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!

Thursday, March 10, 2011

Unrest in Saudi Arabia sparking Oil rally, further Volatility

According to the Associated Press, Saudi police have fired on protestors in the Eastern part of the country. If this is true, and becomes escalated, this could spark a huge rally in oil and petro-currencies, and further declines in the world markets. Any disruption of oil supplies from Saudi Arabia would result in a complete imbalance in demand vs. supply of the commodity, and could push oil significantly higher than any disruption caused by Libya, Algeria or any of the other Arab country, where unrest persists.

As per many sources, tomorrow is expected to be a "Day of Rage" in Saudi Arabia, with protests expected in the Eastern region.

Overnight Developments - March 10, 2011

Some information that may affect the market:


2. China reports a $7.3b trade deficit, its highest in 7 years.

3. Spain downgraded by Moody's, outlook negative.

Of course, everyone is awaiting today's jobless report, at 8:30 am ET.