What Worked During The Last Decade Is Not Likely To Work This Decade
Based on the large amounts of reading that we do each week to stay in front of the curve we came across an excellent article last week from a Hong Kong think-tank known as GK Research (aka GaveKal Research). For those of you who are not familiar with their shop, GakeKal has been around for along time and they have been very accurate over the years with their prognostication for the global financial markets. John Mauldin, someone who we read quite often, will refer to GaveKal from time to time in his international newsletter. In a nutshell, they are highly regarded in our industry.
If you have the time, we've attached a link (see below) to the entire article and we encourage you to check it out at your leisure. If you do not have the time to peruse it but would like the clif notes, we've taken the liberty of summarizing the article for you below.
GAVEKAL ARTICLE SUMMARY
The three big events of 2001 were:
- The terrorist attacks of 9/11. This unleashed a decade of bi-partisan "guns and butter" policies in the U.S. and produced a structurally weaker dollar.
- China joining the WTO (World Trade Organization) in December 2001. China's full entry into the global trading system signaled a re-organization of global production lines and China's emergence as a major exporter.
- The introduction of euro banknotes. The introduction of the common currency unleashed a decade of excess consumption in southern Europe, financed unwittingly by northern Europe through large bank and insurance purchases of government debt.
But today, all three trends have stalled and this perhaps accounts for the discomfort and uncertainty we find today in the financial markets...
- For the first time since 1970, real growth in U.S. government spending is in negative territory.
- Chinese capital spending is slowing down. China still needs to invest a lot more in it's own infrastructure if it is to sustain the growth rates that it has benefited from over the past (10) years.
- Excess consumption in southern Europe (i.e. the Club Med countries like Greece, Italy and Spain) is essentially over. Money is clearly flowing out of those EU countries to seek refuge in other more stable economies.
Conclusion:
- Investors whose portfolios are positioned towards the above three (3) trends are facing the wrong way. Instead of lamenting over the past, investors should be coming to grips with the trends of the future: 1) the internationalization of the RMB, 2) the rise of cheaper and more flexible automation, and 3) dramatically cheaper energy in the US in the years to come.
- The internationalization of the RMB (Renminbi - the official currency of the Peoples Republic of China) and the birth of the RMB bond market is likely to be one of the most important developments of the decade. The closest analogy would be the creation of the junk bond market by Michael Milken back in the 1980's.
- The likely evolution of the US from record high twin deficits to much smaller budget and trade deficits should help push the dollar higher over the coming decade. In short, look to buy investments that are bullish on the U.S. dollar over the next several years.
Source: GaveKal March 14, 2012
Continuing The Theme Of What Worked Last Decade Isn't Necesarily Going To Work During This Decade...
- "This isn't a year [2012] about economic growth or earnings, it's all about the probability of the left tail risk. How afraid are people? When the stock market yields the same as a ten-year Treasury, people are invested in a very afraid manner. My view is that this year is when fear dissipates some, the crisis premium comes out, the risk premium comes out and that means interest rates move up, spreads narrow and equity (stock) valuations move up." (Bloomberg)
Bob Doll, Chief Equity Strategist for BlackRock
Barron's Cover Story This Week Is Betting That U.S. Home Prices Will Be Rising Soon
...there are signs that the long nightmare for American homeowners is in its terminal stage, and that, maybe, just maybe, home prices will bottom and begin to turn by the spring of 2013 - if not before. Certainly, the economy is doing better these days, in part, because of the improved demand for housing in major U.S. cities.
Jobs numbers have been up sharply three (3) months in a row, leading to a jump in consumer confidence of late. The near-record low in mortgage rates and the slide in home prices has made houses and condos stunningly affordable... You can read the entire article by clicking on the link below.
Barron's Article: Ready To Rebound
Meanwhile, some increased cautiousness on China...
China's economy is already in a so-called "hard landing," according to Adrian Mowat, JPMorgan Chase & Co.'s chief Asian and emerging-market strategist.
"If you look at the Chinese data, you should stop debating about a hard landing," Mowat, who is based in Hong Kong, said at a conference in Singapore yesterday. "China is in a hard landing. Car sales are down, cement production is down, steel production is down, and construction stocks are down. It's not a debate anymore, it's a fact." You can read the entire article by clicking on the link below.
Bloomberg Article
Here's a Great Chart Showing the Correlation Between the Odds of a Strike on Iran and Crude Oil Prices
This Math Doesn't Add Up...
From the mid-1980s to 2005, California's population grew by 10 million people, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000. You can read the entire article by clicking on the link below.
WSJ: California's Greek Tragedy
Proof That You Are Never Too Old To Understand or Invest in Technology.
In an interview with Li Ka-shing, Asia's wealthiest person, the octogenarian has an uncanny intuition for what plays in the digital world...
Li's Facebook score is just the latest example of his midas touch in an enviable streak of successful investments. Horizons (one of many of Li's firms) invested early on in, what was at that time, a money-losing Skype back in 2005 - a year before eBay paid $2.5-billion for it! Another Li-backed firm, Siri, was recently bought by Apple in 2010 after Li invested $7.5-million a year earlier. More recently he has made investments in music site Spotify, crowdsourced car-navigation aid Waze and waterproofing tech outfit HzO. You can read the entire article by clicking on the link below.
Where Asia's Richest Man Is Putting His Money Now
And proof that you are never too old to make $2 billion in 7 months...
In late August of 2011, when Bank of America (BAC) was looking for an ally, Warren Buffett and Berkshire Hathaway paid $5 billion and bought a 6% yielding BAC convertible preferred stock with a strike price of $7.14 on 700 million shares. Once BAC trades at $10.00/share (closed on Friday in the $9.70's) the unrealized (or paper) gain on Berkshire's position will be worth $2 billion.
Random tidbits
- The light hitting the earth right now is 30 thousand years old.
- The chances of you dying on the way to get your lottery tickets are actually greater than your chances of winning the jackpot itself.
- $4 trillion in excess reserves now sit on deposit at the G4 central banks.
- Britain will be offering shortly 100-year Gilts (aka bonds) to the financial markets. This means that current Government borrowing will not be repaid until the next century, under a radical plan that was unveiled by George Osborne in last week's UK budget. The Chancellor hopes that the 100-year Gilts will help to "lock in" the benefits of Britain's international "safe haven" status. Perhaps that is true but as an investor one must also take into account the enormous liquidity risk. After all, a lot can happen in 100 years!
- "Capitalism without bankruptcy is like Christianity without hell. You have to have atonement for the ridiculous levels of spending that both the U.S. and Europe have gone through... The spending idiocy of the world is going to catch up with itself and that's where we are today."
Kyle Bass (Hedge Fund Manager and Founder of Hayman Capital)
Even The Economist Magazine is Becoming More Hopeful About an Economic Global Recovery...
