Sunday, January 24, 2016

Potential Risks in 2016

I just thought I'd post a few things I have been contemplating about the current year:

1. I truly think that China's problems will become the world's problems. The world has been increasingly reliant on Chinese growth over the last 25 years, but debt has grown exponentially in China, and China is now drawing on currency reserves to prop up its economy, stock market and growth rates. It will be harder to profit from this thesis, as increasingly this thesis is becoming consensus in the marketplace.

2. I believe that the Federal Reserve will reverse course on interest rates later this year, and this eventually (but likely not this year) will result in negative federal funds rate. I simply don't believe that the U.S. can increase rates and experience a stronger currency, and still expect to experience any form of inflation. Currently, by raising rates, I feel the Federal Reserve has created an environment of exporting inflation to economies with weakening currencies, while deflating commodities, imports and prices of consumer goods in US dollar terms. I don't feel this process ends quickly, and the ECB's current calls for further quantitative easing in the Euro region will only exasperate the situation.

3. I feel that the U.S. may experience its first brokered convention in many decades, and, should Bloomberg attempt a presidential run, they may even see a situation where Congress and the Senate determine the next president and vice president of the United States (12th Amendment). This could be a black swan event, and I'm unsure what impact this has on the markets, or world order for that matter. This is simply something I am contemplating (thanks to cherzeca CoBF for bringing the potential general election issue to my attention).

4. I have believed that deflation will become a global phenomenon, and I still see no reason to back away from that thesis.

There are hundreds of thousands of other risks that could arise, but I can only prepare my portfolio to handle such issues, rather than attempt to directly profit from those risks.

Sunday, January 17, 2016

Market Musings - January 17, 2016

Currently, the market participants are embroiled in discussions about whether the market is simply undergoing a simple but violent correction, or if something more sinister is in the cards. To me, it appears to be a little bit of both. While the U.S. appears to be seeing improved economic metrics, much of the rest of the world is not. Europe, China, South America and much of the rest of the advanced economies of the world are experiencing slowing growth or outright recessionary pressures. China is sporting a 282% overall debtload to GDP, and is desperately trying to prop up its market via the currency market. Europe continues in the doldrums they have been stuck in over the last 7-8 years, and their demographics continue to work against them. Finally, South America, Canada, Australia and the like are all experiencing deep and painful declines in much of their economies, due to the dramatic declines in commodities and the strengthening US dollar. The issues in China appear to be problematic, similar in nature to what occurred in Japan in the 1980's and Southeast Asia in the 1990's. The economy reached an inflection point in 2008, when it appears much of the demand-driven growth slowed. Since then, Chinese consumers, corporations and governments appear to have fueled further growth using debt and building inventories. The debt load to GDP appears to be very high, but, as has occurred in numerous occasions in the past, and it likely could grow further now, unless the market reaction confirms debt deflation is in the cards. European trade appears to have ground to a halt, although the lifting of Iran sanctions will help Airbus immensely. Nothing really has been resolved to repair the treasury/fiscal issues that a complex arrangement as the Euro economies present (multiple budgets and economies versus one currency). Deflation could very well be imported from China and the US over time as currencies continue to be manipulated via quantitative easing and interest rate policies. In the next few months, I will be watching for WTI/Brent oil to fall to the low $20's per barrel, gold to rise to $1,200/oz, the S&P 500 to fall to 1,700 or slightly below, and the CAD/USD to fall to the $0.67 mark. I feel that oil will bottom when the market has a washout fall, while the oil futures do not fall in sympathy (building a more thorough contango). In the meantime, I had established a short position in the S&P 500 ETF (SPY) to hedge my long positions in equities. My major positions are in tobacco, consumer packaging (CCL Industries) and Novo Nordisk, a diabetes drug company. I also hold a fairly large position in Fairfax Financial, a Canadian based, global insurance company that is fully hedged against the market, and is holding deflation hedges (CPI puts) against major global economies.

Wednesday, November 30, 2011

Why I am convinced of a United States Recovery

In my opinion, the apparent complete lack of economic coordination in Europe, and the lack of currency adjustment in China, has led many great investors (Warren Buffett and Seth Klarman to name a couple) to become bullish on the United States. When you look at world GDP, it was approximately $63.04T USD. Of this, the Eurozone represents $12.17T (both figures according to the World Bank). China is currently at $5.88T, and facing a hard landing on its economy, and Japan has a GDP of $5.50T, and embarking on its rebuilding efforts following the earthquake and tsunami this year. Finally, there is the United States ($14.58T), with a long history of capitalism, ebbs and flows, recessions, reactions and recoveries, watching everything unfold with no issues of lack of economic coordination, a three year head start on recovering from its own housing downturn, no major natural disasters from which to recover, and a fairly free moving currency that makes the country look more and more attractive everyday versus China.

While I have not seen consensus, the last forcast I have is for a 3.2% increase in global GDP (World Bank website). that would mean that we should expect a growth of $2.02B in GDP globally. Excluding Japan, Eurozone, and the United States, the rest of the world has a combined GDP of $30.79T. Assuming a very aggressive 5% growth rate for these areas (note that I have not excluded Canada, U.K. from the list, which are among the top ten largest economies in the world), the emerging markets should provide $1.54T of the growth. From the remaining three economic zones, we should therefore presume that we will see $0.5T of growth. If the Eurozone continues to falter, investment will be pushed to one of China, Japan or the United States, I would anticipate. Let's look at a scenario where the Eurozone simply stagnates and produces a GDP growth rate of 0% (I believe they will be in recession next year).

In China, we are in a scenario, where the country is importing inflation as a result of pegging its currency. Therefore, labour and commodity prices are rising for the same finished products. This is then sold out to Europe and the United States (predominantly), where in many cases the prices remain fairly stagnant (due to the economic situation of high unemployment). The scenario lowers margins for many companies, so it would be safe to say that China may not experience supernormalized returns from its current 9-11% GDP growth rates. So this really leaves the future investment to the US and Japan. With Japan facing a rebuilding and an already aging population, it would be safe to also suggest Japan will not experience more than a couple of tenths of a percent of growth in the coming years. This leaves us with the United States. I would presume that much of the European slack would come from the United States, due to its similarity in industrial output, primary economic drivers, and labour force. This projection, even with many of its flaws, would mean the US would grow 3.2%, far higher than the new OECD expectation of 2%. With government cutting back on investments, this would mean more than 100% of the growth would come from the United States. This would bolster growth, and improve financial metrics of US public companies.

Just my thoughts. I may be wrong, but I'll still bet on the U.S. over Europe.

Monday, March 14, 2011

Radiation Leak adds further pressure to Nikkei: Nikkei 225 Futures down 14.5% at Midday Break

Before I begin this post, I would like to convey my feelings on the recent destructive earthquake and tsunami in Japan. The tragedy in Japan has been heartbreaking, and my thoughts and prayers go out to the Japanese people. I hope that all nations and capable people will do whatever they can do to help the people that have been affected.

Please donate to a charity that can help the recovery efforts, like the Red Cross (I have linked to the Canadian and American sites), Doctors Without Borders (U.S.) or Medicins Sans Frontieres (Canada), or UNICEF.

After such a devastating few days in Japan, the news continues to shock the world. While I may sound presumptive, it does appear that the latest explosion in reactor #2 and the fire in reactor #4 of the Fukushima Daiichi Nuclear Power Station have allowed large amounts of radioactive material to be released into the air, and the containment structure may now be breached. The government is now speaking of radiation that is harmful to humans, and that anyone within a 30km radius from the power station should stay indoors. Unfortunately, the odds appear to be very slim that disaster can be fully averted. The futures worldwide have reacted as a result.

The issues in Japan are unprecendented, in terms of the natural disaster and the chaos that may ensue. At this time, the best position of any investor is to look for Mr. Market's most irrational moves, and build positions in strong companies.

And please donate!