DOW + 138 = 15,318
SPX + 12 = 1651
NAS + 30 = 3482
10 YR YLD + .01 = 2.18%
OIL + .63 = 98.02
GOLD – 16.40 = 1369.30
SILV – .16 = 21.78

The past couple of years, the financial markets have been very dependent on the Federal Reserve, perhaps overly dependent. Much of the fundamental analysis of companies and the economy has taken a backseat to the Fed's unprecedented monetary policy of Quantitative Easing. The outlook for the financial markets for the remainder of the year boils down to potential changes in policy. The Federal Open Market Committee has begun its regularly scheduled policy meeting and tomorrow they will issue a policy statement followed by a press conference by Fed Chairman Bernanke.

So, this time tomorrow we'll know more but given the importance of monetary policy, it's worthwhile to consider possibilities and possible market response. There are four possible scenarios to consider:

The first scenario has the Fed announcing preparations for tapering off QE; they won't actually stop QE tomorrow, they'll just announce their intention to exit QE policy at some identifiable point down the road; and of course, it would be conditional on economic developments between now and the determined exit date; it would most like involve scaling back securities purchases without any specific targets for changing interest rates. This seems to be the most probable scenario right now.

Since the Fed announced QE3 last September, the Bank of Japan has started their own $75 billion per month stimulus policy, known as Abenomics. There are fears that the combination of QE3 and Abenomics might have a destabilizing effect. There is no indication the Japanese are backing away from their stimulus program, and there is indication the Euro-zone might consider some sort of monetary stimulus program. So, if the Fed backs down, that leaves room for other central bankers to maneuver.

The other three scenarios for tomorrow's announcement are far less likely. The Fed could announce an immediate tapering off from securities purchases; this is not likely; former Fed Chairman Greenspan tried this in 1994 and it was messy. The only reason the Fed might try this is to shock the markets, inducing a flight to safe havens such as Treasuries, and applying pressure on the politicians to come up with something that resembles fiscal policy. This is risky, like dancing on a carpet of banana peels.

The other scenario involves the Fed announcing that it is continuing with stimulus but it will consider a different mix. In other words, instead of buying $85 billion a month in Treasuries and mortgage backed securities, they will consider other purchases. They might consider student loan debt or state or municipal debt. Again, this would be a bit of a shock but it makes some sense.

The housing market has benefited from the Fed purchasing mortgage backed securities; meanwhile, student loan debt is starting to resemble the subprime markets of a few years back; defaults are on the rise and a meltdown would be ugly.

Likewise, there are several municipalities that could benefit from an infusion of capital from the Fed. Several cities in California are bankrupt. Detroit is insolvent and facing the prospect of default on $17 billion, including pension payments. They have a tightrope balancing act between the legacy obligations to creditors, employees, and retirees and their obligation to the residents of the city to continue to provide basic services. Right now there are 30 fires per day in Detroit. If they cut back on the Fire Department, the whole city could burn. Yes, some of those fires are deliberate.

There are other areas the Fed could consider that would offer a more direct infusion of capital directly into the economy, and they could do this in small steps; stepping back from Treasury or MBS purchases as the markets fluctuate; stepping into brave new arenas as needed. This is a highly unlikely approach but it would offer the biggest bang for the Federal Reserve Note.

The final scenario is that the Fed doesn't change anything tomorrow. Why should they? When they announced QE3, they said they would continue until they reached a target of either 6.5% unemployment or 2.5% inflation. Inflation remains below the Fed’s 2% target. The core consumer price index is up just 1.7% year-on-year in May. The central bank’s preferred measure, the index for personal consumption expenditures, is up only 0.7%. The economy has been adding jobs but the unemployment rate still stands at 7.6%; that's a long way from the target. While some might consider tapering to be an indication the Fed thinks economic recovery is stronger than it looks, an exit from QE now would be an admission of monetary policy failure. Consider it the central bank equivalent of a “Mission Accomplished” banner.

The Fed may ultimately decide that the economy or the markets are simply not ready and that announcing any intention to taper in the coming months may cause more harm to capital markets than its worth. This leaves the Fed with the option to do more jawboning in the future; it leaves them with the option of shocking the markets; it leaves them with more time to figure out alternative monetary policy; and it leaves them with more time to try to see beneficial returns on QE3 before they burn that bridge. Maybe Bernanke would just as soon leave the exit from QE to the next Fed Chairman.

Whatever the Fed announces tomorrow, it will likely rattle the markets. Both stocks and bonds would likely have a party if the Fed holds steady with no changes. The markets love free money from the Fed and no change might just be enough to provide a summer rally; a little boost for the economy.

Stocks would likely take any tapering news poorly. Any news of intention to taper might be enough to push stocks into a summer swoon; and then we would wait to see if that leads to a full fledged bear. At the very least, it would take a little of the exuberance out of stocks. That might not be such a bad thing; the S&P 500 is up about 22% over the past 12 months; there has been a disconnect between the stock market at 20% and the broader economy, which has been growing at a little less than 2%. Any news of intention to taper would likely be positive for bonds in the short term with a flight to safety, at least that was the history following the end of QE1 and QE2.

Tune in tomorrow.

Yesterday, I mentioned that there had been quite a few protests around the world. I listed about a dozen locations where protesters had taken to the streets in huge numbers. I didn't even mention Turkey. I did mention Brazil, where the normally laid back Brazilians took to the streets. Yesterday, the Brazilian protests really picked up steam. It started on Saturday, when the FIFA Confederation Soccer matches began in Brasilia. President Dilma Rouseff was scheduled to make an announcement before the game. The government had spent about $600 million to build a beautiful new soccer stadium, part of the 2014 World Cup. Rousseff was booed relentlessly; she cut short her speech and quickly exited the stage.

You may hear that the Brazilians are upset about a rate increase in bus and subway fares. That's not what the protests are about, or at least it's just a small part. The Brazilians are upset that the government has spent tens of billions preparing for the World Cup, with allegations of corruption; projects are already vastly over-budget and we are a year away. Meanwhile Brazil continues to invest below the OECD average in education. Public health expenditure is even lower. People are going hungry.

Rio de Janeiro consistently ranks amongst the most expensive cities in the world, while minimum wage remains low, about $300 per month. Sao Paulo, the country's financial center is even worse. It is home to the highest concentration of private jets and helicopters in the world, but the lower and middle classes have no access to decent schools and hospitals; and the poor people rely on public transportation. When residents of the two cities took to the streets last weekend bearing placards and chanting slogans demanding answers, regional police responded by firing rubber bullets and tear gas and violent beatings.

In response, the Brazilians took to the streets yesterday in massive numbers. The official estimates were more than 100,000 protesters in downtown Rio; the unofficial numbers topped a quarter million. The international media has also been peculiarly disinterested on the subject, even if coverage of the protests in Turkey, similar in nature to Brazil's, has been extensive and detailed. Spain's El Pais suggested the Brazilian protests have left the international community baffled as the country is consistently painted as a model for growth and development; Brazil is now the world's sixth largest economy, growing rapidly; Brazilians have nothing to complain about.

Certainly the Brazilian government thought that the populace would be distracted by soccer; and while it is true that Brazilians love soccer, it turns out it wasn't enough of a distraction. While there has been economic growth, there has also been growing inequality, and growing poverty. And the World Cup has just highlighted the inequality. The minimum wage of $300 a month is the average price of one ticket to one World Cup soccer game. Soccer was once a game that brought all Brazilians together; now the World Cup just rubs their noses in the fact that they are further apart than ever.

The big reason inequality is now a regular topic of conversation among economists is that the rapid rise of a super rich class while average workers are left in the dust makes it impossible to ignore. The IMF and the World Bank have just released a report showing that at the same time US companies are taking down a record share of GDP in profits, our country’s ranking in inequality is worse than that of many developing economies. New York City is more unequal than China, and also more unequal than Russia, famed for its oligarchs, and India, which still has hundreds of millions living in abject poverty.