Eclectica Fund Commentary

by Hugh Hendry
Eclectica Fund Manager

“The power to become habituated to his surroundings is a marked characteristic of mankind.”

John Maynard Keynes
The Economic Consequences of the Peace, 1921

This month I will attempt to answer the entrance examination for the Chinese civil service. That is to say, I will attempt to tell you everything that I know. In doing so, I will argue that this year’s rally in inflationary assets, from emerging stock markets to industrial commodities to the fall in the US dollar, could be a FAKE. Let me explain why.

But first, I am indebted to Scott Sumner, professor of economics at the University of Bentley, and his essay on the economic lessons that can be drawn from timelessness in art (see http://blogsandwikis.bentley.edu/themoneyillusion/?p=2542). It is a theme that I will constantly revisit in my arguments below.

Obama’s Plan and the Key Battleground

December 2, 2009 | 1155 GMT

By George Friedman

U.S. President Barack Obama announced the broad structure of his Afghanistan strategy in a speech at West Point on Tuesday evening. The strategy had three core elements. First, he intends to maintain pressure on al Qaeda on the Afghan-Pakistani border and in other regions of the world. Second, he intends to blunt the Taliban offensive by sending an additional 30,000 American troops to Afghanistan, along with an unspecified number of NATO troops he hopes will join them. Third, he will use the space created by the counteroffensive against the Taliban and the resulting security in some regions of Afghanistan to train and build Afghan military forces and civilian structures to assume responsibility after the United States withdraws. Obama added that the U.S. withdrawal will begin in July 2011, but provided neither information on the magnitude of the withdrawal nor the date when the withdrawal would conclude. He made it clear that these will depend on the situation on the ground, adding that the U.S. commitment is finite.

Why I am an Optimist

by John Mauldin November 28, 2009 In this issue: Subprime Dubai More Government Data Fun: Unemployment Claims Were Not Down Why I Am Optimistic About the Future The Millennium Wave New York and My Own Psychic Income

Wave of Debt Payments Facing U.S. Government

By Edmund L. Andrews, the New York Times

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Government Debt Spirals

Greece tests the limit of sovereign debt as it grinds towards slump

By Ambrose Evans-Pritchard, The Telegraph

Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance.

Euro membership blocks every plausible way out of the crisis, other than EU beggary. This is what happens when a facile political elite signs up to a currency union for reasons of prestige or to snatch windfall gains without understanding the terms of its Faustian contract.