Category: global investing

By BFI Capital

As we head deeper into a new decade, and after a memorably turbulent 2020, financial markets seem remarkably optimistic. They look forward to friendlier fundamentals, improved global economic growth, and the much-awaited mass vaccinations which are to improve consumer confidence and lead us back to a “normal life”. This all happens, of course, under the benevolent and sage guidance of governments and central banks that will competently lead us all to a robust recovery. Yet, I wonder: might this outlook be a little too optimistic?

I am not a big fan of economic and financial forecasts. The pretense of being able to foresee what will happen during the next year – or even decade – in a complex system such as the global economy should always be taken with a healthy dose of skepticism. Therefore, I’m sharing my own outlook for 2021 as food for thought, to be considered and added to, or weighed against, the reader’s own expectations and analyses.

While I do have my doubts about future predictions themselves, I am in fact a great fan of the PROCESS of forecasting – all the reading, learning and analysis involved, the discourse, and the estimation of what might lie ahead. That is fun and stimulating. It is one of the reasons I love what we do at BFI. And it is a necessary exercise for investment success. Smart investing is based on recognizing and understanding the driving forces, relevant trends, and global dynamics. That understanding lays the foundation for your strategic allocation. And, while nobody can model (at least for now) and foresee the future, an educated and informed guess is still better than throwing darts at the board without any knowledge at all – well, at least in my experience. So, here we go.

The Great Rebound – or The Great Awakening?

At some point, in school or some other type of Economics 101 class, we all learned that stock markets reflect the aggregate of effective and expected successes and/or failures of companies in an economy, which again reflect the overall strength or weakness of an economy. Therefore, with stock markets ending the nightmare year of 2020 at new record highs, that would leave us to believe the global economy is amazingly strong and robust. Right?

Well, unfortunately, it is not that simple. The world we live in has very little to do with the rules and theories that traditional economics were based on. When I graduated from university, I would not have been able to envision a world where interest rates are at zero, inflation is nowhere in sight, debt levels – both public and private – are at record highs, money supply is at record highs, money velocity and productivity are at record lows and, yet, the S&P 500 has just reached a new, all-time record after one of the worst recessions in modern history.

However, we have all been taught, sometimes painfully, that “markets are always right”. And they have priced in a great deal of positivity. Much of that optimism for 2021 is based on the belief that things can only get better after 2020. Once the coronavirus pandemic is in check with mass vaccinations underway, and once all that pent up demand comes back to life, how can things not get better from there?

So, the question is whether 2021 will provide us with a global economy that goes down in history as The Great 2021 Rebound, or whether we will instead encounter The Great 2021 Awakening. Personally, I think both scenarios have convincing arguments that would support each of them. And at BFI, we will be investing accordingly…; let me explain:

Key factors and considerations

Here’s a summary of some of the core factors and considerations for investing in 2021:

1) The hope of ending COVID. Vaccinations are being rolled out globally. Expectations are high that this will allow us to leave the pandemic behind and return to some form of normalcy in the coming months. In China and other parts of Asia, this already appears to be a reality. However, we should also expect logistical setbacks and delays. Moreover, this coronavirus, as so many in the past, will continue to evolve and mutate, while new viruses may also emerge. Therefore, based on the lessons we learn from this round of “pandemic management” and the future measures employed, we may expect to see more lockdowns and heavy-handed government interventions.

2) Split-world economy. The world economy remains somewhat decoupled. China, along with some other Asian economies, have normalized and are much less impacted by the pandemic and the respective government measures. On the other hand, America and Europe remain hard hit. Therefore, 2021 starts with weak and slowing economies in the Western world, while Asia is enjoying solid growth. Assuming we don’t experience any major pandemic setbacks, an economic rebound may occur in Europe and the US as well. However, this would go against the secular declining growth potential stemming from negative demographics, excessive debt, increasing regulation, and misguided policies.

3) Monetary and fiscal excess. Few things are certain in life beyond death and taxes, but it appears we may add a third item to the list: debt. The arrival of this new decade is paired with record peaks and growth rates of debt and deficits, both public and private, and pretty much everywhere. In response to COVID-19, and “thanks to it”, governments have been given the magic-money wand. And they are making ample use of it. As shown in the chart that follows, the fiscal response in 2020 alone dwarfs the response over the period of 2008-2010 during the last financial crisis. A similar picture, by the way, can be seen in monetary policy.

Fiscal Deficits 2020 as % of GDP

Source: Clocktower

This unprecedented expansion of monetary and fiscal support is being justified as a measure to help those who have lost their jobs and businesses. It is presented as relief and support spending. However, as can be seen particularly in Europe and the US, the pandemic has been highly politicized. And the so-called “relief packages” include numerous and large items that have little or nothing to do with relief and support in the context of the pandemic.

4) Big Government. With the unlimited power of “creating” money and debt, the share of government spending in most economies has reached levels that are highly concerning. Empirically, we know that government dollars spent are less productive – in other words they add less to growth – than dollars spent in the private economy.

Sheep spend their lifetimes afraid of a wolf and end up getting eaten by the shepherd. ~ Unknown

According to IMF estimates, published in October 2020, government spending as a share of GDP now accounts for more than half, at 50.5%. The Euro area is at 55.7%, while the United States is at 47.2%. The increased share of government influence on the economy (planned economics) is in the process of crowding out the more efficient, innovative and propulsive private sector. It is in essence killing off the benefits of a free-market economy.

Government Debt as % of GDP

Source: Refinitiv Datastream, ECR Research

A necessary condition for sustainable economic growth in the future is a reduction of debt levels. However, reducing the current debt levels would require politically unpopular measures (austerity, debt restructuring, defaults…). The way out that governments are currently working toward instead will involve a mix of inflation and financial repression (higher taxes), and the hope for growth.

5) Negative Real Interest Rates. Financial prudence and thriftiness have been largely thrown overboard, at least in the public sphere. Financing this kind of squander and profligacy, of course, is only possible in the context of rock-bottom interest rates. In fact, as depicted in the following diagram, financing costs (net government interest payments as a percentage of GDP) have been relatively flat, and in some cases, as in Italy or Germany, they have been decreasing over the past 20 years.

Cheap Financing – Net Government Interest Payments as % of GDP

Source: Refinitiv Datastream, ECR Research

This reduction in financing costs is counterintuitive. But it is a reflection of the past four decades – and particularly the last decade – of increasingly low interest rates. As we’ll touch on shortly, two primary deflationary forces (globalization and technology) have contributed to a very unique scenario: they have allowed (and continue to allow) governments and central banks to expand the monetary base beyond comprehension without inflation (in terms of CPI) rising and counterbalancing.

To be clear, we are coming to the end of a secular credit cycle. Sovereign bond yields around the world are in a secular bottoming process that may stretch out for a few more years, but we are, in effect, at the brink of transitioning into a new era.

At this point, with interest rates at rock-bottom, the trillion-dollar questions on the minds of economists and investors are: when will yields start rising? And how? Central banks will try to keep interest rates low, but how and for how long will they be able to resist market forces that will force yields up, particularly once inflation starts to rise?

6) CPI Inflation. Currently, CPI inflation is depressed in most economies, with outright deflationary situations in several European and Asian countries. Central banks have been communicating their intentions to raise inflation to around 2% for several years without much success. The deflationary forces were too strong. Fed Chairman Powell even expressed the intention to let inflation “run hot” (run higher, maybe 4%?).

It is impossible to say if and when inflation will rise in earnest, and how high it will go. The estimates of reputable economists are running all over the map. I personally don’t expect inflation to be a problem in 2021 (a ‘problem’ in a sense that it could trigger turbulence on the yields front). However, we do know from history that inflation can be quite unpredictable, with sudden spurts and eruptions that do have the potential of moving markets rapidly.

7) Equity Bubbles. There are some sectors in the equity market that look overvalued and (very) toppish. Equity markets have been the main beneficiaries of cheap money. The liquidity induced has lifted the prices of stocks higher and higher.

At BFI, we increasingly see the potential for a short-term correction in stock markets. However, based on an almost 100% certainty of continued monetary and fiscal stimulus, stock markets will continue to benefit. Therefore, we give 2021 the probability of another year with very attractive profits in stocks. The expected setbacks need to be considered and managed actively, however.

Major stock market bubbles since 1960; the FAANG stocks look, and smell, like another one

Source: BCA Research

8) Social Tensions. Wealth inequality in western economies is rising. To a large part, this is due to the monetary and fiscal policies discussed earlier: wealthy investors are able to reap profits on the back of rising financial markets, while the general economy does not allow for equal financial progress for the majority of society. This has led to growing dissatisfaction and growing potential for stark social unrest, as seen in the US last year. In my opinion, the polarization and social tensions in America will not go away under a Biden-Harris presidency.

And it is hardly surprising that the corona crisis has increased this inequality. A recent IMF study on inequality during and after five major pandemics this century found that inequality increased considerably in all cases in the five years following the outbreak, (both when focusing on the Gini coefficient and on the proportion of the total pie taken up by the 20% of households with the highest incomes). More social unrest is in the offing and studies suggest that inequality slows down economic growth.

Inequality on the Rise: Mean Household Income in the US

Source: Refinitiv Datastream / ECR Research

9) The Future is Faster than You Think. This is a title I am borrowing from another interesting book written by Peter H. Diamandis. It discusses how converging technologies are rapidly transforming business, industries, and our lives. I recommend reading this book to get a good overview of the manifold technological advances and the impact they have (and increasingly will have) on literally everything. A constellation of disruptive technologies – the internet of things, cloud computing, big data, 5G communication and, of course, artificial intelligence – is paving the way for a new form of global economy.

Unless you take good note of the (in some cases exponential) acceleration in technological progress as a result of the confluence of several different innovations, you will have a hard time understanding the power of de-monetization and deflation that the so-called Fourth Industrial Revolution (4IR) has. It is a force to be reckoned with in our economic and investment analysis. At this point, unfortunately, it is hard to determine whether the net impact will be positive or negative in the decade ahead. These technological advances are arriving at lightning speed and our current societal systems – and most of all, our governments – are not ready to cope efficiently and effectively with them. Therefore, while much good can come from all of this, we are also facing some formidable challenges.

Investment Strategy

Based on the current circumstances and trends, we all need to reevaluate and carefully consider our individual investment strategies. In the current context, I strongly recommend an investment approach that is PRUDENT, ACTIVE, AND SYSTEMATIC. I do NOT consider the current markets to be in a do-it-yourself environment and I think investors that are not financially sophisticated and experienced enough, with the necessary analytical tools and skills, should either mandate a professional investment firm or radically adjust and simplify their exposure to financial markets.

At BFI, and for our clients interested in a globally diversified portfolio structured to withstand the test of times, the strategic approach for 2021 in summary looks something like this:

• Equity: Stay invested with a strong exposure to selective sectors in equity markets, globally diversified, with increased weighting in emerging markets.
• Bonds: Strongly reduced exposure to bonds. Short-term government paper may serve for liquidity purposes. Very selective corporate exposure. Replacement of typical traditional allocation to bonds with alternatives, including gold, silver, and low-volatility hedge funds.
• Gold and silver: We have significant allocations to gold and silver, and we have started to add mining. Many of our wealthy clients hold physically allocated precious metals in segregated storage in Switzerland with Global Gold, in addition to their discretionarily managed portfolios with BFI Infinity.
• Alternatives: We have significant exposure to real estate, hedge funds and precious metals (physical and mining). We are also looking to increase our exposure to commodities, which are starting to come out of an extended bear market, and which might also profit from potentially increasing inflation expectations.
• Downside Protection: We actively employ downside protection tools, primarily put options, on the stock markets. This allows us to stay fully invested without the danger of stark losses in the expected corrections.
• Crypto Currencies: We invest in Bitcoin in small allocations via specialized strategies that also protect on the downside. For increased exposure to Crypto, we cooperate with business partners specialized in this field.

Conclusion

Effective vaccines, declining political risks, ongoing fiscal and monetary stimulus, and pent-up demand have created a jubilant mood among investors and analysts and a very bullish outlook for 2021. However, markets are ignoring several risks and rising long-term rates that could throw a wrench into the works in the course of this year.

Stoics like Epictetus, Seneca or Diogenes recognized the value of not allowing your emotions and passion to run out of control. In victory and success, as in defeat and pain, their objective was to prioritize reason, virtue and the discipline of Eudaimonia (striving to be the best version of yourself at all times) over emotional excess based in pleasure, fear or greed.

I believe that the principles of stoicism can provide a valuable compass for life. And, as we find closure with 2020, I think we are well advised to practice some stoicism as we continue our journey into the new decade. In other words, let us not be too pessimistic or too optimistic. Let us take a calm and reasoned look at what this new year might have to offer; and then, why don’t we settle for some cautious optimism.

https://www.bficapital.com/post/from-nightmare-to-fairy-tale-or-inflated-expectations-for-2021

https://www.gmo.com/americas/research-library/waiting-for-the-last-dance/

Fasanara Capital

Emergence of New Capital Markets

Summary

Therapy time for 2020’s:

• What worked won’t work
• Radical unorthodox is the only way, experience is your enemy, experimentation your
  saviour
• Choose a strategy, not a trade. Go anti-bubble
• Go the extra mile, pull up your sleeves, go to the real economy, seek infrastructure
  and technology. Can’t claim fees on the ability to pick stocks or bonds at zero rates –
  it’s delusional
• In a word, leave the old, embrace the new, venture out: experimentation vs
  experience
• Finishing on a positive note, with chaos comes opportunity: new + chaos = truly
  innovative field, fertile ground for truly innovative ideas (not old ideas that are applied to a new context, or variations of existing ideas

https://www.fasanara.com/22102019

Gavin Baker

George Vanderheiden is one of the best investors I’ve ever known. He chose to retire in early 2000, massively underweight technology and massively overweight home builders, tobacco and other value oriented stocks. He had written “Tulip bulbs for sale” on the whiteboard outside his office and left a package of them underneath in late 1999.

2020, especially the end of it, has me thinking of George and what I have learned from listening to him over the years.

Manias often end at the end of a calendar year. To quote George via a New York Times article dated January 13, 2000: “What I’ve found over a lot of years is that a lot of these manias seem to end at the end of the year” with the article further noting that George “thought a value revival might be just around the corner, noting that the end of other investing crazes — the run-up in the Japanese stock market during the 1980’s, the biotechnology craze of 1991 and the rise of the Nifty 50 in 1972 — all fizzled around the start of a new year.” Obviously prescient and does make one think about the current environment, which is clearly a mania of sorts even if it is “narrower” mania than 1999/2000.

It is important to start the year thinking about where one could lose the most money, rather than where one can make the most money. George spoke to the analysts and fund managers from time to time after he retired. During one of those talks, hosted by Will Danoff, George observed that while most fund managers began the year thinking about which stocks they should own to make the most money, he began the year with the knowledge that roughly 50% of his positions were mistakes, tried to carefully think about which of those mistakes would cost him the most money and eliminate those positions. Minimizing mistakes is essential given that almost all investors — even the best ones — are wrong circa 50% of the time. I really love the humility inherent to this mentality, which is aligned with my increasing belief that “I don’t know” are the three most important words in investing, not “margin of safety.” One can always be wrong, no matter how much work has been done or big the “margin of safety” appears to be.

Being too early is the same as being wrong. Analysts and fund managers often say that “they were early,” rather than wrong. George’s point was that being too early is a mistake rather than a defense. Time in the market is more important than timing the market, but timing does matter for individual stocks as the “price you pay determines the return you get.”

Being a fund manager makes it easier to change your mind relative to being an analyst. George once said that being an analyst, forced to publicly defend and justify your decisions, made it much harder to change your mind relative to fund managers “who could buy or sell in the dark of the night without anyone knowing.” Very true and important given that I believe investing success comes down to finding the right balance between conviction and flexibility; i.e. changing your mind at the right time, especially when you have been wrong.

As a fund manager, you cannot take so much risk that you get taken out of the game or take yourself out of the game at the wrong time. George was obviously 100% right about the technology bubble and value resurgence that followed. He was positioned perfectly for the next 3–5 years, but he wasn’t there to reap the benefits. While George chose to retire, I am also reasonably confident that the relentless questioning from management, consultants, the press and the constant outflows from his funds in 1999 contributed to his decision. This dovetails with both the idea of “client alpha” and George’s own “sometimes being too early is the same as being wrong.” Difficult to even say the latter because George was SO right for the right reasons and didn’t just own value stocks, he owned the stocks that were the best performing value stocks over the next few years. But the larger point for me is that there is a level of risk that is unhealthy for all constituents, even the fund manager. There is nothing better when you are winning and nothing worse when you are losing.

“Client alpha” really matters. “Client alpha” is the idea that having the right clients who are aligned with what you are trying to achieve as a fund manager is critically important. Otherwise capital is often taken away at exactly the wrong time. Buffett was able to stay in the game in 1999 because he had a permanent capital vehicle and a carefully cultivated public image. This is one reason that being a good communicator is important to being an investor if one is managing external capital — one cannot have “client alpha” if the clients don’t understand what the fund manager is trying to accomplish. George was a great communicator, but no one has ever been better than Buffett.

George is one of the greats. I am grateful for all that I learned from him over the years. And to this Morningstar headline from October 5, 2000, “Gasp, could George Vanderheiden been right,” I will simply yes, George was right.

WRITTEN BYGavin Baker

https://gavin-baker.medium.com/lessons-from-george-vanderheiden-one-of-the-greatest-investors-ive-ever-known-4bfa74c4b6d4

By Charles Gave December 25, 2020

THE BOOM OF 2021 BY CHARLES GAVE

Many readers will be familiar with my four quadrants representation of macroeconomic conditions, which like most Gavekal research is backed by impeccable logic. The tricky part, as ever, is linking the conceptual insight to current market conditions. To put it simply, the questions I want answered are: where are we today and where are we likely going next?

Needless to say, I have worked on such questions since authoring the tool back in 1978. Over the years, I have come up with a few answers ranging from the straightforward to the rather complex, as expounded on in my 2016 book investigating Wicksellian analysis.

Back to MV=PQ
In this paper, I want to show that using tried-and-tested tools, which have not changed since they were built, I can, indeed, pinpoint where we are, and where we are going. Longtime readers will know that I place emphasis on the old equation MV=PQ, except that I consider V to be an independent variable, and not the result of the ex-post tautology V=PQ/M.

They may even recall that around the turn of the millennium, I developed a leading indicator for Q (growth in volume), for P and for V, while M (M2) is provided to me by the Federal Reserve. Hence, a logical solution to my problem of mapping where we are in the four quadrants should be possible.

My growth indicator will tell me whether we are on the left or right side of the four quadrant representation, while my P indicator will give indications of whether we are in the top or the bottom halves. And the V indicator should tell me whether interest rates are going to rise, or fall.

Let’s start with the US growth/recession indicator, shown below, which incorporates mostly economic data.

The indicator collapsed at the end of 2019 and the early part of 2020, but has now returned to positive territory. This reading suggests that the US recovery will continue, which is supported by my “control” tool— a diffusion index of economically sensitive prices—which incorporates only market prices. The diffusion indicator is telling me that a boom is coming in the US, which confirms the message of the growth/recession indicator that a US recession is highly unlikely in the near future.

And thus, I can safely assume that we are on the right side of the four quadrants; either in an inflationary growth period (top right) or in a disinflationary boom time (bottom right).

Having established that the US economy sits in the right side of the quadrant, I feel fairly sure that its precise position is in the upper (inflationary) quadrant as my “P indicator” of inflation has shot up.

In the chart above, the P indicator is compared to the second derivative of the US CPI (ex-Shelter). Why the second derivative? Because what matters for financial markets is not the actual inflation rate but the “surprising” changes in this rate, either up or down. And surprises may be coming. The P indicator seems to expect, one year down the road, a rise of at least 200bp in US CPI, which would take it close to 3%, versus 0.8% today.

In summary, my indicators tell me that US growth will be strong and we are on the right side of the four quadrants framework. As prices seem set to accelerate, we are moving into the upper half, which means that 2021 should see an inflationary boom in the US.

The velocity of money turns up
This brings me to the velocity of money, V, and to the reaction of the central bank to the US entering an inflationary phase. The amount of money injected into the US economy in the last 12 months has been stupendous. As a result, V has collapsed as never before. But most of this money is still in the accounts of economic agents (the Treasury, individuals, and companies) and is apparently starting to be used. As a result, velocity is starting to rise again, but I will know for sure by how much only with a considerable lag, due to the time needed for GDP data to be compiled.

So, I need a tool to give me some “lead” on the likely direction of economic velocity. This is why I built the Gavekal Velocity Indicator using market-based data that gives a heads-up as to whether what I call economic velocity (PQ/M) is about to turn up, or turn down. The chart is shown below.

The GVI—which is supposed to lead actual velocity by six months—“turned” up at the beginning of September 2020 and is now positive. This implies that cash balances held by economic agents are starting to move into the real economy. It confirms that activity is accelerating.

I have argued before that if the velocity of money is rising, demand for money must be growing faster than the supply of money. This implies that the price of money—the interest rate—will rise. What could upset this logic would be the Fed continuing to print, so that M keeps rising. If this happens, it goes without saying that the US dollar exchange rate will fall big time.

Conclusion

• Economic activity is going to be strong, to very strong, in the near future.
• Inflation is going to accelerate significantly in the next 12 months.
• Yields on 10-year treasuries will rise from an abnormally low level to a more normal level, implying a gain of about 200bp.
• If the Fed tries to stop rates rising, the US dollar may collapse, which will be inflationary for the US and deflationary in Europe.

In short, the US is moving from a deflationary boom to an inflationary boom. A wrinkle could be a big rise in the oil price, which would make the situation difficult for the Fed, as it was in 1973. In past inflationary booms, non-US markets, especially in Asia, tended to outperform the US, while the dollar usually fell. Hence, investors needed to own gold and long-dated bonds in currencies which were due to revalue strongly (deutschmark and Swiss franc in the 1970s) but large cash positions also had to be held in those currencies.

My advice today is to replace bunds with Chinese government bonds and hold cash in Asian currencies, which are tracking the renminbi. As an aside, Brazilian bonds and cash tend to offer exceptional returns and could be put in the aggressive part of the portfolio as a replacement for equities.

The Boom of 2021

Louis-Vincent Gave

Chief Executive, Gavekal
Hong Kong

Louis-Vincent Gave, CEO of Gavekal, is a go-to source for institutional investors trying to interpret global macro risks such as the financial implications of China’s rise. Gave, 46, was born in Paris, educated at Duke University, and based in Hong Kong before the pandemic. Gavekal provides independent research and manages $1.7 billion in Asian fixed-income and equities strategies, primarily for European institutions.

Barron’s: What investment trends will be most prominent after the pandemic?

Louis-Vincent Gave: If I ask what the most important development was in 2001, most people would say it was 9/11. With the benefit of hindsight, it was China joining the World Trade Organization, which changed the world for the following 20 years. If I ask about 2007, you’d say it was the start of the subprime crisis. With the benefit of hindsight, it was the launch of the smartphone.

With hindsight, what will people say about 2020?

So far, the Covid response in the U.S. has been a $12,800 increase in debt per capita; in the United Kingdom, it’s $7,000, and in Germany and France, $5,300. In China, it’s $1,200. The Western world responded with massive increases in budget deficits, which could constrain future policy options, while Asia, especially China, hasn’t.

Western policy makers have no choice but to embrace yield-curve controls; they can’t let interest rates go back up. You had Japan and Europe in the yield-curve control gang. The big change now is that the U.S. has joined them. Once the European Central Bank went down this [path], the euro tanked. Once we are on the other side of Covid-19 and it becomes clear the U.S. has no other choice, the dollar will collapse.

What will be the best investment opportunity post-Covid?

Investing in Asian fixed-income markets, in local currencies. Governments there have broadly been more efficient at dealing with Covid-19. Central-bank balance sheets and government spending haven’t grown out of control. Just as water flows downhill, capital is attracted to positive real [inflation adjusted] rates. Today, these are mostly found in Asia.

What is the most pressing public policy issue the U.S. will face?

How to fund runaway debt. For now, everyone’s answer is through modern monetary theory [which posits that governments that control their own currency can spend freely]. Once the debt is monetized by the central bank, there are no historical examples, outside of Japan, where that doesn’t lead to massive and very fast inflation, massive currency debasement, or both.

What does that mean for the dollar’s reserve-currency status?

I look at currencies like computer operating systems. Most Gavekal clients use Microsoft because everyone else uses it. The dollar is Microsoft. Go back to 2005-06, when Apple was trading at nine times earnings and viewed as making a niche product. In 2007, Apple said it would create a parallel system and went straight to the consumer, who took [Apple] not because it was cheaper but because it was easier.

So the renminbi is Apple.

We are seeing the rollout of Chinese fintech solutions across Southeast Asia, the Middle East, and Africa through WePay and Alipay. Then, tack on the digital renminbi and look forward to a future where an Indonesian businessman goes to Singapore and pays for his taxi with Alipay and the transaction isn’t settled through Swift or the dollar but through digital renminbi. The pushback I get is that no one is going to trust the digital RMB—or, who wants the Chinese government to know how and where you spend your money? That’s a big roadblock, but if you told me 10 years ago people would put Alexa in their homes voluntarily….

Aren’t you worried about China’s debt or social instability?

For the past 10 years, I’ve been told that Chinese debt was about to implode and there would be riots in the street. In the past 10 years, we have seen riots in France and the U.S—and in Hong Kong—but China has been remarkably stable. We have been told that the Chinese government would have no choice but to nationalize big parts of the economy and the renminbi would collapse. That scenario has unfolded in Europe and the U.S. [The U.S.] has increased debt by $4.2 trillion, three-quarters of which was funded by the Fed. Meanwhile, the renminbi has been the strongest currency year to date and over 10 years.

What is a key concern for Asia-based investors?

The decoupling of the U.S. and China is a massive change, and Taiwan is an important fault line. Taiwan wasn’t too much of an issue when the U.S. and China got along and all China produced were cheap plastic toys and bicycles. But this year, the market cap of the global semiconductor industry is above that of the energy sector. Taiwan Semiconductor Manufacturing [ticker: TSM] said it is already manufacturing a generation of chips that Intel [INTC] has said it won’t be able to fabricate until as late as 2023. If you think semiconductors matter more than energy, Taiwan Semi is one of the most important companies in the world.

What are the longer-term ramifications of President Xi’s crackdown in Hong Kong?

The core thesis is that Xi is a transformational president—the first imperialist president since the Ming Dynasty. If you are Xi and you hear your companies won’t have access [to U.S. markets], Hong Kong sounds like a great way to internationalize the renminbi and do a digital renminbi. Most Westerners saw the intervention as the death of Hong Kong, but China guaranteed Hong Kong would be China’s capital markets for the foreseeable future. [Xi] has no choice but to make it a success, which is why the Hong Kong dollar is stuck at the high end of its [trading] band.

Chinese internet stocks have been hit by increased regulatory scrutiny, including the scuttling of the oversubscribed planned public offering of Ant Group. Does this mark a turning point for these companies?

Since the [suspension] of the Ant IPO and new antitrust [guidelines], we also had a state-owned coal company default on one billion renminbi, or $150 million. One big issue for China has been a trade surplus of $60 billion and enormous inflows into China tech and bonds driving the renminbi higher.

In the Western world, we would raise rates [to deal with potential bubbles]. In China, they have regulatory weapons. They managed to cool the tech stocks in China and inflows into Chinese bonds. They got their message through.

You have been living in Vancouver during the pandemic. What is the one place on Earth that you’d most like to visit when the pandemic ends?

I have to get back to my Hong Kong and Beijing offices. I miss my colleagues and my friends there.

Thank you.

https://www.barrons.com/articles/renminbi-will-gain-wider-use-globally-gavekal-ceo-51607134576

By Leika Kihara, Tetsushi Kajimoto via reuters

TOKYO (Reuters) – Japan announced a fresh $708 billion economic stimulus package on Tuesday to speed up the recovery from the country’s deep coronavirus-driven slump, while targeting investment in new growth areas such as green and digital innovation.

The new package will include about 40 trillion yen ($384.54 billion) in direct fiscal spending and initiatives targeted at reducing carbon emissions and boosting adoption of digital technology.

Policymakers globally have unleashed a wall of monetary and fiscal stimulus to prevent a deep and prolonged recession as the coronavirus closed international borders and sent millions out of work. In the United States, a $908 billion coronavirus aid plan is currently under debate in Congress.

In Japan, the pandemic has forced the government to put its fiscal reform agenda on the backburner, despite holding the industrial world’s heaviest public debt burden, that is twice the size of its economy.

“We have compiled the new measures to maintain employment, sustain business and restore the economy and open a way to achieve new growth in green and digital areas, so as to protect people’s lives and livelihoods,” Prime Minister Yoshihide Suga told a meeting with ruling party executives.

The package, approved by cabinet on Tuesday, would bring the combined value of coronavirus-related stimulus to about $3 trillion – roughly two-third the size of Japan’s economy.

Suga said the fresh stimulus will boost Japan’s gross domestic product (GDP) by around 3.6%.

Japan’s economy, the world’s third-largest, rebounded in July-September from its worst postwar contraction in the second quarter, though many analysts expect a third wave of COVID-19 infections to keep any recovery modest.

Aside from direct fiscal spending, the package included credit guarantees and loan facilities for small firms facing funding strains caused by the pandemic. (this is important)

The new stimulus also featured steps underlining Suga’s policy priorities eyeing a post-pandemic world, contrary to two previous packages that focused on dealing with the immediate strain on households and business from the pandemic.

Examples include a 2-trillion yen fund to promote investment that helps achieve carbon neutrality by 2050, and 1 trillion yen to accelerate digital transformation.

Lacking, however, were details on how to fund the package.

The government will compile a 20-trillion-yen third extra budget for the current fiscal year, a source told Reuters. It is also seen setting aside money for the package under next year’s budget.

With tax revenues hit by slumping corporate profits blamed on COVID-19, some investors say the government may need to issue 15 trillion yen worth of new bonds to fund the third extra budget alone.

“Japan needs to make a plan for fiscal reform and shift to reconstructing public finance at some point. But now is the time to help firms and households hit by the pandemic,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.

($1 = 104.0200 yen)

https://ca.reuters.com/article/idUSKBN28I02Y

Story time by Dinesh Sairam

1/ Our story begins with Mansa Musa or Musa I of Mali, an African king who consistently figures in the list of richest people in the world (Inflation-adjusted). One of his given names was ‘Lord of the (Gold) Mines of Wangara’. Lest we forget, Gold was the ‘Money’ in those days

2/ One fine day in 1324, Musa decided to go on a pilgrimage to Mecca. Of course, it was easier said than done. Mecca was ~8,500 Kms away from Timbuktu, Mali. Ultimately he did make that journey and it has been recorded in the script “The Chronicles of the Seeker” by Mahmud Kati.

3/ Famously, he took a ton of ‘money’ (Gold) with him to aid in his journey (Well in his defense, it was ~8,500 Kms). About 60,000 laborers and soldiers carried 2 Kgs each and their camels carried 13 Kgs each, bringing the tally to an estimated ~1,30,000 Kgs of Gold.

4/ Being a generous King, he donated Gold left and right to every poor person he saw on the way. Regions of Cairo, Medina and Mecca became instantly ‘rich’. The estimated donation is ~32,000 Kgs of Gold or ~$2 Billion in today’s estimate

5/ Do you think Musa’s kind-hearted generousness made Cairo, Medina and Mecca flourish? That would be the perfect fairy-tale ending, but Economics and the Law of Unintended Consequences beg to differ. Musa caused a severe hyperinflation in these parts.

6/ Since everyone became ‘rich’ overnight, they refused to work unless they’re paid a hefty salary. So business owners had no choice but to increase prices to support wages. Over a year of two, high prices drained people off their Gold and they became poorer than before

7/ As Musa returned from his pilgrimage, he saw the damage he’d caused. He tried to remedy the situation, but it was too late. Regions of Cairo, Medina and Mecca would continue to be devastated for years to come.

8/ If you think this story is unrealistic, history repeated itself as recently as in 2006-08. The Zimbabwean government printed gobs of money starting in 2005. This caused, you guessed it, a hyperinflation. At the peak, the inflation was 98%, meaning prices DOUBLED every day

9/ You might also be aware of the ridiculous denominations of currencies in Zimbabwe in 2008. At the same time this was being printed, meat for daily consumption was priced at ~Z$ 200 Million. Now these kinds of notes sell on eBay, in case you’re interested.

10-END/ George Gobel, the Standup Comedian, once said “If inflation continues to soar, you’re going to have to work like a dog just to live like one.” That’s Dark Humor, but we’re already in the midst of excess liquidity. What will follow this isn’t too difficult to guess.

Thread by @Dinesh_Sairam on Thread Reader App – Thread Reader App

By Gary Tanashian via nftrh.com 

We’re still on the way. We have a president driving his political party ever deeper into the Guyanese jungle, even as some jump off the wagon in disgust while others remain parched, ‘mmm, gimme that Koolaid.’

After all the pardons are given out and the cult leader is banished we will be left with the same monetary-economic situation as before. Massive amounts of debt, massive amounts of people living on the edge and the Continuum still permissive of ongoing inflationary monetary and fiscal policy.

While I think Janet Yellen is a million miles better than the clown in Treasury today, she will need to get with and stay on the bailout program just like the outgoing guy. The Biden admin and the incoming special interests will demand it, just as did the outgoing special interests.

It’s all aimed squarely at Uncle Buck. The oldest macro parlor trick in the book. Devalue the currency. Nobody is able to do it quite like the US because nobody else controls the world’s reserve currency. As long as interest rates and inflation expectations are not out of control, they can basically do as they please and the people will love them for it (paraphrase straight out of Gladiator).

DXY is cracking further below the breakdown point and what’s worse, daily RSI is not nearly as oversold as it became at the last two lows.

The monthly chart shows a vulnerable Uncle Buck eying the next two support areas. The first coincides with a 50% Fib retrace of the cyclical bull market and the second around the 62% Fib. I think this chart has built up enough downside fuel to reach 83 in due time.

Here again is what you see when you look behind the veil of normalcy. When you decide that you’ve been making it all too complex when it really is this simple. US dollar down (inverse up), stock market up. So the bears should be staying tuned to the currency situation rather than their dogma and indeed one might say, cult of their own.

America is going Bananas and the rest of the world is along for the ride.

Banana Republic Update | Notes From the Rabbit Hole (nftrh.com)

Snippet from Louis Vincent Gave interview with Real Vision where Louis explained the difference between US Dollar and Yuan