Today at work we had a conversation about clocks. One of my employees wants to put clocks above the doors to the office, and I mentioned that we had the same when I was in school. In fact, I explained, the clocks were connected to a central system so that the moment they struck three, the bell would ring. The ladies in the office, chuckling, said, "we didn't have money for such a system." They went on to say, "but we did have a picture of our president in every classroom." Of course, we had no such thing, but we did have a flag in our room that we had to pledge allegiance to every morning. At that point, I described the drill, complete with the hand over the heart.

I pledge allegiance, to the flag
of the United States of America
and to the republic
for which it stands
one nation, under god
indivisible,
with liberty and justice
for all

They looked at me dumbfounded and asked, "that is in a democracy?"
"Yes," I replied.
"Wow, you guys are crazy."
"You never had to do anything like that?" I asked.
The answer came, "no, of course not."
"Do they still do that?" they asked.
"Honestly, I don't know," I answered.

It struck me as strange that in a country living under the dictatorial regime we knew as Russian communism, no cult of nationality was practiced such as the one I was forced to practice every school day for at least 12 years. While we talked about how brainwashed they all were, we engaged in a practice which now, looking back, seems to me absurd and nationalistic, by comparison they lived in relative freedom.

So I ask you, do kids still have to recite the pledge of allegiance?

If so, can you think of any other country that has a similar nationalistic practice in place?

I can't.

Recap of the 17th

While the evening was reserved for celbrating freedom, others used this day for advancing their own agenda. The socialists organized 2,000 people who rallied against the proposed radar base outside of Prague. Students complained that the transformation has been largely botched. And the Nazis ironically chose this day to mourn the death of free speech after being snubbed in their bid to march through Prague's Jewish Quarter to "celebrate" Kristallnact.

So they really ran the gamut, from opportunistic socialists to ill-informed students, to simply misguided radicals.

It is clear that while it is important to look back, this country has a lot of looking forward to do.

The Velvet Revolution Begins

Today marks 18 years since the official beginning of the Velvet Revolution. November 17th marks the day of intense protests in 1989 that led to the fall of communism in the Czech Republic.

The date became significant in 1939 when the Nazis suppressed a student protest, executing 9 organizers, imprisoning 1200 demonstrators, and shutting down the University system. In 1941, Great Brittan declared November 17th to be International Students Day. This is still the only Czech holiday with international significance.

So with communism falling all over eastern Europe, it was no surprise that the Czechs took to the streets in peaceful demonstration, filling Vaclávské Náměstí with about a half a million people shaking their keys, the keys to freedom.

It is an interesting story, and you can read about it in more detail here.

TICS Data

Last month I reported on the "TICS" data, otherwise known as net foreign purchases (of domestic assets). So just quickly, because of the trade deficit (averaging about $57 billion per month) it is necessary that there are net positive cash inflows to make up the differences. Essentially, we need foreigners to buy stocks, property, t-bills, and the like in roughly the same amount as our trade deficit. Anything that Americans take out of the country of course counts against that total (which is why we say NET foreign purchases). If not, the currency suffers.

So as an FX enthusiast, I watch this data. I don't know why it is largely ignored, because it is a crucial bit of information. I suspect that if this trend continues, we will be hearing more about it.

Two months ago, July's data revealed a shortfall. Only $17 billion net. Analysts expected a rebound as this data is usually pretty volatile (I've seen months well over $100 billion) but instead the Treasury reported -$69.3 billion. Since it had been just about level going into that month, we were looking at about $100 billion shortfall, and the dollar has been suffering in part due to that.

Today, September's report was released. Analysts expected $66 billion, which would cover September's trade deficit, but not much more. Want to guess what the real number is? -$26.4 billion.

The dollar is down sharply on the news. No one on CNBC has even mentioned it.

I remember last year when I was obsessed with the looming mortgage crisis and my conservative friends called me chicken little. Well, I think we will be hearing about this in the coming months.

People seem to be saying, "if Bernanke wants to debase the dollar, fine, but not with my money!"

Understanding the Falling Dollar

A lot of my readers don't really understand economics and specifically currency exchange issues. Well, it is all relative. Here is an article by someone who REALLY understands currencies, and I think it is quite approachable, even if you are not an expert in these things.

So if you want to know why the dollar is diving, check it out.

Bad Idea

I know, I know, bad, bad, bad. But seriously, this is bad.

Today and tomorrow mark the 69th anniversary of the Kristallnacht which was a precursor of the horror the Jews of Europe would face over the next 7 years.

To "celebrate" this anniversary, the Czech Young National Democrats plan to march through Prague's Jewish Quarter (Josefov) tomorrow. They will be accompanied by their colleagues from Slovakia and Germany.

Now, this march has been official banned, but they are going to march anyway. The pretext for the ban is simply that the Young National Democrats announced the march internationally before they got the permit. The permit originally was granted until the city could find a technicality to ban the march.

When I first moved to Prague, the Nazis used to march at least once per year. The Communists and Anarchists would organize counter-demonstrations and there would be fireworks (not the kind you light with a match, the metaphorical kind). Afterwards, the Anarchists would smash the windows of the local McDonalds and of some public buildings. Few people got hurt and I always found it kind of fun to watch.

But it has been quite a long time since such an event has taken place, and I fear the worst for this one. This will be a real test for the Prague riot crews.

In any case, I just want to point out that contrary to what some people say, Nazis are (ultra) right-wingers. That is why the Communists hate them. So let's just stop trying to connect us civilized people with these animals (i.e. me with Stalin because we "lean the same way"). No one wins that argument.

Update: Luckily there were only minor clashes, and the police prevented the Neo-Nazis from marching through the Jewish quarter. Have a look at the photogallery if you like.

Bad Day All Around

Pick your poison today. Dow down 360 points. Oil close to $100. Gold up well above $800. But if you ask me, the real problem is the dollar.

The dollar has now reached its record low against all major currencies on the news that China wants to diversify its assets away from the greenback. Have a look at this chart....

So Bernanke's double dip on rate cuts is starting to have its effect, although I'm not sure this is the one he intended. Meanwhile Treasury Secretary Paulson continues to talk about America's strong dollar policy. His credibility is just about shot at this point.

Meanwhile, the largest insurance company in the world, AIG, lost over 7% of its value today which seems to confirm that the subprime mortgage crisis is not "well contained." Citibank wrote down about $38 billion in assets that were overvalued (read subprime) and this indicates that other write-downs are on the horizon. Moody's also downgraded major SIVs further pressuring the credit markets. Furthermore, Mario Cuomo, the NY DA has filed subpoenas on Freddie Mac and Fanny Mae regarding possible collusion with Washington Mutual in overvaluing asset backed securities.

I think we are still at the beginning. This is going to get worse.

The drastic drop in the dollar (which most analysts say are will continue) is going to make it even less likely that the TICS data is going to bounce back. Translation: as the dollar continues to drop, more and more people will refuse to put their money into dollar denominated assets. Hell, even a typical model knows better than that.

The upside? Christmas shopping in the US with foreign currency. Whoo Hoo!

Postscript: Did I say Citibank wrote down $38 billion? Sorry, that was a few days ago. Today it was GM.

Elections According to the Market

I've mentioned before that the open market is generally a better predictor of election results than any poll. When people are putting their hard-earned down, there is no agenda except for making money. There is no margin of error or 0.05 alpha to concern oneself with. Having said that, the markets only give the probability at any given point in time. Any gaffe or revelation can change the shape of the election at any time (as with the polls).

It has been a while since I checked in with Intrade, the most widely used election market. As I've explained before, the number associated with each result represents the cost of a $1 contract in cents. This translates roughly to the percentage chance that the result in question will come to pass. So for example, if the value is 10, it will cost you 10 cents to buy a contract that will pay $1 if you are right. This means that the market expects that there is about a 10% chance that what you bet on will come to pass.

The face of the upcoming presidential election has changed drastically in the past few months. Starting with the Republicans, we see a two man race, with Romney picking up the support from other candidates that have seen their numbers drop drastically lately (like Thompson, Brownback, and McCain). You can see Romney's steady climb in the race for the Republican nomination below.



On the other hand, Giuliani's numbers are relatively stagnant...



So it is clear that Romney is picking up the others' support in the GOP race. The GOP race had been much more interesting than the democrats with 4 or 5 serious contenders, but now it looks like a two-man race.

Turning now to the Democratic race which used to be a two-person race until recently, we see Clinton now up to a figure above 70.



This surge has come mostly at the expense of Barak Obama (the others are insignificant as ever).



So far, all of these charts have to do with the nominations. With Romney gaining so much ground in the race for the GOP nomination, one would expect that the odds of him winning the presidency would be similarly on the rise. However, that is not the case...



Instead, while Clinton seems to have the Democratic nomination nearly locked in, and Romney is making progress towards gaining the GOP nomination, the odds are leaning towards a Democrat in the White House. Below is the chart for the probability that the Democrats will take the White House in 2008.



It has never looked better for Hilary Clinton.

It May Be Over for Čunek

I don't think I've been following this story, but it has just gotten so juicy I can't resist.

Jiří Čunek is a Christian Democrat who gained a lot of attention as mayor of Vsetín (my wife's home town) by moving the Romanies (Gypsies) out of the center and into mobile units on the edge of town. Others were forced into buildings unfit for living on the other side of the country. Čunek is certainly not the first to trample on the rights of Romanies. There is the recent case regarding forced sterilization for example.

And in actuality, what Čunek did was actually applauded by many (although some applaud the forced sterilization of Romanies, but not quite so loudly). His real troubles began when he was accused of taking a 500,000 Kč ($25,000) bribe as mayor of Vsetín from a real estate company (the one that developed the property where the Romanies used to live). It looked pretty bad in that the company had withdrawn the amount one day, and he deposited the same amount (minus a little pocket cash) the next day. He was, however, cleared of those charges.

Through all of this, he became the leader of his party, was elected to the Senate, and in order to form a coalition, was appointed Deputy Prime Minister. But now it looks like they have finally got him. He will likely have to resign because of revelations that he took welfare while he had millions of Koruna in the bank (about $100,000 at the time). Already the subject of controversy, the pressure on him is now immense. Here are some quotes that reflect the general feeling....

Čunek must explain it trustworthily, otherwise he has no chance to stay in my government.

-Mirek Topolánek, Prime Minister


A normal man who has two healthy hands does not take welfare when he has millions of crowns on his accounts.

-Miroslav Kalousek, Christian Democrats Finance Minister


And what does Mr. Čunek have to say for himself?

I do not feel it as an ethical failure.


At least in this case, he is telling the truth.