Thursday, October 19, 2017

Truth and Political Correctness

"Today's politically correct society prefers to waste its time with tearing down important historical monuments that are a reminder of our history, even if it was not always glorious. Important issues such as how we are going to resolve the problem of excessive debts and enormous unfunded pension fund liabilities, etc are ignored or neglected."

"If stating some historical facts makes me a racist, then I suppose that I am a racist."

Monday, October 2, 2017

October 2017 Monthly Commentary

In mid-May 2000 (17 years ago), my friend George Schott, in a contribution for the Gloom Boom & Doom report (the title of the GBD report was The Coming Vindication of Value Investors) wrote under the subtitle, "Ramp Champs" that the April 3, 2000 edition of Forbes Magazine, which unintentionally presaged the NASDAQ's worst week in its history, published an article entitled, ‘Ramp Champs: The Best-Managed, Fastest-Growing Tech Companies in the World.’

A month later these stocks had already declined by 66% from the early 2000 highs, and at the October 2002 low, the NASDAQ 100 Index had declined by 83% from the March 2000 high.....

In early 2000 a huge change in stock market leadership occurred. The TMT sector entered a historic bear market, while old economy stocks began to outperform. However, the transition was not smooth but turbulent because although the old economy stocks outperformed the TMT sector and the NASDAQ Index they were under pressure from the unfolding 2000 to 2003 bear market (the Dow Jones Industrial average fell from the January 2000 high to the October 2002 low by 39%).

It is therefore, important to keep in mind that in a bear market even the stocks which will be the future leaders face powerful headwinds coming from the value destruction that bear markets bring along. There are numerous similarities between the 2000 TMT bubble and the current US stock market bubble. However, whereas the 2000 bubble was concentrated in just the TMT sector the current asset bubble is just like SPECTRE (Special Executive for Counter-intelligence, Terrorism, Revenge and Extortion) everywhere – admittedly to lesser degree in some asset classes. The 2000 NASDAQ collapse - because of its narrow scope - did not cause widespread economic or financial hardship. This cannot be said of the current all-encompassing asset bubble. Whenever it will burst, the economic damage will be considerable all around the world as well as the capital losses to asset holders as there are hardly any places to hide. 

via gloomboomdoom

Tuesday, August 22, 2017

India could be the second largest economy in 20 years

According to PwC (PricewaterhouseCoopers), the auditing firm, India is basically going to be the second largest economy in the world in 20 to 30 years. I know lots of wealthy families who have hardly any exposure to India at all. But in my opinion, foreigners who have no money in India have made a mistake. Now, should they invest when the index is at 32,000? 

Well if they don't have any money in India, then I would at least invest a little bit at 32,000 but have a disciplined program that if the market declined, I would buy more and not sell if it goes down. 

Thursday, August 3, 2017

August 2017 Market Commentary Summary

Recently, a Bloomberg column by Alberto Gallo caught my attention for its insights about the “Minsky Moment.”

According to Gallo, "In his theory on financial markets' fragility and instability, the late Hyman Minsky argued that ‘from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control.’ Following the 2008 crisis, he inspired the term ‘Minsky moment’ to describe a sudden market collapse that follows the exhaustion of credit."
Gallo thinks that, "Today, we may be approaching a second Minsky moment. After the 2008 debt crisis, central bankers reacted with unconventional tools. If the problem was excess debt, the remedy applied was to lower interest rates and buy large quantities of it. Quantitative easing helped to avoid an even deeper recession, but it didn't solve the root causes of the crisis. Global debt levels are up 276 percent in the last decade to $217 trillion, or 327 percent of GDP, according to the Institute of International Finance. But this time around the issue isn't only excess debt – it is also that prolonged loose monetary policy may have left us with at least three collateral effects. The first is a mis-allocation of economic resources. By keeping rates at record-low levels, central banks have made it easier for inefficient firms to survive, as in a rising tide that lifts all boats. The second is a rise in wealth inequality, where the wealth effect from rising asset prices benefited asset owners and the old more than the young and the poor. The third is a suppression of risk premia and volatility across financial markets.”

I agree with most of what Gallo has to say, except that there is actually a lot of volatility already, which manifests itself in different asset prices simultaneously (except in the S&P 500), which has produced some unpredictable results. If you consider how the asset purchases of the ECB and the BoJ have vastly exceeded the Federal Reserve’s balance sheet expansion in 2016 and 2017, you would have assumed in advance US dollar strength and not US dollar weakness (though since the beginning of the year, this report has repeatedly argued that the US dollar was grossly overvalued).

The point is that we had plenty of volatility already within stock, commodity, bond and currency markets. The US dollar and the Euro are the world’s most actively traded currencies and between May of 2016 and the end of the year, the Euro lost more than 10% against the US dollar. This year the Euro has recovered and has so far gained 12%. Given the size of this market and its economic and financial importance I would regard these movements as very volatile.

I am actually bringing up the subject of volatility because some investors will argue that markets no longer make any sense. To this I would respond that frequently markets will move "without making sense" at the time of the initial move. But later, when we look back at market moves they make perfect sense. Therefore, when I see such a large move of the Euro against the US dollar I ask myself if the market is not implying that the Fed’s rhetoric about tightening monetary conditions is just what it usually is in the case of central banks: empty talk by some "ignoranti" with no or little action following through.

In the next twelve months, making money from equities will become trickier than in the first seven months of this year as some sectors, markets, and individual stocks do well while others decline. In the US, I would expect the FANG and related stocks to perform poorly, whereas mining, fertilizer, and commodity related companies (including oil) perform relatively better.

I wish my readers superb summer holidays and don’t forget Lin Yutang' words:

"If you can spend a perfectly useless afternoon in a perfectly useless manner, you have learned how to live." 

Kind regards 
Yours sincerely

Marc Faber