I pretty much think of Kyle Bass as the smartest investor out there. He has a new interview online with Financial Sense Newshour. Here’s an interesting quote about why Japan’s eventual bond crisis is a question of when, not if:
“When you think about what Reinhart and Rogoff’s book says, it kind of gets to an answer but it’s not the right way to look at things; there are many more variables to analyze the situation with. One is, of course, debt to central government tax revenues—that ratio. Another one is what percentage of your central government tax revenues do you spend on interest alone? Those barometers are much more impactful than just using a debt-to-GDP barometer. And then when you think about Reinhart and Rogoff’s work, if you’ve read all the white papers that they’ve written prior to writing the book, one of the other conclusions that they draw is when debt gets to be about 100% GDP it becomes problematic. Well, what that means is, typically—and, again, painting the world with a broad brush—central government tax revenues are roughly 20% of GDP. So what they’re telling you is when debt gets to be 5 times your revenue, that’s when you start to have a problem. Historically, the analysis that’s been done empirically by academics has focused on the countries that have fallen into a restructuring or a default as a result of this ratio that you and I are discussing. Historically, those have been emerging market economies that have higher borrowing costs. So, it actually makes complete sense that that number is too low when you’re talking about a developed market economy versus an emerging economy because, in theory, a developed economy can borrow at lower rates than an emerging economy can. That being said, in Japan, when the debts are 24 times their central government tax revenue, they are already completely insolvent—it’s just a question of when does it blow up.”
Wednesday, October 30, 2013
Monday, October 28, 2013
"Once more unto the breach..." (Redux)
Around the blogosphere, some of the usual suspects are referencing the WWII “boom” as conclusive evidence in favor of implementing Keynesian fiscal stimulus measures right now. Which strikes me as a totally misleading narrative. The sequence of the war was more like this…rationing and hard times, many people killed, and that condition persisting for as long as the war did. It was only after the war, and when government got out of the way, that life started to improve again.
Africa - The Ultimate Frontier Market
The subtitle is A Guide to the Business and Investment Opportunities in Emerging Africa and the author is David Mataen (2012).
I started reading it in February, but put it down because I couldn’t find a rhythm. But after reading the book by Joe Studwell, I thought that it would be interesting to see if some of the same ideas about emerging economies popped up when talking about Africa.
As you might have surmised, the book tries to outline the investment thesis for Sub-Saharan Africa. And it is the standard case in many ways – very strong demographic tailwinds, concerted efforts at political and economic reform, an increasingly educated population with rising consumer demands and more wealth, growing financial and credit markets, and improved infrastructure. There is not a huge focus on why instability persists in many countries. And whereas Studwell used Asia as a means to underwrite his thesis about more state control at the nascent stages of development, Mataen takes the approach that state intervention is generally counter-productive and dissuades the foreign investment needed for efficiencies to take hold. While Mataen relies on that last point in making many of his other arguments, he seems to treat it as true by stipulation. However, there is reference to the fact that allowing the former colonial powers to maintain some control over land after independence left many from the indigenous population landless, a big concern within Studwell’s framework and something that Mataen believes led to the large slums that still remain in many African cities.
Nevertheless, I do think that Africa represents the largest, untapped investment idea out there. Assuming you can navigate civil wars, corrupt governments and other obstacles, there is money to be made. And while that last statement reeks of skepticism, don’t misread the fact that I am a long-term bull.
I started reading it in February, but put it down because I couldn’t find a rhythm. But after reading the book by Joe Studwell, I thought that it would be interesting to see if some of the same ideas about emerging economies popped up when talking about Africa.
As you might have surmised, the book tries to outline the investment thesis for Sub-Saharan Africa. And it is the standard case in many ways – very strong demographic tailwinds, concerted efforts at political and economic reform, an increasingly educated population with rising consumer demands and more wealth, growing financial and credit markets, and improved infrastructure. There is not a huge focus on why instability persists in many countries. And whereas Studwell used Asia as a means to underwrite his thesis about more state control at the nascent stages of development, Mataen takes the approach that state intervention is generally counter-productive and dissuades the foreign investment needed for efficiencies to take hold. While Mataen relies on that last point in making many of his other arguments, he seems to treat it as true by stipulation. However, there is reference to the fact that allowing the former colonial powers to maintain some control over land after independence left many from the indigenous population landless, a big concern within Studwell’s framework and something that Mataen believes led to the large slums that still remain in many African cities.
Nevertheless, I do think that Africa represents the largest, untapped investment idea out there. Assuming you can navigate civil wars, corrupt governments and other obstacles, there is money to be made. And while that last statement reeks of skepticism, don’t misread the fact that I am a long-term bull.
Thursday, October 24, 2013
The Reserve Currency
There’s been some chatter lately about the dollar’s status as the reserve currency. Some (including Krugman) have tried to downplay its significance. I think any such analysis is wishful thinking at best and political pandering more likely.
Why does the “exorbitant privilege” matter? There are two crucial pieces that I credit the Richard Duncan and David Stockman books with helping me to understand. It matters because the dollar is the currency of settlement in international trade. And, relatedly, because the export/mercantilist economies need to buy dollar reserves and assets in order to keep their own currencies weaker.
For example, in the case of the former, China wants to by a barrel of oil from Saudi Arabia, but they need to go out in the market and buy some dollars in order to effectuate the transaction (all of which makes some of the recent moves by countries to conduct trade in gold or Renminbi interesting). With the latter, the Chinese peg the Renminbi to the dollar in order to keep their own exports cheaper for and more attractive to U.S. consumers. As should be clear, both create a demand for dollar assets – that presumably helps to keep interest rates lower, allowing the American government to run large deficits and sell debt, and American consumers to lever up and buy more stuff.
One can only wonder what might happen if the status quo were to change.
Why does the “exorbitant privilege” matter? There are two crucial pieces that I credit the Richard Duncan and David Stockman books with helping me to understand. It matters because the dollar is the currency of settlement in international trade. And, relatedly, because the export/mercantilist economies need to buy dollar reserves and assets in order to keep their own currencies weaker.
For example, in the case of the former, China wants to by a barrel of oil from Saudi Arabia, but they need to go out in the market and buy some dollars in order to effectuate the transaction (all of which makes some of the recent moves by countries to conduct trade in gold or Renminbi interesting). With the latter, the Chinese peg the Renminbi to the dollar in order to keep their own exports cheaper for and more attractive to U.S. consumers. As should be clear, both create a demand for dollar assets – that presumably helps to keep interest rates lower, allowing the American government to run large deficits and sell debt, and American consumers to lever up and buy more stuff.
One can only wonder what might happen if the status quo were to change.
Tuesday, October 22, 2013
The Long Game
I want to expand on my last post because I finally feel like something clicked with respect to gold and where it’s headed. Let’s review:
-In a post on October 11th, I looked at gold on a daily chart (each candlestick represents one day’s price action). My view was that a cup-and-handle was in play, with the cup spanning from early May to late August. The handle piece was still not confirmed and needed to set up in a hurry in order to be viable. But, if it happened, the overhead resistance level would be $1,420 and projected to somewhere around $1,700.
-Within that post, and acknowledging the possibility that a low was not yet in, I suggested an alternative theory that the cup was really a left shoulder and part of a larger bottoming formation that could span well into 2014. Again, the neckline would be $1,420, but the bottom had yet to be found. Still, borrowing from Jim Rogers and others who think it could go as low as $900 to $1,000, the projected target would be something like $1,800 to $1,900.
-Enter today’s thinking. On an even longer time frame, where we look at price in terms of weeks instead of days, the chart is suggestive of an inverse head-and-shoulders about halfway through, this time with $1,800 as the key level of overhead resistance. But, by virtue of the larger scope, the target would be significantly higher. If the price had found a bottom at roughly $1,200, then the minimum projection would take us to $2,400. But, again, accepting Jim Rogers’ rough forecast and using $1,000 as an eventual trough, the new projected target could be at least $2,600. In this scenario, we are talking about a pattern that is apt to take another 18 to 24 months to resolve.
What am I going to do about it?
-The key is to watch the $1,420 level, which is less than $100 away as I write. A break above and I’m playing a move towards $1,700. And any pullback along the way should produce higher lows and a trend line will inevitably develop that one could to use to trade in and out. Or you might just buy some long-dated out-of-the-money calls with the break of $1,420.
-If the cup-and-handle doesn’t materialize, then we are probably headed lower. Without an instinct to where the fall would stop, $1,000 seems like as good a forecast as any, so I’m buying when we get there. Again, probably some LEAPS and I’m giving myself enough time to let the head on both the weekly and daily charts play out. I’m selling them when we get back above $1,700.
So far, either scenario seems to bring us to the same place as far as selling this initial trade.
-Once we get up to the $1,700 to $1,800 level, a correction of some depth will come as the right shoulder develops. My expectation is that the support will exist between $1,500 and $1,600. And the right shoulder itself should take 9 to 12 months to form, bottoming out somewhere in the middle of that period. And if I’m smart enough to see it, I will again consider adding to physical and LEAP positions at around that level.
-Now it’s time to see the bottoming formation complete itself. And it probably says 2015 on the calendar as that happens. But then the fireworks begin.
(Breathe.)
Obviously, this could all be moot. But, if I’m wrong, it doesn’t really matter yet, because I’m not going to do anything right now. But, if I’m right – and I kind of have to believe that if I’m convinced that the bull market will continue – then all of the above seems reasonable. And, to bring Jim Rogers back to the discussion, a cup-and-handle or an inverse head-and-shoulders, all within an even larger inverse head-and-shoulders, taking place over 3 or 4 years… well, that sure sounds like a “complicated bottoming process”.
-In a post on October 11th, I looked at gold on a daily chart (each candlestick represents one day’s price action). My view was that a cup-and-handle was in play, with the cup spanning from early May to late August. The handle piece was still not confirmed and needed to set up in a hurry in order to be viable. But, if it happened, the overhead resistance level would be $1,420 and projected to somewhere around $1,700.
-Within that post, and acknowledging the possibility that a low was not yet in, I suggested an alternative theory that the cup was really a left shoulder and part of a larger bottoming formation that could span well into 2014. Again, the neckline would be $1,420, but the bottom had yet to be found. Still, borrowing from Jim Rogers and others who think it could go as low as $900 to $1,000, the projected target would be something like $1,800 to $1,900.
-Enter today’s thinking. On an even longer time frame, where we look at price in terms of weeks instead of days, the chart is suggestive of an inverse head-and-shoulders about halfway through, this time with $1,800 as the key level of overhead resistance. But, by virtue of the larger scope, the target would be significantly higher. If the price had found a bottom at roughly $1,200, then the minimum projection would take us to $2,400. But, again, accepting Jim Rogers’ rough forecast and using $1,000 as an eventual trough, the new projected target could be at least $2,600. In this scenario, we are talking about a pattern that is apt to take another 18 to 24 months to resolve.
What am I going to do about it?
-The key is to watch the $1,420 level, which is less than $100 away as I write. A break above and I’m playing a move towards $1,700. And any pullback along the way should produce higher lows and a trend line will inevitably develop that one could to use to trade in and out. Or you might just buy some long-dated out-of-the-money calls with the break of $1,420.
-If the cup-and-handle doesn’t materialize, then we are probably headed lower. Without an instinct to where the fall would stop, $1,000 seems like as good a forecast as any, so I’m buying when we get there. Again, probably some LEAPS and I’m giving myself enough time to let the head on both the weekly and daily charts play out. I’m selling them when we get back above $1,700.
So far, either scenario seems to bring us to the same place as far as selling this initial trade.
-Once we get up to the $1,700 to $1,800 level, a correction of some depth will come as the right shoulder develops. My expectation is that the support will exist between $1,500 and $1,600. And the right shoulder itself should take 9 to 12 months to form, bottoming out somewhere in the middle of that period. And if I’m smart enough to see it, I will again consider adding to physical and LEAP positions at around that level.
-Now it’s time to see the bottoming formation complete itself. And it probably says 2015 on the calendar as that happens. But then the fireworks begin.
(Breathe.)
Obviously, this could all be moot. But, if I’m wrong, it doesn’t really matter yet, because I’m not going to do anything right now. But, if I’m right – and I kind of have to believe that if I’m convinced that the bull market will continue – then all of the above seems reasonable. And, to bring Jim Rogers back to the discussion, a cup-and-handle or an inverse head-and-shoulders, all within an even larger inverse head-and-shoulders, taking place over 3 or 4 years… well, that sure sounds like a “complicated bottoming process”.
The Longer View
Unfortunately the right side (price) got cut off, but below is gold on a weekly basis going back to June, 2011 (i.e., it includes the spike to $1,900 per ounce).
I don't have much to say, except that maybe we are halfway through the head in an inverse head-and-shoulders. The neckline is $1,800. The trough is $1,200. It will probably take another a year or two to complete, but it projects to north of $2,400. And if you marry it to my other recent analysis, which is more short-term and looks at the potential cup-and-handle that could be another inverse head-and-shoulder within the larger one on the weekly, all you're doing is setting up an even higher target.
I don't have much to say, except that maybe we are halfway through the head in an inverse head-and-shoulders. The neckline is $1,800. The trough is $1,200. It will probably take another a year or two to complete, but it projects to north of $2,400. And if you marry it to my other recent analysis, which is more short-term and looks at the potential cup-and-handle that could be another inverse head-and-shoulder within the larger one on the weekly, all you're doing is setting up an even higher target.
Setting Sun
For any long-time reader, my interest in the fate of the Japanese economy is not a secret. And the most recent data point, that the trade deficit continues to shoot up, bolsters my thesis that things will not end well.
Let’s take a step back. Prime Minister Shinzo Abe rolled into office on an agenda that would help Japan out of its deflationary funk and grow the economy. Although multi-pronged, the main tool has been a Central Bank willing to buy $75 billion per month in assets in order to generate inflation, exports and wage growth. So far, the results have been underwhelming. Last November, the USD/JPY cross was in the high-70s, it is now at about 100. And with that, none of the good stuff has really followed. Sure, corporate profits are up, but inflation is up as well. And not the good kind that economists always promise, but the one where wages are stagnant and energy and food costs are higher.
Anyway, back to the latest piece of evidence in the case for an economic implosion in the land of the rising sun. Exports rose 11.5% YoY in September, but that is actually a loss in real terms when the currency depreciation is factored in. Add to that that, imports also rose 16.5% YoY and one is left with the worst September trade deficit ever, the same story as the preceding 4 months. And even with higher corporate profits, much of it is being made overseas and the revenues are not being repatriated.
So, I think the path is clear, even as most people continue to look for the silver lining. I am inclined to put on a Yen short with more verve. It strikes me as the trade that will keep on giving.
Let’s take a step back. Prime Minister Shinzo Abe rolled into office on an agenda that would help Japan out of its deflationary funk and grow the economy. Although multi-pronged, the main tool has been a Central Bank willing to buy $75 billion per month in assets in order to generate inflation, exports and wage growth. So far, the results have been underwhelming. Last November, the USD/JPY cross was in the high-70s, it is now at about 100. And with that, none of the good stuff has really followed. Sure, corporate profits are up, but inflation is up as well. And not the good kind that economists always promise, but the one where wages are stagnant and energy and food costs are higher.
Anyway, back to the latest piece of evidence in the case for an economic implosion in the land of the rising sun. Exports rose 11.5% YoY in September, but that is actually a loss in real terms when the currency depreciation is factored in. Add to that that, imports also rose 16.5% YoY and one is left with the worst September trade deficit ever, the same story as the preceding 4 months. And even with higher corporate profits, much of it is being made overseas and the revenues are not being repatriated.
So, I think the path is clear, even as most people continue to look for the silver lining. I am inclined to put on a Yen short with more verve. It strikes me as the trade that will keep on giving.
Subscribe to:
Posts (Atom)
-
In light of my previous post, here's what I'm thinking: buy some GLD $180 calls that expire 3/16/13. Right now, you can get them fo...
-
When it comes to understanding what's going on in the world -- and, by that, I mean the real facts and actual implications, rather than ...
-
I came across this really interesting chart regarding 2013 and 2014 EPS forecasts by region and globally. Note the very pronounced move fr...