Tuesday, October 18, 2016

Central banks have no option but to continue Money Printing

I was not a fan, for now several years of U.S. equities. But I always said that emerging markets over the last 12 months have become relatively attractive. And so this year, we had the Philippines, Thailand, Indonesia, Vietnam all up in the order of 15 to 25 percent. So I think we have to look at the world...there’s plenty of money floating around the world. One day it goes into commodities and then another day it goes into equities and then it goes into some currencies and then it goes into bonds and so forth. So we can’t be overly diplomatic. 

And number two, I really believe the Fed and other central banks have no option but to print money. The whole system collapses if they stop printing money. And so they will keep on printing money. Now over the last 18 years, the balance sheets of major central banks have gone up 16 times. I think they can go up by another 20 times or maybe 30 times or 100 times. You know if you can print money, you really can print money. The impact on the economy is of course not very good, but you can do it.

Thursday, October 13, 2016

World will move to a sound financial system over time

The crisis in 2007-08 occurred because we had excessive credit growth and because banks in Europe and of course in the U.S. changed their nature – from being essentially institutions that accept deposits and then make loans to people, into big institutions that gamble with clients’ money. And so the first problem occurred with Bear Stearns and then Lehman Brothers in the U.S. and then AIG, and that was then bailed out. But the bailout did not lead to cleaning-up of the system. The banks were allowed to continue to gamble with their capital. 

And now with zero interest rates and with more leverage than in 2007 in the banking system and in total debt as a percentage of GDP, now there is a problem with Deutsche Bank. And I suppose the bank is basically bankrupt. But the government will not let it go bankrupt. They will engineer some kind of a bailout. Either the government can ask the private sector to help Deutsche Bank or the government can help Deutsche Bank. But it is not that the bank will disappear. But I think what will happen over the time is that these banks like Deutsche Bank, Credit Suisse, UBS , JPMorgan, Citi  and so forth will not be allowed to gamble in all kinds of speculative markets - whether it’s equities, swaps, currencies. So I think that in general we’ll move over time to sound the financial system. But it is not going to happen overnight, it will take a lot of time.

Tuesday, October 11, 2016

Wednesday, October 5, 2016

October 2016 Monthly Market Commentary

87 years old Jack Bogle founded the Vanguard Company in 1974. Today, Vanguard is one of the most respected and successful companies in the investment world. According to Bogle, we shouldn’t expect “a revisitation of the ’80s or ’90s, when stocks returned 18% a year…. Those planning on a comfy retirement or putting a kid through college will have to save more, work to keep costs low, and - above all - stick to the plan.”

The Wall Street Journal explains that “Mr. Bogle relies on a forecasting model he published 25 years ago, which tells him that investors over the next decade, thanks largely to a reversion to the mean in valuations, will be lucky to clear 2% annually after costs. Yuck.

Then why invest at all? Maybe it would be better to sell and stick the cash in a bank or a mattress. ‘I know of no better way to guarantee you’ll have nothing at the end of the trail,’ he responds. ‘So we know we have to invest. And there’s no better way to invest than a diversified list of stocks and bonds at very low cost.’”

Normally, I would not spend much time discussing Indexing. The point I want to make is that for the average investor (by definition a relatively small investor) “there’s no better way to invest” than Bogle’s strategy of investing “in a diversified list of stocks and bonds at very low cost.”

However, I am referring here to the average investor and not to the savvy financier who knows how to select one of the few active managers who actually outperforms an index over time, or an investor who has sufficient analytical skills and discipline to select companies that beat the index over time.

In a recent article for the Financial Times, William White observed that

“The monetary stimulus provided repeatedly over the past eight years has failed […] Debt levels have risen […] Consumers have had to save more, not less, to ensure adequate income in retirement. At the same time, easy money threatens two sets of undesirable side effects. First, current policies foster financial instability… and many asset prices bid up to dangerously high levels. Second, current policies threaten future growth. Resources misallocated before the crisis have been locked in through zombie banks supporting zombie companies. On the demand side, accumulating debt creates headwinds, leading to more monetary expansion and more debt […] On the supply side, misallocations slow growth, which again leads to monetary easing, more misallocation and still less growth.”

I have a high respect for Bill White as an economist because he identified the problems correctly. Unfortunately, I cannot agree with his view that “Only government action can resolve a global solvency crisis.”

Therefore, I expect more of the same: larger fiscal deficits, larger governments that will own not only their public debts but increasingly also equities through their respective central banks, which will happily continue to print money.

In this context my readers should remember the words of Paul Volcker:

“It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. [I]f the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.”