"Well, my first misadventure with gold was standing in a queue in front of the Nicholas Deak currency and coin shop, which was on lower Broadway. And it might have been January of 1980 at the very peak but if not then, it was late 1979. I almost top ticked it. That was before I learned never to stand in line to buy an asset. You always want to go where nobody else is in line."
Jim Grant, May 20th 2011
Below are articles/reports I have found interesting over the last week:
1. Jim Grant – Q&A: refutes the fallacy of counterfactual statements that the world would end if the Fed had not intervened to prevent a systemic collapse in 2008, why a gold standard in our lifetimes is coming, on whether he is buying gold currently, on inflation, on corporate valuation, and where (and more importantly when) investors should be putting money to work. Here is also a 30 minute interview with Jim on Gold Money with James Turk.
2. “The Hidden State Financial Crisis” - by Meredith Whitney. After 25 weeks of consecutive and material outflow from municipal funds, Whitney doubles down focusing on state finances.
3. “Straight from the Horse’s Mouth” – May commentary from Ice Cap Asset Management. Page 4 is a nice touch.
4. “Commodity Prices, Inflation Measures, and Inflation Targeting”: presentation by James Bullard of the St. Louis Fed. To contextualize his views on core inflation, here is his latest speech given recently in New York: “Measuring Inflation: The Core is Rotten”.
5. “Why Facebook Needs Sheryl Sandberg”: profile of Mark Zuckerberg’s COO. Coincidentally, she is a cousin of David Einhorn.
6. “Now is not the time to raise interest rates”: superb article by Adam Posen (external member of the BOE MPC) in the FT. Note you need to be subscribed.
7. Ira Sohn Conference Notes: Hedge Fund Manager Presentations: Part 1 (Sabretooth, TPG, Centerbrige, KKR, Harbinger and Kynikos) and Part 2 (Frontpoint, Pershing Square, Gotham, Greenlight, Icahn, Corriente, DoubleLine, Marc Faber, Cerberus and Trian). Here is David Einhorn’s speech where he goes through his investment thesis for Delta Lloyd and Microsoft. Please send on any presentations or speeches from this conference you come across.
8. Here is a recent Bloomberg interview of Mark Faber: “in front of far too many luxury hotels there are far too many Ferraris, Maseratis, Bentleys... I see a boom everywhere, except for the working class, except for the lower, middle class. But among the well to do people the wealth that is floating around and the prices you pay for high end properties is incredible, and I think that will come to an end, and a lot of people will lose a lot of money... I was in La Jolla, Laguna Beach, Newport Beach, I was in front of a restaurant smoking and I've never seen so many Ferraris, Maseratis, Bentleys and fancy cars anywhere in the world, and this is in America. I am not saying this is wrong, but there is an opulence among a small group of people that is huge when there are lots of people that are struggling. This gives me a bad feeling because I've seen so many emerging economies when they were booming, that was the time to get out." This week's must watch.
9. “Update After PCAR, Troika Visit and SPU” - Bank recapitalisation an important watershed in recovery from crisis; focus will be on fiscal aggregates from now on – a recent NTMA presentation on Ireland. Attachment available on request.
10. “President's Fine Words May Not Address the Middle East's Real Needs”: Robert Fisk discusses what Obama should have said in his recent speech.
http://ccmacromusings.blogspot.com/
Friday, June 3, 2011
The Real Housewives of Wall Street
“The Real Housewives of Wall Street” – by Matt Taibbi in Rolling Stone magazine (article recommended to readers of Jeremy Gratham’s latest quarterly letter, both below).
Below are articles/reports I have found interesting over the last week:
1. Oaktree founder Howard Marks discussed interest rate rises in a recent CNBC interview.
2. “Part 2: Time To Be Serious (and probably too early) Once Again”: Jeremy Grantham’s Q2 Investor Letter, May 11: “"I do not feel the same degree of confidence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of quantitative easing would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected (indeed unexpectable) special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk than was justified by value alone in honor of Year 3, QE2, and the Fed in general. Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed income, manipulated by the Fed, also badly overpriced. Although the taking of some “extra” risk by riding the Fed’s coattails has been profitable for six months, I admit to being a bit disappointed: I really felt the market had the Fed’s wind in its sails and would move up deep into the 1400 to 1600 range by October 1, where it would be, once again, over a 2-sigma 1-in-44-year event, or, officially, a bubble. (At least in a world where GMO is the official.) At such a level, I was ready to be a real hero and absolutely batten down the hatches, become extremely conservative, and be prepared to tough out any further market advance (which, with my record, would be highly likely!). The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table." This week’s must read.
3. Here is the “The Real Housewives of Wall Street” article Grantham recommends reading by Matt Taibbi in Rolling Stone magazine.
4. “QE2 has transformed commodity markets into liquidity-driven markets”- recent report by Richard Koo: He makes the point that the relationship between monetary indicators breaks down during balance sheet recession i.e. velocity is in declining trend.
5. “How to Make Ireland Solvent” – by Daniel Gros. Here is Daniel Gros speaking at the IIEA on “Ireland and the Euro Crisis - Is There Light at the End of the Tunnel?". He thinks the external adjustment is key for solvency, and Ireland has adjusted from that perspective but he believes Ireland’s biggest opportunity lies in finding private sector-owned foreign assets to de-lever i.e. contrary to current EU directives, forcing the pension funds (who are the main holders of large foreign assets) to buy Irish government bonds. My understanding is that as a country we have a small net foreign debt, comprising large net foreign debt of the government and slightly less large net foreign assets of the private sector. These assets are held by pension funds and insurance companies. If the government can direct these (quite low yielding) assets to government debt (much higher yielding), we can avoid default. I am not convinced our new coalition government will be able to pull of what The Fidesz has managed to do already this year. [thanks AC]
6. “The Full Brady” – by Barry Eichengreen writing for Project Syndicate.
7. Profile of Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates, who in 2010, made more profit (c.$15bn) than Google, Amazon, Yahoo, and eBay combined.
8. “Extreme Conditions and Typical Outcomes” – latest market valuation piece from Hussman Funds.
9. “Will Aussie housing go bust?” - “Eventually people are going to realise that taking a 2 per cent pre-tax yield from renting a house that isn’t going up in value doesn’t make any sense, if you’re paying 7 or 8 per cent for the associated loan”, Mark Joiner, CFO of National Australia Bank.
10. Russell Napier interview with John Authers of the FT. As he pointed out in his recent note which I included in Macro Musings a few weeks ago, "whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." He further explained: "A risk to reflation would send equities sharply lower. The failure of QEII will undermine investor faith in a monetary solution. With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside. The Fed will try again with a new package, but investors would do best by waiting to see how it plays out." His outlook is that first we will see another major deflationary shock, following which the Fed, already boxed in a corner, will have two choices: let major financial institutions fail, or proceed to monetize outright. Regardless of which outcome is picked, Napier's target for the S&P, which just happens to coincide with that of Albert Edwards is 400 (or somewhere in that vicinity).
Below are articles/reports I have found interesting over the last week:
1. Oaktree founder Howard Marks discussed interest rate rises in a recent CNBC interview.
2. “Part 2: Time To Be Serious (and probably too early) Once Again”: Jeremy Grantham’s Q2 Investor Letter, May 11: “"I do not feel the same degree of confidence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of quantitative easing would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected (indeed unexpectable) special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk than was justified by value alone in honor of Year 3, QE2, and the Fed in general. Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed income, manipulated by the Fed, also badly overpriced. Although the taking of some “extra” risk by riding the Fed’s coattails has been profitable for six months, I admit to being a bit disappointed: I really felt the market had the Fed’s wind in its sails and would move up deep into the 1400 to 1600 range by October 1, where it would be, once again, over a 2-sigma 1-in-44-year event, or, officially, a bubble. (At least in a world where GMO is the official.) At such a level, I was ready to be a real hero and absolutely batten down the hatches, become extremely conservative, and be prepared to tough out any further market advance (which, with my record, would be highly likely!). The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table." This week’s must read.
3. Here is the “The Real Housewives of Wall Street” article Grantham recommends reading by Matt Taibbi in Rolling Stone magazine.
4. “QE2 has transformed commodity markets into liquidity-driven markets”- recent report by Richard Koo: He makes the point that the relationship between monetary indicators breaks down during balance sheet recession i.e. velocity is in declining trend.
5. “How to Make Ireland Solvent” – by Daniel Gros. Here is Daniel Gros speaking at the IIEA on “Ireland and the Euro Crisis - Is There Light at the End of the Tunnel?". He thinks the external adjustment is key for solvency, and Ireland has adjusted from that perspective but he believes Ireland’s biggest opportunity lies in finding private sector-owned foreign assets to de-lever i.e. contrary to current EU directives, forcing the pension funds (who are the main holders of large foreign assets) to buy Irish government bonds. My understanding is that as a country we have a small net foreign debt, comprising large net foreign debt of the government and slightly less large net foreign assets of the private sector. These assets are held by pension funds and insurance companies. If the government can direct these (quite low yielding) assets to government debt (much higher yielding), we can avoid default. I am not convinced our new coalition government will be able to pull of what The Fidesz has managed to do already this year. [thanks AC]
6. “The Full Brady” – by Barry Eichengreen writing for Project Syndicate.
7. Profile of Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates, who in 2010, made more profit (c.$15bn) than Google, Amazon, Yahoo, and eBay combined.
8. “Extreme Conditions and Typical Outcomes” – latest market valuation piece from Hussman Funds.
9. “Will Aussie housing go bust?” - “Eventually people are going to realise that taking a 2 per cent pre-tax yield from renting a house that isn’t going up in value doesn’t make any sense, if you’re paying 7 or 8 per cent for the associated loan”, Mark Joiner, CFO of National Australia Bank.
10. Russell Napier interview with John Authers of the FT. As he pointed out in his recent note which I included in Macro Musings a few weeks ago, "whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." He further explained: "A risk to reflation would send equities sharply lower. The failure of QEII will undermine investor faith in a monetary solution. With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside. The Fed will try again with a new package, but investors would do best by waiting to see how it plays out." His outlook is that first we will see another major deflationary shock, following which the Fed, already boxed in a corner, will have two choices: let major financial institutions fail, or proceed to monetize outright. Regardless of which outcome is picked, Napier's target for the S&P, which just happens to coincide with that of Albert Edwards is 400 (or somewhere in that vicinity).
Thursday, May 19, 2011
Teaching The Monarch's Horse to Talk
"A story is told of a man sentenced by his king to death. The latter tells him that he can keep his life if he teaches the monarch’s horse to talk within a year. The condemned man agrees. Asked why he did so, he answers that anything might happen: the king might die; he might die; and the horse might learn to talk. This has been the eurozone’s approach to the fiscal crises that have engulfed Greece, Ireland and Portugal, and threaten other member states. Policymakers have decided to play for time in the hope that the countries in difficulty will restore their creditworthiness."
Martin Wolf, Financial Times May 10th 2011
Below are articles/reports I have found interesting over the last week:
1. Profile of Bill Ackman, founder of the seven year old Pershing Square Capital. He can never be accused of lacking hunger/ambition [thanks ML].
*As mentioned in the report, it all started for Ackman at Gotham Partners in 2002 when they took a huge short position in the federally backed agricultural insurer Farmer Mac, then released a report titled "Buying the Farm." For those interested, here is the report (conclusion and background to the company are worth reading at the start of the report). They made $75m on the trade.
2. “Copper is King”: Niall Ferguson wrote a timely piece on copper dated April 24th: “All over the world, central banks are applying the brakes. The European central bank has already raised rates. The Fed seems intent on ending quantitative easing in June. The People’s Bank of China, meanwhile, has not only raised rates but also increased reserve requirements for banks. Remember, this comes as fiscal policy is also being tightened in the developed world—even, belatedly, in the United States. Remember, too, that higher commodity prices act as a tax on consumers in importing countries. Higher prices plus lower growth equals stagflation.”
3. “Silver Finger by Harry Hurt III - September Issue 1980 - Playboy”: Over 30 years ago, a man by the name of Nelson Bunker Hunt hatched the perfect plan: protect his inherited wealth (which then was one of the largest legacy fortunes in the world) from the inflationary destruction of "paper" assets by converting his assets into silver, and in the process cover the silver market, and send the price of silver to an inflation adjusted price of over $140 (nearly three times higher than the nearly record nominal silver price hit last week). Understandably, Hunt's name has appeared very often in the popular media in recent months. This article tells his story.
4. Corsair Capital – Q1 Letter: Corsair returned 6% in Q1: “"The global economy’s strength leads us to believe companies will exit the sidelines with renewed confidence and deploy cash for strategic acquisitions. Market multiples remain below historic averages and the capital markets are open; companies can now afford to strategically position themselves to benefit from higher growth in emerging markets, gain access to resources, improve cost structures, and so forth." They own Six Flags and Readers Digest, amongst others.
5. “Ireland's future depends on breaking free from bailout”: he is at it again! Morgan Kelly writes a damming and despairing article in the Irish Times.
6. “An Overview of Behavioral Finance and the Economy, What Worries Us, Our View of the Market, and Some Stock Ideas”: Presentation by T2 Partners. A few notable comments:
- We Think We’re Likely in A Range-Bound Market – And With Interest Rates Low and P/E Multiples High, It’s Hard to See How a Sustained Bull Market Could Occur;
- Based on Inflation-Adjusted 10-Year Trailing Earnings, the S&P 500 at 24x Is Trading at a 44% Premium to Its 130-Year Average of 16.3x.
The presentation then details some of their investment ideas – Berkshire and Microsoft. Go to slide 59 and see if you can guess what company they are short.
7. “Civilization: Is the West History”: Niall Ferguson has a new six part documentary. Each of the six 45 minute parts represent the six “killer apps” that had allowed Western powers to dominate the world: Part 1 (Competition), Part 2 (Science), Part 3 (Property), Part 4 (Medicine), Part 5 (Consumerism) and Part 6 (Work). This week’s must watch.
8. “Go East Young Man”: by Steve Galbraith of Maverick Capital from their Q1 Investor Letter.
9. “The Governance of a Fragile Eurozone”: Paul de Grauwe of Leuven University recently published this paper: “When entering a monetary union, member-countries change the nature of their sovereign debt in a fundamental way, i.e. they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries’ sovereigns into default. In this sense member countries of a monetary union are downgraded to the status of emerging economies. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple equilibria arise. I analyze the implications of this fragility for the governance of the Eurozone. I conclude that the new governance structure (ESM) does not sufficiently recognize this fragility. Some of the features of the new financial assistance are likely to increase this fragility. In addition, it is also likely to rip member-countries of their ability to use the automatic stabilizers during a recession. This is surely a step backward in the long history of social progress in Europe. I suggest a different approach to deal with these problems”.
Interestingly Martin Wolf in the FT critiques this report’s contrast between the current positions of Spain and the UK: “The yield on Spanish government 10-year bonds is almost two percentage points higher than that on UK equivalents, at 5.3 per cent against 3.5 per cent. This is a bigger difference than it may seem. If one assumes that the Bank of England and the European Central Bank both meet their 2 per cent inflation target, Spain’s real interest rate is more than double that of the UK. Do the fiscal positions of the two countries explain the contrast? Not obviously: Spain will have lower ratios of net and gross public debt to gross domestic product until at least 2016. It will also have lower fiscal deficits until 2014 and a lower primary fiscal deficit (before interest payments) until 2013. True, according to the International Monetary Fund, the UK fiscal deficit is forecast to be 1.3 per cent of GDP in 2016, against Spain’s 4.6 per cent. And differences in primary deficits explain 2.9 percentage points of this gap. But even this is not solely due to a difference in fiscal effort, since Spain’s economy is forecast to grow on average by 1.6 per cent between 2011 and 2016, while UK average growth is forecast at 2.4 per cent. As Prof de Grauwe notes, the liquidity of debt markets is vital. If, say, a government rolls over its debt every six years and also runs a fiscal deficit of about 3 per cent of GDP, it needs to issue new debt equal to a fifth of GDP every year. Suppose new buyers disappeared: we would see a “sudden stop” and a default. Suppose creditors think such illiquidity is indeed a risk. They would refuse to buy the bonds, rates of interest would soar and the economy would collapse. But it makes no sense to buy bonds at high interest rates either: the higher the interest rate, the more likely is a forced default.”
10. “Why Silver Might Crash – Critical Events in Complex Metal Systems” – a report from Hinde Capital.
Regards
Martin Wolf, Financial Times May 10th 2011
Below are articles/reports I have found interesting over the last week:
1. Profile of Bill Ackman, founder of the seven year old Pershing Square Capital. He can never be accused of lacking hunger/ambition [thanks ML].
*As mentioned in the report, it all started for Ackman at Gotham Partners in 2002 when they took a huge short position in the federally backed agricultural insurer Farmer Mac, then released a report titled "Buying the Farm." For those interested, here is the report (conclusion and background to the company are worth reading at the start of the report). They made $75m on the trade.
2. “Copper is King”: Niall Ferguson wrote a timely piece on copper dated April 24th: “All over the world, central banks are applying the brakes. The European central bank has already raised rates. The Fed seems intent on ending quantitative easing in June. The People’s Bank of China, meanwhile, has not only raised rates but also increased reserve requirements for banks. Remember, this comes as fiscal policy is also being tightened in the developed world—even, belatedly, in the United States. Remember, too, that higher commodity prices act as a tax on consumers in importing countries. Higher prices plus lower growth equals stagflation.”
3. “Silver Finger by Harry Hurt III - September Issue 1980 - Playboy”: Over 30 years ago, a man by the name of Nelson Bunker Hunt hatched the perfect plan: protect his inherited wealth (which then was one of the largest legacy fortunes in the world) from the inflationary destruction of "paper" assets by converting his assets into silver, and in the process cover the silver market, and send the price of silver to an inflation adjusted price of over $140 (nearly three times higher than the nearly record nominal silver price hit last week). Understandably, Hunt's name has appeared very often in the popular media in recent months. This article tells his story.
4. Corsair Capital – Q1 Letter: Corsair returned 6% in Q1: “"The global economy’s strength leads us to believe companies will exit the sidelines with renewed confidence and deploy cash for strategic acquisitions. Market multiples remain below historic averages and the capital markets are open; companies can now afford to strategically position themselves to benefit from higher growth in emerging markets, gain access to resources, improve cost structures, and so forth." They own Six Flags and Readers Digest, amongst others.
5. “Ireland's future depends on breaking free from bailout”: he is at it again! Morgan Kelly writes a damming and despairing article in the Irish Times.
6. “An Overview of Behavioral Finance and the Economy, What Worries Us, Our View of the Market, and Some Stock Ideas”: Presentation by T2 Partners. A few notable comments:
- We Think We’re Likely in A Range-Bound Market – And With Interest Rates Low and P/E Multiples High, It’s Hard to See How a Sustained Bull Market Could Occur;
- Based on Inflation-Adjusted 10-Year Trailing Earnings, the S&P 500 at 24x Is Trading at a 44% Premium to Its 130-Year Average of 16.3x.
The presentation then details some of their investment ideas – Berkshire and Microsoft. Go to slide 59 and see if you can guess what company they are short.
7. “Civilization: Is the West History”: Niall Ferguson has a new six part documentary. Each of the six 45 minute parts represent the six “killer apps” that had allowed Western powers to dominate the world: Part 1 (Competition), Part 2 (Science), Part 3 (Property), Part 4 (Medicine), Part 5 (Consumerism) and Part 6 (Work). This week’s must watch.
8. “Go East Young Man”: by Steve Galbraith of Maverick Capital from their Q1 Investor Letter.
9. “The Governance of a Fragile Eurozone”: Paul de Grauwe of Leuven University recently published this paper: “When entering a monetary union, member-countries change the nature of their sovereign debt in a fundamental way, i.e. they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries’ sovereigns into default. In this sense member countries of a monetary union are downgraded to the status of emerging economies. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple equilibria arise. I analyze the implications of this fragility for the governance of the Eurozone. I conclude that the new governance structure (ESM) does not sufficiently recognize this fragility. Some of the features of the new financial assistance are likely to increase this fragility. In addition, it is also likely to rip member-countries of their ability to use the automatic stabilizers during a recession. This is surely a step backward in the long history of social progress in Europe. I suggest a different approach to deal with these problems”.
Interestingly Martin Wolf in the FT critiques this report’s contrast between the current positions of Spain and the UK: “The yield on Spanish government 10-year bonds is almost two percentage points higher than that on UK equivalents, at 5.3 per cent against 3.5 per cent. This is a bigger difference than it may seem. If one assumes that the Bank of England and the European Central Bank both meet their 2 per cent inflation target, Spain’s real interest rate is more than double that of the UK. Do the fiscal positions of the two countries explain the contrast? Not obviously: Spain will have lower ratios of net and gross public debt to gross domestic product until at least 2016. It will also have lower fiscal deficits until 2014 and a lower primary fiscal deficit (before interest payments) until 2013. True, according to the International Monetary Fund, the UK fiscal deficit is forecast to be 1.3 per cent of GDP in 2016, against Spain’s 4.6 per cent. And differences in primary deficits explain 2.9 percentage points of this gap. But even this is not solely due to a difference in fiscal effort, since Spain’s economy is forecast to grow on average by 1.6 per cent between 2011 and 2016, while UK average growth is forecast at 2.4 per cent. As Prof de Grauwe notes, the liquidity of debt markets is vital. If, say, a government rolls over its debt every six years and also runs a fiscal deficit of about 3 per cent of GDP, it needs to issue new debt equal to a fifth of GDP every year. Suppose new buyers disappeared: we would see a “sudden stop” and a default. Suppose creditors think such illiquidity is indeed a risk. They would refuse to buy the bonds, rates of interest would soar and the economy would collapse. But it makes no sense to buy bonds at high interest rates either: the higher the interest rate, the more likely is a forced default.”
10. “Why Silver Might Crash – Critical Events in Complex Metal Systems” – a report from Hinde Capital.
Regards
Saturday, May 14, 2011
This Time Had Better Be Different
“Bank shares are also in a class of their own in this bubble, even after the sharp fall from 2007 till 2009. In terms of how high bank share prices climbed, this bubble towers over all that have gone before, and even what is left of this bubble is still only matched by the biggest of the preceding bubbles, the 1890s and the 1970s”.
Steve Keen, "This Time Had Better Be Different", below.
Below are articles/reports I have found interesting over the last week:
1. "The Liquidation of Government Debt" - latest paper (March) from Reinhart (and Sbrancia): "Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).".
2. T2 Partners presented at the Value Investing Congress last week. The St Joe analysis is fit for Hollywood.
3. Australia Housing: “This Time Had Better Be Different: House Prices and the Banks” - Part 1 and Part 2. Superb two part analysis from Steve Keen. This week's must read.
If you’re really interested in Australia, attached below is a report from Fisher and Kent: “Two Depressions, One Banking Collapse”, that looks at the variation in the performance of the financial sector during two previous depressions. Differences in real external factors and government policies were not sufficient to explain variation in the performance of the financial sector. The depression of the 1890s in Australia was associated with the collapse of the banking system, whereas problems in the financial system during the 1930s depression were far less severe. This is despite the fact that the initial macroeconomic shock during the 1930s depression was at least as large as that during the 1890s depression.
4. Crispin Odey's Q1 2011 Conference Call - transcript: "So our forecast is that inflation, far from being 5% at the end of that, it will be at 11%. Which means at that moment interest rates have to rise because that is the moment that the central banks have got that mandate. If interest rates rise from 0% to 7%, you can be sure that at round about 35% to 40% of that rise will make its way again through to inflation. So our cry is that you move into a very different kind of cost cut inflation coming through in which essentially the central bank remains behind the curve even if they are raising interestrates which themselves are much higher, the rises are much steeper and faster than people anticipate but I think that is the shock bit and that is why I hope with all of you, I spend my life worrying about that bit, not really about where we are now but about that and making sure that we have got the right franchises.".
5. Last week George Soros spoke at the Cato Institute in Washington DC on a panel about Friedrich August Hayek's "The Constitution of Liberty".
6. Jim Rickards latest interview on KWN.
7. “ The Caine Mutiny (Part 2)” – Bill Gross for May continues on from his Skunked April piece.
8. “Low foreign debt means State will not go broke” – Daniel Gros writes in the Irish Times.
9. Greenlight Capital Q1 Letter: David Einhorn's hedge fund Greenlight Capital struggled last quarter, returning -2.5%. Their short positions caused a drag on performance and as a result they've covered some of their lower conviction names. "We are in a particularly difficult environment for shorting stocks. In response, we have reviewed many of the names in our short portfolio. We covered more than a dozen lower confidence shorts during the quarter. We exited four successful shorts in the for-profit education industry, two foreign bank shorts (one at a small gain, the other at a large loss), a domestic bank short (at a loss), and a technology short (also at a loss). We also covered several others where performance exceeded our expectations. We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above).". They also added new positions in Best Buy and Yahoo.
10. Niagara Capital Q1 conference call: Overview of Q1 performance but also poses questions for Bernanke that weren't but should have been asked in the recent Q+A (1. why did we need QE 2 and now stilll accommodative monetary policy if deflation risk averted 2. why doesn't the Fed examine global inflationary impact of US monetary policy).
Steve Keen, "This Time Had Better Be Different", below.
Below are articles/reports I have found interesting over the last week:
1. "The Liquidation of Government Debt" - latest paper (March) from Reinhart (and Sbrancia): "Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).".
2. T2 Partners presented at the Value Investing Congress last week. The St Joe analysis is fit for Hollywood.
3. Australia Housing: “This Time Had Better Be Different: House Prices and the Banks” - Part 1 and Part 2. Superb two part analysis from Steve Keen. This week's must read.
If you’re really interested in Australia, attached below is a report from Fisher and Kent: “Two Depressions, One Banking Collapse”, that looks at the variation in the performance of the financial sector during two previous depressions. Differences in real external factors and government policies were not sufficient to explain variation in the performance of the financial sector. The depression of the 1890s in Australia was associated with the collapse of the banking system, whereas problems in the financial system during the 1930s depression were far less severe. This is despite the fact that the initial macroeconomic shock during the 1930s depression was at least as large as that during the 1890s depression.
4. Crispin Odey's Q1 2011 Conference Call - transcript: "So our forecast is that inflation, far from being 5% at the end of that, it will be at 11%. Which means at that moment interest rates have to rise because that is the moment that the central banks have got that mandate. If interest rates rise from 0% to 7%, you can be sure that at round about 35% to 40% of that rise will make its way again through to inflation. So our cry is that you move into a very different kind of cost cut inflation coming through in which essentially the central bank remains behind the curve even if they are raising interestrates which themselves are much higher, the rises are much steeper and faster than people anticipate but I think that is the shock bit and that is why I hope with all of you, I spend my life worrying about that bit, not really about where we are now but about that and making sure that we have got the right franchises.".
5. Last week George Soros spoke at the Cato Institute in Washington DC on a panel about Friedrich August Hayek's "The Constitution of Liberty".
6. Jim Rickards latest interview on KWN.
7. “ The Caine Mutiny (Part 2)” – Bill Gross for May continues on from his Skunked April piece.
8. “Low foreign debt means State will not go broke” – Daniel Gros writes in the Irish Times.
9. Greenlight Capital Q1 Letter: David Einhorn's hedge fund Greenlight Capital struggled last quarter, returning -2.5%. Their short positions caused a drag on performance and as a result they've covered some of their lower conviction names. "We are in a particularly difficult environment for shorting stocks. In response, we have reviewed many of the names in our short portfolio. We covered more than a dozen lower confidence shorts during the quarter. We exited four successful shorts in the for-profit education industry, two foreign bank shorts (one at a small gain, the other at a large loss), a domestic bank short (at a loss), and a technology short (also at a loss). We also covered several others where performance exceeded our expectations. We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above).". They also added new positions in Best Buy and Yahoo.
10. Niagara Capital Q1 conference call: Overview of Q1 performance but also poses questions for Bernanke that weren't but should have been asked in the recent Q+A (1. why did we need QE 2 and now stilll accommodative monetary policy if deflation risk averted 2. why doesn't the Fed examine global inflationary impact of US monetary policy).
Wednesday, August 11, 2010
In Ben We Trust
“The de-rating in Western equities continues to rhyme in a surprisingly familiar way to what we experienced in Japan a decade ago (see chart below). Another cyclical rally has led to a temporary pause in the structural de-rating process just as it did in Japan a decade ago. US equities looked cheap verses bonds last year but will look even cheaper next year!”
Albert Edwards, Soc Gen, August 2010
Below are some articles/videos I have found interesting over the last week:
1. “Valuing the S&P 500 Using Forward Operating Earnings“: Hussman Funds: “If you take away one thing from this week's comment, it is that stocks are a claim to a long-term stream of cash flows that will actually be distributed to investors over time, and that this stream of cash flows cannot be estimated from a single year's earnings number. The main reason for this is that profit margins vary from year-to-year over the business cycle, and tend to mean-revert over the long-term. Earnings (net and operating) tend to be depressed during periods of economic strain, but when they reflect compressed profit margins, they are strongly associated with above-average rates of subsequent growth over the following 7-10 years. In contrast, earnings that reflect elevated profit margins are strongly associated with poor rates of subsequent growth. When analysts take earnings figures at face value, and presume to "capitalize" them simply by dividing by interest rates, they demonstrate a Kindergartener's grasp of securities valuation.”
2. “Why is Deflation Bad?” – Paul Krugman cites three reasons to worry about deflation, two on the demand side and one on the supply side.
3. “Welcome to the Recovery” – more administration folly this time from Tim Geithner.
4. “No need for a panicked fiscal surge” – attached by Kenneth Rogoff writing in the FT.
5. Are you an Austerati or a Stimulati? Compare and contrast two opposing views….Paul Krugman vs Niall Ferguson (watch part 1 and 2 of both).
6. Raoul Pal, who retired from managing money at the age of 36, after co-managing GLG's Global Macro Fund, and the hedge fund sales business in equities and equity derivatives at Goldman among others, has been publishing the his Global Macro Report since and has just come out with the most condensed version of truth about our economic reality. The attached report provides the most in depth observation on the "future recession in an ongoing depression" which is arguably the best way to describe the current economic predicament. I found it quite interesting he writes a paragraph on a book I’ve just started reading: “If you’ve read the book The Fourth Turning by William Strauss and Neil Howe, you’ll note that this is almost exactly as they predicted. At the end of The Fourth Turning, we start the entire process again, returning to where the super-cycle began. In this case we would be returning to a society much more like the 1950’s which was a time of economic and social conservatism, economic isolationism and a whole heap of insecurity and paranoia”. Excellent data here on UK and Hungarian economies too. Send me your email address if you want this large attachment.
7. “Uncertainty changing investment landscape” – attached by Richard Clarida and Mohamed El-Erian: “We should all feel sorry for policymakers who face such distributions. The probability of a policy mistake is materially higher, especially as policy measures are subject to lags. What is less appreciated is the extent to which this changing shape of distributions affects conventional wisdom in the investment world, together with the rules of thumb that many investors have come to rely on. We can think of five implications”.
8. Felix W. Zulauf has worked in the financial markets for almost 40 years, starting his investment career as a trader for Swiss Bank, then training in research and portfolio management in New York, Zurich and in Paris.In 1977, Felix joined Union Bank of Switzerland (UBS), Zurich, managing global mutual funds, heading the institutional portfolio management unit and being global strategist for the UBS Group. He founded his wholly owned Zulauf Asset Management AG in 1990, allowing him to independently practice his own individual investment philosophy. Here is an interview with him.
9. “Why Today’s Deflation Won’t Kill Gold” – from Peak Theories research: a) Gold’s primary trend is up b) Today’s deflation will bleed into hyperinflation c) Ultimate hoarding vehicle d) Untarnished credit quality.
10. “The Farce Is Complete: S&P Downgrades Moody's To BBB+ From A-2”.
Albert Edwards, Soc Gen, August 2010
Below are some articles/videos I have found interesting over the last week:
1. “Valuing the S&P 500 Using Forward Operating Earnings“: Hussman Funds: “If you take away one thing from this week's comment, it is that stocks are a claim to a long-term stream of cash flows that will actually be distributed to investors over time, and that this stream of cash flows cannot be estimated from a single year's earnings number. The main reason for this is that profit margins vary from year-to-year over the business cycle, and tend to mean-revert over the long-term. Earnings (net and operating) tend to be depressed during periods of economic strain, but when they reflect compressed profit margins, they are strongly associated with above-average rates of subsequent growth over the following 7-10 years. In contrast, earnings that reflect elevated profit margins are strongly associated with poor rates of subsequent growth. When analysts take earnings figures at face value, and presume to "capitalize" them simply by dividing by interest rates, they demonstrate a Kindergartener's grasp of securities valuation.”
2. “Why is Deflation Bad?” – Paul Krugman cites three reasons to worry about deflation, two on the demand side and one on the supply side.
3. “Welcome to the Recovery” – more administration folly this time from Tim Geithner.
4. “No need for a panicked fiscal surge” – attached by Kenneth Rogoff writing in the FT.
5. Are you an Austerati or a Stimulati? Compare and contrast two opposing views….Paul Krugman vs Niall Ferguson (watch part 1 and 2 of both).
6. Raoul Pal, who retired from managing money at the age of 36, after co-managing GLG's Global Macro Fund, and the hedge fund sales business in equities and equity derivatives at Goldman among others, has been publishing the his Global Macro Report since and has just come out with the most condensed version of truth about our economic reality. The attached report provides the most in depth observation on the "future recession in an ongoing depression" which is arguably the best way to describe the current economic predicament. I found it quite interesting he writes a paragraph on a book I’ve just started reading: “If you’ve read the book The Fourth Turning by William Strauss and Neil Howe, you’ll note that this is almost exactly as they predicted. At the end of The Fourth Turning, we start the entire process again, returning to where the super-cycle began. In this case we would be returning to a society much more like the 1950’s which was a time of economic and social conservatism, economic isolationism and a whole heap of insecurity and paranoia”. Excellent data here on UK and Hungarian economies too. Send me your email address if you want this large attachment.
7. “Uncertainty changing investment landscape” – attached by Richard Clarida and Mohamed El-Erian: “We should all feel sorry for policymakers who face such distributions. The probability of a policy mistake is materially higher, especially as policy measures are subject to lags. What is less appreciated is the extent to which this changing shape of distributions affects conventional wisdom in the investment world, together with the rules of thumb that many investors have come to rely on. We can think of five implications”.
8. Felix W. Zulauf has worked in the financial markets for almost 40 years, starting his investment career as a trader for Swiss Bank, then training in research and portfolio management in New York, Zurich and in Paris.In 1977, Felix joined Union Bank of Switzerland (UBS), Zurich, managing global mutual funds, heading the institutional portfolio management unit and being global strategist for the UBS Group. He founded his wholly owned Zulauf Asset Management AG in 1990, allowing him to independently practice his own individual investment philosophy. Here is an interview with him.
9. “Why Today’s Deflation Won’t Kill Gold” – from Peak Theories research: a) Gold’s primary trend is up b) Today’s deflation will bleed into hyperinflation c) Ultimate hoarding vehicle d) Untarnished credit quality.
10. “The Farce Is Complete: S&P Downgrades Moody's To BBB+ From A-2”.
Saturday, March 13, 2010
Trust Everyone, But Do Not Cut The Cards Yet
“Rising stock prices and low interest rates have been a powerful tonic for lifting business and consumer confidence during economic recoveries. The tendancy after a deep downturn has been to underestimate the impact of economic policy and the business sector’s ability to strengthen. Our bet is that barring significant negative shocks, this recovery will prove to be durable”.
BCA Research March 2010
Below are some interesting articles I have read in the last week:
(Hover mouse over link, hold CTRL and click on links to access)
1. This January investment letter from Josh Berkowitz's global macro hedge fund Woodbine Capital says global rebalancing is the most important macro issue: "The natural adjustment for countries on the wrong side of global imbalances is to live below their means for an extended period of time, reversing the process from the pre-crisis period. Fiscal policy plays a far more important role than monetary policy in that process”. They are long fixed income and long exchange rates in regions that have seen aggressive exit strategies; they have bullish risk positions in countries like Hungary and bearish risk positions in countries like the UK for a fiscal consolidation trade; they are long capital goods providers tied to the emerging world and short companies providing capital to sectors in industrialized countries with excess supply; They have bullish Asian forex positions here and think stronger currencies will be found in countries that will be forced to raise rates. Please leave your email address on the comment page if you'd like a copy.
2. Nouriel Roubini - US Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession are Rising:
- Temporary factors that will boost growth in H1 '10 (2.7% F) will fade in H2 (1.5% F) led by private sector deleveraging;
- This H1 f/c could prove optimistic based on some of the most recent data releases;
- Dismissive of weather as an excuse; same for anyone (he calls them V shapers) using resilience of real consumption in January or the robustness of capex spending in Q4:
“Thus, the macro data are fully consistent with – at best – a U-shaped recovery. But the last two weeks of data are actually suggesting a significant downside risk to even an anemic 2.7% growth forecast for H1 as Q1 looks on a path closer to 2.0-2.5 growth. And if this is the best we get in H2 2009 and Q1 2010, when the effect of the temporary factors is still at their peak, what will happen to growth in H2 when these temporary factors will be faded out? At best a 1.5% growth rate that looks too close for comfort to a tipping point of a double-dip recession".
Please leave your email address on the comment page if you'd like a copy.
3. Betting on the Blind Side: Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession. This is a fantastic read.
4. How to Handle the Sovereign Debt Explosion – another sensible piece from Mohammed El-Erian at PIMCO, cautioning that the fiscal consolidation we are and will see will have what he calls “damaging recognition lags in both the public and private sectors”. He maintains we should expect rather than be surprised by this.
5. The European Union Trap: the latest John Mauldin piece is written by Rob Parenteau, an Austrian economist. The Austrian School holds that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult and advocates a laissez faire approach to the economy. Here’s the summary of his description of how economies will navigate the financial balances map (there’s a subtle common message between his point re blind pursuit of fiscal sustainability and PIMCO’s message above):
"The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus. More specific to the current predicament, we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard won and well deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export led growth strategies. Then again, it is also said that necessity is the mother of all invention (and desperation, its father?), so perhaps current account deficit nations will find the product innovations or the labor productivity gains that can lead to growing the market for their tradable products. In the meantime, for the sake of the citizens in the peripheral eurozone nations now facing fiscal retrenchment, pray there is life on Mars that exclusively consumes olives, red wine, and Guinness beer."
Please leave your email address on the comment page if you'd like a copy.
6. Making the Trend Your Friend: AQR Capital's Cliff Asness describes the process driving the Managed Futures Strategy Fund, its strategy versus other absolute return funds, and the timing of its recent launch (his fund is ranked at the top for "absolute return" funds).
7. Macro Man: 20 Questions: he has a list of 20 questions that you should try to answer to see what your absolute view is on each issue. It’s an interesting exercise to reverse-engineer your macro view. Please leave your email address on the comment page if you'd like a copy.
8. BCA Research – Global Investment Strategy: BCA research is excellent - it's interesting to see how much their view of the global recovery conflicts with that of Roubini et al. The main stumbling block is private sector consumption - all previous post war recoveries have been led by a rebound in private consumption. They believe, having looked at patterns of previous recoveries, that the magnitude and speed of consumption recovery matches the average pattern. Please leave your email address on the comment page if you'd like a copy.
9. Varieties of internal devaluation: Peripheral Europe in the Argentine mirror – this Voxeu piece looks at the similarities between Europe's fiscal woes now and those of Argentina in the earlier part of this century and explains why the internal devaluation options explored by Argentina (a "zero deficit rule" and an alternative currency) didn’t work.
10. These two articles - Stiglitz (The Dangers of Deficit Reduction) and Rogoff (Japan’s Slow Motion Crisis) are from a fantastic website that has regular well-informed contributions worth following.
BCA Research March 2010
Below are some interesting articles I have read in the last week:
(Hover mouse over link, hold CTRL and click on links to access)
1. This January investment letter from Josh Berkowitz's global macro hedge fund Woodbine Capital says global rebalancing is the most important macro issue: "The natural adjustment for countries on the wrong side of global imbalances is to live below their means for an extended period of time, reversing the process from the pre-crisis period. Fiscal policy plays a far more important role than monetary policy in that process”. They are long fixed income and long exchange rates in regions that have seen aggressive exit strategies; they have bullish risk positions in countries like Hungary and bearish risk positions in countries like the UK for a fiscal consolidation trade; they are long capital goods providers tied to the emerging world and short companies providing capital to sectors in industrialized countries with excess supply; They have bullish Asian forex positions here and think stronger currencies will be found in countries that will be forced to raise rates. Please leave your email address on the comment page if you'd like a copy.
2. Nouriel Roubini - US Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession are Rising:
- Temporary factors that will boost growth in H1 '10 (2.7% F) will fade in H2 (1.5% F) led by private sector deleveraging;
- This H1 f/c could prove optimistic based on some of the most recent data releases;
- Dismissive of weather as an excuse; same for anyone (he calls them V shapers) using resilience of real consumption in January or the robustness of capex spending in Q4:
“Thus, the macro data are fully consistent with – at best – a U-shaped recovery. But the last two weeks of data are actually suggesting a significant downside risk to even an anemic 2.7% growth forecast for H1 as Q1 looks on a path closer to 2.0-2.5 growth. And if this is the best we get in H2 2009 and Q1 2010, when the effect of the temporary factors is still at their peak, what will happen to growth in H2 when these temporary factors will be faded out? At best a 1.5% growth rate that looks too close for comfort to a tipping point of a double-dip recession".
Please leave your email address on the comment page if you'd like a copy.
3. Betting on the Blind Side: Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession. This is a fantastic read.
4. How to Handle the Sovereign Debt Explosion – another sensible piece from Mohammed El-Erian at PIMCO, cautioning that the fiscal consolidation we are and will see will have what he calls “damaging recognition lags in both the public and private sectors”. He maintains we should expect rather than be surprised by this.
5. The European Union Trap: the latest John Mauldin piece is written by Rob Parenteau, an Austrian economist. The Austrian School holds that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult and advocates a laissez faire approach to the economy. Here’s the summary of his description of how economies will navigate the financial balances map (there’s a subtle common message between his point re blind pursuit of fiscal sustainability and PIMCO’s message above):
"The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus. More specific to the current predicament, we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard won and well deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export led growth strategies. Then again, it is also said that necessity is the mother of all invention (and desperation, its father?), so perhaps current account deficit nations will find the product innovations or the labor productivity gains that can lead to growing the market for their tradable products. In the meantime, for the sake of the citizens in the peripheral eurozone nations now facing fiscal retrenchment, pray there is life on Mars that exclusively consumes olives, red wine, and Guinness beer."
Please leave your email address on the comment page if you'd like a copy.
6. Making the Trend Your Friend: AQR Capital's Cliff Asness describes the process driving the Managed Futures Strategy Fund, its strategy versus other absolute return funds, and the timing of its recent launch (his fund is ranked at the top for "absolute return" funds).
7. Macro Man: 20 Questions: he has a list of 20 questions that you should try to answer to see what your absolute view is on each issue. It’s an interesting exercise to reverse-engineer your macro view. Please leave your email address on the comment page if you'd like a copy.
8. BCA Research – Global Investment Strategy: BCA research is excellent - it's interesting to see how much their view of the global recovery conflicts with that of Roubini et al. The main stumbling block is private sector consumption - all previous post war recoveries have been led by a rebound in private consumption. They believe, having looked at patterns of previous recoveries, that the magnitude and speed of consumption recovery matches the average pattern. Please leave your email address on the comment page if you'd like a copy.
9. Varieties of internal devaluation: Peripheral Europe in the Argentine mirror – this Voxeu piece looks at the similarities between Europe's fiscal woes now and those of Argentina in the earlier part of this century and explains why the internal devaluation options explored by Argentina (a "zero deficit rule" and an alternative currency) didn’t work.
10. These two articles - Stiglitz (The Dangers of Deficit Reduction) and Rogoff (Japan’s Slow Motion Crisis) are from a fantastic website that has regular well-informed contributions worth following.
Saturday, March 6, 2010
Homogenous bond market
“The Kings, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle”.
“Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee”.
Bill Gross, March Investment Outlook
Below are some articles I have found interesting in the last week:
1. Hugh Hendry's latest investor letter out of his Eclectica Fund and his Absolute Macro Fund. He has sold over half of his 2 year forward curve steepeners in the UK. As of the end of January, currency positions represented 31% of their NAV, while government bonds (greater than 10 year) represented 18.3%. Looking at his top ten holdings, you see quite a mix of macro bets and equity plays. What's interesting is that ALL of Hendry's top 10 equity holdings are tobacco or cigarette companies. Overall though, the vast majority of their Absolute Macro holdings are appropriately in macro bets with currencies and fixed income. They also have a 1.5% short equity allocation via Eurostoxx put options.
2. Here is an in-depth look at Greek finances (Industrial Output, PMI, retail sales, car sales, borrowing needs, tax and income policy).
3. In a related topic, the difficulties Greece face is eloquently summarized by George Soros.
4. Martin Wolfe recently wrote an article in the Financial Times "The world economy has no easy way out of the mire". This blog analyses the article and its' gloomy conclusions.
5. “Industry investment research is often more useful in defining what assumptions are already factored into share prices than highlighting what is likely to move them going forward. Much of what passes for “analysis” in the investment industry is simply the extrapolation of current trends into perpetuity.” – Argonaut February letter my Barry Norris. I couldn’t have put it better myself and this analysis is rife in such a turbulent and uncertain market. This is a clever piece though, touching on the access-to-debt party we all had at Germany’s expense from 1999. The writer queries the sustainability of Chinese growth rates in the absence of fixed asset investment growth and all the associated commodity EM consequences.
6. Bill Gross from PIMCO focuses his entire March letter on sovereign debt. He basically discusses the prospect of a more homogenous type of bond market as per the quote above.
7. “Empires on the Edge of Chaos” - Niall Ferguson theorizes about the consequences of things going wrong in complex systems (argues that the scale of disruption is nearly impossible to anticipate). This is heavy reading.
8. “The Idiocy of Hope” - Marc Faber from January (pls request this from me). Investment considerations in 2010 include weakness in the Yen and Japanese government bonds (so strength in equities), preference for large cap high quality stocks and avoidance of small caps (I guess the credit access trade) and finally a nervousness of the near unanimous consensus that emerging markets will continue to outperform US equities.
9. “Japan – Past the Point of No Return”: Presentation (pls request this from me)focusing on one fact that's been known for a while: the Japanese savings rate is declining as their population ages. But, the main thing to take away from that is that the Japanese will become net sellers of bonds and this has consequences. In order to fight off the yen's depreciation against the dollar, Japan will have to sell some of their dollar reserves. That's a much bigger deal than it sounds when you consider that Japan is the largest holder of US treasuries. Conclusively, Katsenelson argues that the US economy should work things out naturally rather than relying on continuous stimulus spending so we don't end up like Japan.
10. Paul Krugman: “The Fed, and equally importantly the ECB, is seriously underestimating the deflationary danger. The basic rules haven’t changed: a slack economy puts downward pressure on inflation. One measure of core inflation is the Dallas Fed’s trimmed-mean personal consumption expenditures deflator, in two big recessions and aftermath, 1981-82 and 2007-2009. There’s a hint here in the data of stickiness as inflation gets close to zero. But zero isn’t a magic number: even falling inflation raises real interest rates when nominal rates can’t fall”.
“Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee”.
Bill Gross, March Investment Outlook
Below are some articles I have found interesting in the last week:
1. Hugh Hendry's latest investor letter out of his Eclectica Fund and his Absolute Macro Fund. He has sold over half of his 2 year forward curve steepeners in the UK. As of the end of January, currency positions represented 31% of their NAV, while government bonds (greater than 10 year) represented 18.3%. Looking at his top ten holdings, you see quite a mix of macro bets and equity plays. What's interesting is that ALL of Hendry's top 10 equity holdings are tobacco or cigarette companies. Overall though, the vast majority of their Absolute Macro holdings are appropriately in macro bets with currencies and fixed income. They also have a 1.5% short equity allocation via Eurostoxx put options.
2. Here is an in-depth look at Greek finances (Industrial Output, PMI, retail sales, car sales, borrowing needs, tax and income policy).
3. In a related topic, the difficulties Greece face is eloquently summarized by George Soros.
4. Martin Wolfe recently wrote an article in the Financial Times "The world economy has no easy way out of the mire". This blog analyses the article and its' gloomy conclusions.
5. “Industry investment research is often more useful in defining what assumptions are already factored into share prices than highlighting what is likely to move them going forward. Much of what passes for “analysis” in the investment industry is simply the extrapolation of current trends into perpetuity.” – Argonaut February letter my Barry Norris. I couldn’t have put it better myself and this analysis is rife in such a turbulent and uncertain market. This is a clever piece though, touching on the access-to-debt party we all had at Germany’s expense from 1999. The writer queries the sustainability of Chinese growth rates in the absence of fixed asset investment growth and all the associated commodity EM consequences.
6. Bill Gross from PIMCO focuses his entire March letter on sovereign debt. He basically discusses the prospect of a more homogenous type of bond market as per the quote above.
7. “Empires on the Edge of Chaos” - Niall Ferguson theorizes about the consequences of things going wrong in complex systems (argues that the scale of disruption is nearly impossible to anticipate). This is heavy reading.
8. “The Idiocy of Hope” - Marc Faber from January (pls request this from me). Investment considerations in 2010 include weakness in the Yen and Japanese government bonds (so strength in equities), preference for large cap high quality stocks and avoidance of small caps (I guess the credit access trade) and finally a nervousness of the near unanimous consensus that emerging markets will continue to outperform US equities.
9. “Japan – Past the Point of No Return”: Presentation (pls request this from me)focusing on one fact that's been known for a while: the Japanese savings rate is declining as their population ages. But, the main thing to take away from that is that the Japanese will become net sellers of bonds and this has consequences. In order to fight off the yen's depreciation against the dollar, Japan will have to sell some of their dollar reserves. That's a much bigger deal than it sounds when you consider that Japan is the largest holder of US treasuries. Conclusively, Katsenelson argues that the US economy should work things out naturally rather than relying on continuous stimulus spending so we don't end up like Japan.
10. Paul Krugman: “The Fed, and equally importantly the ECB, is seriously underestimating the deflationary danger. The basic rules haven’t changed: a slack economy puts downward pressure on inflation. One measure of core inflation is the Dallas Fed’s trimmed-mean personal consumption expenditures deflator, in two big recessions and aftermath, 1981-82 and 2007-2009. There’s a hint here in the data of stickiness as inflation gets close to zero. But zero isn’t a magic number: even falling inflation raises real interest rates when nominal rates can’t fall”.
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