I have said that my appetite for purchasing equities has increased in recent months, and I continue to look for opportunities to do so. That said, I have had some interesting thoughts about the world markets that I'd like to share.
The United States vs. China
I am deeply worried about how the overall world economy can grow in the future without some decoupling of the Chinese currency from the U.S. currency. Only a year ago, the U.S. government was begging the Chinese to remove their peg of the U.S. dollar (by selling the dollars/Treasuries they currently own - in the trillions of dollars) - and allow the RMB (yuan) to inflate from its artificially low USD peg. Twelve months later, I'm sure the Chinese are wondering why they didn't move to further de-peg their RMB. The USD has been rapidly strengthening against virtually all major currencies, save for the yen, and it has caused quite a Catch-22 for the US and China. Should the Chinese sell those treasuries and dollars to the open market, surely the appetite for US dollars will appreciably fall, and the dollar could collapse under the weight of the US's very own printing press. This could have one of two effects, one desirable and one undesirable.
If this were to occur, we may worldwide be lucky enough to see a decline in the USD - and the return of inflation, the growth engine of the world. A stronger RMB is in the cards in the next 5-10 years anyways. The Chinese will become a consuming nation of finished goods rather than a supplier of them, and will need to offload its peg to be able to consume more using a higher valued currency. Why not now?
Well, the flip side of the question is the answer to that question. The Chinese economy could potentially trade places with the U.S. by selling its treasuries. By strengthening the RMB at this time, it loses its global position of cheapest mass producer, which is the engine it has now. If it doesn't sell the USD and treasuries, it is already losing that position with other global players like the EU.
The European Union - is the model sustainable
The EU continues to lower its interest rate, to stave off huge problems for behemoths like Spain (the housing bubble) and Germany (which has seen its share of problems with the likes of VW). This brings me back to my old question - will the Euro survive? By creating the Euro, Germany and other large European countries placed their confidence in the hands of emerging economies like Slovakia and Slovenia. The dynamics in each country can conflict with each other, and result in movements by the European Central Bank that may run contrary to the needs of individual member states that have adopted the Euro. In late-2008 Germany was already handing hundreds of billions of Euros to its banks in an effort to shore up its banks, while the ECB was still being implored by the world to lower its rates. The ECB seems to be very much behind the curve now, and is desperately trying to catch up with lower rates that the US has already applied. I feel that the EU is showing tremendous cracks under the pressure of its model. While free trade is always an ideal, countries giving so much control of their economic viability to a central bank certainly is not. How this affects trade with China and the U.S. is still emerging.
This is the primary reason I love macro-economics - there are millions of issues at play (with a few Black Swans that will emerge along the way), and it takes market makers months to digest a slice of that information to make decisions. We are participants of the most exciting film (I just hope most of us can leave the theater with our shirts) the world has seen in some time. This is the essence of globalization: we will see more volatility, more Black Swans and more currency blowups.
Sunday, January 18, 2009
Saturday, November 8, 2008
Thinking Long-Term: Secular Bear Markets
Fear has gripped world markets, world governments, and pretty much everybody around the world. This economic disaster is the result of the excesses that the world enjoyed throughout the 80s and 90s. We are now paying for the leverage and lending bubble that developed, as people tried to keep the party going. Now, everyone's scared that the world will end up in a long-drawn recession, or much, much worse (I'm just as worried as everyone else). If you've been reading this blog, you can see that I hedged myself against a market meltdown, which we experienced over the last 6 weeks. Contrary to most, I'm feeling much better now than I did then.
I have been a proponent of the "Dow Theory". Essentially what this stipulates is that the market goes through cyclical ups and downs over the short-term, and secular ups and downs over the long-term. These cyclical movements can result in 3 month to 6 year trend movements in the markets, whereas longer term secular movements can result in 7 to 25 year longer term trends. In a secular bear market, the markets can move in cyclical bear or bull markets, but ultimately the market cannot break its former highs. Make no mistake of it, we are in a secular bear market, and have been in one since the dot-com crash in 2001. The S&P 500, the 500 companies deemed to represent the U.S. economy best, has not been able to break the 1,580 to 1,600 mark for the last 8 years. Over this time, the world economies have been growing dramatically, but as a result of huge P/E ratios and expectations in the late 90s, early 2000 period, we are going through a period of consolidation in the marketplace. Ultimately, in general, historical P/E ratios reach the single digits before the market can once again proceed forward into a new secular bull market.
In essence, the businesses are catching up to the lofty expectations in the 90s. It's as though the market was the driver in a very serious car accident. While the accident only takes a moment, it takes years to resusitate, rehabilitate, restrengthen and renew the driver and his/her health and confidence before we can move forward. However, ultimately, before the renewal of the driver's confidence, we know that their health is no longer in question. The market will get project this health much sooner than we as individuals get the confidence to fully invest again. We must be willing to step in front of the train with the hopes that it will stop before it hits us smack in the face (figuratively-speaking of course).
I'm not calling a bottom, nor am I saying I have closed all my hedged positions (buying ETF's that move inverse to the markets). What I am saying is this: even in the 1930s, the bottom happened within 3 years of the start of the Depression. If you have a longer-term outlook, you have to be compelled into investing somewhat into the markets. I have been slowly closing hedges, and buying equities. Mostly, this equity is in low debt stocks or large-capital stocks that will continue to sell goods the world needs.
Within the rubble of any disaster lies the tools, lessons and catalysts for the next great growth period. In this market, there are companies that will become the next great stocks to hold as the market starts to move upwards again.
I have been a proponent of the "Dow Theory". Essentially what this stipulates is that the market goes through cyclical ups and downs over the short-term, and secular ups and downs over the long-term. These cyclical movements can result in 3 month to 6 year trend movements in the markets, whereas longer term secular movements can result in 7 to 25 year longer term trends. In a secular bear market, the markets can move in cyclical bear or bull markets, but ultimately the market cannot break its former highs. Make no mistake of it, we are in a secular bear market, and have been in one since the dot-com crash in 2001. The S&P 500, the 500 companies deemed to represent the U.S. economy best, has not been able to break the 1,580 to 1,600 mark for the last 8 years. Over this time, the world economies have been growing dramatically, but as a result of huge P/E ratios and expectations in the late 90s, early 2000 period, we are going through a period of consolidation in the marketplace. Ultimately, in general, historical P/E ratios reach the single digits before the market can once again proceed forward into a new secular bull market.
In essence, the businesses are catching up to the lofty expectations in the 90s. It's as though the market was the driver in a very serious car accident. While the accident only takes a moment, it takes years to resusitate, rehabilitate, restrengthen and renew the driver and his/her health and confidence before we can move forward. However, ultimately, before the renewal of the driver's confidence, we know that their health is no longer in question. The market will get project this health much sooner than we as individuals get the confidence to fully invest again. We must be willing to step in front of the train with the hopes that it will stop before it hits us smack in the face (figuratively-speaking of course).
I'm not calling a bottom, nor am I saying I have closed all my hedged positions (buying ETF's that move inverse to the markets). What I am saying is this: even in the 1930s, the bottom happened within 3 years of the start of the Depression. If you have a longer-term outlook, you have to be compelled into investing somewhat into the markets. I have been slowly closing hedges, and buying equities. Mostly, this equity is in low debt stocks or large-capital stocks that will continue to sell goods the world needs.
Within the rubble of any disaster lies the tools, lessons and catalysts for the next great growth period. In this market, there are companies that will become the next great stocks to hold as the market starts to move upwards again.
Thursday, October 9, 2008
When the crisis will end?
I have been seeing the markets crumble around us, and I am of course concerned like everyone else. The central banks around the world have been trying to stave off the abyss, and have thrown everything at the markets. Nothing has worked. There are several problems in the markets these days.
There is over $360 trillion (yes, trillion with a T) in financial contracts in the marketplace that is subject to LIBOR (the London interbank offered rate - the rate that banks lend to each other). According to Bloomberg.com, that's over $53,500 per person on earth. When you look at it, ultimately debts are held by people, even if it is artificially held in corporations. This debt becomes the debt for the world, and each and everyone of us is burdened by this. As the amounts are absolutely unsustainable, these financial contracts must be reduced. The market cannot afford this. These debt amounts are absolutely unsustainable. It was absolutely necessary for the banks to deleverage. It just happened that the financial industries appetite for risk (hedge funds, derivatives and mortgage-backed securities) had to doom us. Even though the government has been pumping trillions of dollars into the marketplace, this will not result in reduction of the credit rates. We have seen cuts to bank rates, it has not resulted in lower LIBOR. LIBOR must, must, must decline to more manageable levels before we can return to financial normalcy. Therefore, even if the governments around the world continue to pump money into the markets, we will see the money supply continue to decline as that $53,500/person drops to more normal levels, and LIBOR finally drops to levels closer to the US Fed funds rate.
I will add one thing: I personally feel that we will need Keynesian economics to recover from the long-term problems that we will see from this crisis. Without concerted and worldwide coordinated government projects, the world industrial output will come to a standstill.
There is over $360 trillion (yes, trillion with a T) in financial contracts in the marketplace that is subject to LIBOR (the London interbank offered rate - the rate that banks lend to each other). According to Bloomberg.com, that's over $53,500 per person on earth. When you look at it, ultimately debts are held by people, even if it is artificially held in corporations. This debt becomes the debt for the world, and each and everyone of us is burdened by this. As the amounts are absolutely unsustainable, these financial contracts must be reduced. The market cannot afford this. These debt amounts are absolutely unsustainable. It was absolutely necessary for the banks to deleverage. It just happened that the financial industries appetite for risk (hedge funds, derivatives and mortgage-backed securities) had to doom us. Even though the government has been pumping trillions of dollars into the marketplace, this will not result in reduction of the credit rates. We have seen cuts to bank rates, it has not resulted in lower LIBOR. LIBOR must, must, must decline to more manageable levels before we can return to financial normalcy. Therefore, even if the governments around the world continue to pump money into the markets, we will see the money supply continue to decline as that $53,500/person drops to more normal levels, and LIBOR finally drops to levels closer to the US Fed funds rate.
I will add one thing: I personally feel that we will need Keynesian economics to recover from the long-term problems that we will see from this crisis. Without concerted and worldwide coordinated government projects, the world industrial output will come to a standstill.
Tuesday, October 7, 2008
Europe vs. the World - Can the E.U. survive this debacle?
As we have been facing this complete freefall in the market (can someone say capitulation?), I think we need to evaluate where to put our hard-earned dollars when it comes to the equities market. As I've stated before, I believe that we are facing deflation, in spite of all the unsuccessful US actions to increase the money supply, and try and shore up the lending system. With lending at a standstill, and deleveraging already underway with the banks, I often wonder where to put my money. But a more pressing issue to the world should be, how will the E.U. deal with this?
The reason why this question is so pertinent is that the European Union has one central bank for those countries that use the Euro (so U.K. is excluded among a group of the E.U. countries). That assists the Euro-zone in creating a central interest rate, and a central monetary policy. The big problem within the E.U. is that each country has its own Treasury function, and each country still has its own government with its own budgetary system. Because of this, countries in the Eurozone will decide to take different actions to shore their economies, thereby affecting all countries in Europe. This can create a worse problem than in the rest of the countries around the world. When a country doesn't control its own monetary policy, but controls the treasury function, it can only hinder coordinated attempts to stabilize an economy. I will be interested to see how Europe copes with the current meltdown, and I even feel there is a remote possiblity that the Euro could be rejected in some countries and even the total rejection of the European Economic Community by others.
The reason why this question is so pertinent is that the European Union has one central bank for those countries that use the Euro (so U.K. is excluded among a group of the E.U. countries). That assists the Euro-zone in creating a central interest rate, and a central monetary policy. The big problem within the E.U. is that each country has its own Treasury function, and each country still has its own government with its own budgetary system. Because of this, countries in the Eurozone will decide to take different actions to shore their economies, thereby affecting all countries in Europe. This can create a worse problem than in the rest of the countries around the world. When a country doesn't control its own monetary policy, but controls the treasury function, it can only hinder coordinated attempts to stabilize an economy. I will be interested to see how Europe copes with the current meltdown, and I even feel there is a remote possiblity that the Euro could be rejected in some countries and even the total rejection of the European Economic Community by others.
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