Category: global investing

Martin Armstrong writes in his blog

Recently, NASA’s photo of the sun showed ZERO sunspots. The previous and current solar cycle has been declining significantly in solar activity beyond what has been known before. There still remains the risk that we will see a further decline in the next cycle that will begin in 2020. This may have a significant impact upon weather and could be a significant reason why the computer is projecting an inflationary cycle ahead that will be created by a cost-push effect rather than a speculative boom.

Enclosed please find the transcript of Incrementum AG fantastic Q3 Advisory Board meeting, discussing the “Complacency Bubble” that we are currently in. Their special guest this quarter was Simon Mikhailovich. Simon is a contrarian investor and entrepreneur. 

During the call they discussed

• How the Fed has already created hyperinflation.
• How the US might have to enter a new arms race.
• Why a market crash is not the biggest risk to the US economy and what is the biggest risk actually?
• Why US rates will go lower, and why European rates will become even more negative.
• Read the PDF of the Advisory Board Transcript here

Fasanara Capital writes

“First, the ‘nocebo effect’ of negative interest rates. In medicine, the nocebo effect is opposite to a ‘placebo effect’, insomuch that it depicts the phenomenon in which inert substances or mere suggestions of substances actually bring about negative effects in a patient. As a market participant, if I know that lending does not yield much, but may entail untraditional levels of risks, I do not lend. I wait and see what happens first. As a borrower, if I feel the economy is so desperate as to be in need of endless non-sensical negative rates, I do not borrow. What can be the prospects in an economy in need of dramatic measures. Having flipped completely upside down the lending and borrowing scheme, by messing around with the price of money, creates a market economy that leaves economic agents wandering and waiting on the side-lines. They go to sleep, like Snow White after biting the red apple.
In that, enduring negative rates are deflationary. Thus, in a vicious cycle, defeating the purpose for which they are introduced.”

LINK

Alex writes for macro-ops https://macro-ops.com/how-to-identify-the-consensus/

Here’s John Percival, writing in his book The Way of the Dollar, describing how to identify the Consensus and act as a Contrarian. 

“Remember the last time you sold a currency at what proved to be the bottom, or bought at the exact top? That wasn’t just bad luck — nor even just foolishness. You and the crowd caused the bottom, or the top. 

The Consensus. 

I know of one top equity fund manager who has no other rule for handling the currency markets than to go against the consensus. It’s common sense. We must be ‘contrarians’, if we are to survive in financial markets in general and the currency markets in particular. During the great bull market in the dollar in 1981-5, it was the one single rule that assured survival. If you have any problem with that, I suspect there is no solution but to observe markets till it’s no longer a problem; for the shifts from pessimism to optimism and back are what bull and bear markets are about. 

The difficulty is to define “the consensus”. The crowd isn’t always wrong. When a price movement gets going, the crowd as often as not will line up in the direction of the movement. But standing against the crowd, at times can be as desirable as standing in the way of an express train. This is the drawback of such objective measures of opinions as Market Vane — a well known American service which measures bullish opinion among traders. If you poll traders, most of them will point in the direction of the trend. Bullish opinion as measured by Market Vane tells us the direction of prices over the past week, but not necessarily a lot more. 

Perhaps Bruce Kovner, of Caxton, nailed the problem when he said that what he was looking for was the consensus that is not confirmed by price action. That covered the entire 1981-5 bull market in the dollar when the consensus was constantly bearish. It also covers the price extremes, when the consensus is wrong by definition. 

Whether we are looking at the underlying multi-month/ multi-year trend or the intermediate multi-week moves, there are usually two phases when the consensus is not confirmed by price — early in the move and at the end of the move. Soon after a price reversal, majority opinion is usually aligned with the previous trend, i.e. the consensus lags. Similarly, majority opinion strengthens along with the on-going trend, trending to reach peak consensus at the price extreme. So the ideal position is to be contrarian at the beginning and end of a move, and pro-consensus in the middle. Nice work if you can get it so right. 

Never forget that the consensus 

usually includes you.

The consensus gauge is a subjective gauge. We read the papers and specialist commentators and we talk to people, and we conclude that most punters are facing one way. If we are facing the same way, we have to reconsider the situation in the light of our other sentiment gauges and cut back if they are flashing yellow. In the heat of a powerful favourable price move, we are often lulled into complacency: at that point, consulting the consensus is an essential discipline — it often comes as a shock to discover that we are in with the herd, and it can be very costly if we fail to make this discovery. When we diagnose a situation where the consensus is not confirmed by price, we should not just cutback but try facing the other way, to see whether anything clicks. If the market action feels right; if the open interest is extended; and if we can find a fitting rationale, we can reverse our position… 

Helpful Images

There is another description of the consensus-that’s-not-confirmed-by-price. It consists of two images that have become part of the ancient lore of Wall Street, the Wall of Worry and the River of Hope. A bull market we recall, “climbs a wall of worry” ; and “a bear market flows down a river of hope”. In point of fact, the description normally only applies to the early and middle stages in bull and bear markets. So we can be very comfortable when we diagnose a wall or a river — assuming we’re climbing and flowing respectively. 

In the later stages of the trend, things change. The worriers capitulate to the up-trend; and the hopers throw in the towel and give up the fight against the bear. At this stage, in a bull market, we find die-hard bears saying that, well, we are heading for a collapse, but prices are going to go up further before they head down. And in a bear market die-hard bulls assert that prices are far too low — but they can go lower still. The conversion process is nearing its end. Now we have to get a little wary, for obviously we are in the region of consensus. And this is a very dangerous region because nobody on earth can tell how far things can go. Currencies, stocks, commodities — it makes no difference. In this respect they’re all the same. 

It is said of Joseph Kennedy, father of President John Kennedy, that when he was having his shoes shined one day in autumn 1929, he was astonished to hear the shoe shine boy tip him a hot stock that was sure to go from 160 to 2000 or whatever. That was all Joe K needed. If shoe shine boys (or elevator attendants, or hairdressers, the cover of Newsweek or whatever) were tipping stocks, it was time to get out. So Joe K started selling short and thus laid the foundation of the family fortune — so the story goes. But if it’s true that Joe K went short at that moment then he was lucky. The sucker buys at the top of the market; geniuses and liars sell at the top of the market; but the super-sucker sells short at what he thinks is the top of the market. 

In 1979, the then financial editor of Britain’s Daily Mail newspaper, Patrick Sargent (later to be a founder of Euromoney), called the top of the gold market at around $450. It was a perfectly sound call, in the light of the speculative heat in gold at the time especially from one who had been bullish of gold for a good time. Yet gold was to climb a further $400 by early 1980, when speculation turned from red-hot to white-hot. Imagine being short at $450! As I say, no-one on earth knows where a speculative trend will end — except with hindsight… 

This brings us to the question how you can distinguish a minor multi-week extreme from a major multi-month or multi-year extreme. The late stages in that great dollar bull market of 1980-5 provide a clue: you watch the way the conversion process trickles down through the different categories of currency observers. In mid-1984, the world was still full of die-hard dollar bears who had considered the currency overvalued ever since 1981. Who were they? It wasn’t the dealers, who are not and do not need to be overly concerned with underlying value; nor was it the trend-followers. It was the value-oriented analysts — researchers and economists by profession — with a long-term orientation. What happened was that some time during the autumn of 1984, the bearish consensus among this category turned round; and it happened relatively suddenly. You will see it quite clearly if you go back over the research material turned out by major banks at the time. “The dollar is grossly overvalued at DM 3.00, but we think it will head further up before it collapses”, that kind of thing. 

In other words, it’s just as you would expect. When the long-termers who were formerly skeptical at last capitulate to the trend, then you have a total consensus and the end is nigh for the major multi-month / multi-year move. Nigh, but not necessarily over. At this point one of our sentiment gauges comes into its own. We have to watch market action: the way the markets react in relation to the background and to news events.”

Michael Lewis wrote in his book Liar’s Poker that: 

Everyone wants to be, but no one is, for the sad reason that most investors are scared of looking foolish. Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are, strangely enough, happy to stand on the edge of a precipice as long as they are joined by a few thousand others…

It’s incredibly difficult to identify the consensus and act as a contrarian in markets. A good first step is to acknowledge that you suffer from the same base cognitive impulses that drive the rest of the herd — we’re ALL part of the Dumb Money crowd. 

As soon as you accept this, you can then go about learning some tools to help you step back from the crowd and better understand the popular narratives and emotions that are driving prices. Doing so is more art than science and it takes a lot of work. But it’s better than standing on the edge of a precipice… 

Deep Throat writes…..

Deploying our patented Dick Fuld Banker Speak Translator (BST) here’s how Maggie really meant to answer Grace’s question if she were fully transparent:

Maggie Wu — Chief Financial Officer Thank you, Grace, for the question. Yes, it’s true, our margins have improved at an unbelievable pace through this last quarter.  We are brilliant accounting professionals to be sure. The improvement is due primarily from our analysis of all the money we’ve wasted building software, marketing, kickbacks and dumb-ass projects that just don’t work, probably never will and are not yet being used by anybody.  Since it’s so cutting edge, we’ve determined that, even though it’s “useless shit” (technical term) right now, we’ve capitalized all of the costs, payroll and kickbacks associated with these projects because, by definition, if these payments don’t benefit the business in the current quarter, they will surely benefit the business sometime in the future.  In any event, we are amortizing the cost of all of these tiny, immaterial projects scattered over our 1,300 consolidating operating entities (so PWC can’t possibly figure this out) over 5 years rather than expense these costs in the current period, as we had been incorrectly doing in prior quarters.  Lucky we caught it!  Also, Joe told me that I had to “hit the number or else my next vacation will be in Xinjiang” so we came up with this cockamamie crock of steaming turds of an accounting change, ran it by PWC, increased their fees and just hope that dumb-ass US Investors don’t catch on to what we’re doing.  Anyway, I’m safe in China so if that ungrateful bastard Jay Clayton has any problem with what we’re doing, after all of the fees we paid him at Sullivan & Cromwell, he and his SEC and that pain in the ass FBI can stick their subpoenas “where the sun don’t shine”.

read full article below

https://deep-throat-ipo.blogspot.com/2019/08/the-baba-investor-calltrade-warwhat.html

In the latest sign that absolutely nothing makes sense anymore, WeWork filed formal regulatory paperwork with the Securities and Exchange Commission last week, officially notifying the world that it will soon be going public.

If you haven’t heard of WeWork (or it’s parent– ‘The We Company’), it’s a real estate company that owns practically zero real estate.

Instead, they lease vast amounts of office space in commercial buildings on long-term contracts, and then sub-lease that space to individual tenants– often small businesses– with short-term contracts.

It’s essentially the same business model as Regus– which provides virtual office services, business addresses, and short-term office space, in pretty much every major city around the world.

Yet Regus is actually profitable. Its parent company, UK-based International Workspace Group, reported a profit of nearly 300 million British pounds (about $350 million USD) for the first six months of 2019. And the company consistently makes money.

read full article below

The latest sign that absolutely nothing makes sense

Lacy Hunt is the authority on bond markets and he concludes in this must read piece

“Accordingly, monetary restraint is continuing to weigh on economic growth. Inflation, which fell below the Fed’s targets and most Wall Street forecasts, will remain on a downward path. These cyclical forces suggest that inflationary expectations should continue to fall this year and next as the economic growth rate weakens further. This means that a mild recession would push the real rate into negative territory. Thus, both determinants of the nominal long risk-free rate (i.e. the real rate and inflationary expectations) are directionally favorable for further interest rate declines, although the path will continue to remain volatile. “

http://www.hoisington.com/pdf/HIM2019Q2NP.pdf

Summary

In the next downturn, default rates will increase to very high levels and defaults to very high dollar amounts.

There is also now clearly high correlation between high-yield bond returns and the stock market, with the correlation rising well above 70% since 2008-2009.

All indications are that the benign credit cycle will continue through 2019 and possibly beyond.

Read full article below

https://seekingalpha.com/article/4284691-edward-altman-credit-cycle

Martin Armstrong writes in his blog….

The IMF has continued to assume that the zero-bound on interest rates can be a serious obstacle for fighting recessions on the part of the central banks. The IMF maintains that the zero-bound is not a law of nature; it is a policy choice. The latest in the IMF papers argue that tools are available to allow central banks to create deep negative rates whenever needed to reverse recessions. They claim that maintaining the power of monetary policy in the future to end recessions within a short time will require deep negative interest rates.

IMF Recommends “DEEP” Negative Interest Rates as the Next Tool

KKR writes in their Global perspectives https://www.kkr.com/global-perspectives/publications/hot-spots

So, what should investors know about what we learned during our journey to key “hot spots” around the globe in 2019, and what does it mean for our asset allocation framework?

1. As one might expect, trade was the topic du jour across both continents. Our key takeaway was that there may or may not be a headline win around trade eventually, but the global competitive landscape has shifted permanently, in our view. From what we can tell, there is a growing nationalist movement amongst politicians to usher in a collective disarmament of the World Trade Organization. In many instances supporting national champions is now more important than sourcing the lowest cost supply chains. It is one of the reasons that we have always believed that President Trump would threaten to implement Round IV of tariffs (see mid-year outlook Stay the Course for full details). Consistent with this view, we see a Berlin Wall-type scenario now unfolding across global technology standards – one that flies in the face of what the WTO and other organizations that promote open standards have attempted to achieve for nearly three decades. Already, Western players such as Google, Facebook, Twitter, and WhatsApp have had difficulty in China, and in their places, Baidu, Ren Ren, Weibo, and WeChat are now thriving. Not surprisingly, we see 5G as the next chapter in this global bifurcation of technology standards/providers. Meanwhile, several foreign firms with whom we spoke during our time in Beijing indicated some sort of an acceleration in supply chain diversification away from China in order to reduce operating risks. Thailand, Vietnam, Mexico, and even the United States and Europe, were all mentioned during our visits as key beneficiaries of this rerouting, a migration pattern my colleague Frances Lim has been arguing for some time. At the same time, the trend towards insourcing within China is now a very viable one for investors to consider backing with their capital. The decision-makers with whom we spoke in Beijing confirmed that the trend towards insourcing is broad-based, spanning the industrial, technology, and healthcare sectors. So, our bottom line is that, even if there is positive headline news around trade negotiations (e.g., China buying more oil or soybeans) in the coming months, rule of law and national security concerns represent longer-term issues that are not easily fixable, particularly as the geopolitical and strategic importance of technological prowess across industries increases. If we are right, then a different investment playbook than what worked for the last 25 years is now required.
2. In terms of the global inflation outlook, our travels lead us to believe that we are stuck somewhere between disinflation and deflation. As a team at KKR, we are firmly in the camp that demographics, technological change, and excess capacity are likely to keep a lid on inflationary trends for the near future. Consistent with this view, we now estimate that the Federal Reserve needs to engineer 40-50 basis points of inflation annually just to keep inflation stable, given that deflation is actually playing out in many key sectors such as Autos, Technology, and Consumer Goods. Hence, as we describe below in more detail, we remain of the view that rates are likely to stay lower for longer, which has huge investment implications for both individual and institutional savers. In the world we envision, upfront yield becomes more important to credit allocators, while pricing power becomes more important to investors in equity securities. Importantly, China’s recent decision to let its currency weaken only strengthens our conviction in our thesis.
3. China continues to be the most innovative technology market that we visit each year, while Europe is trying to close the gap. Driven by 330 million millennials that are coming of age, the opportunity around Big Data, Artificial Intelligence, and 5G remains outsized within both the consumer and corporate segments of China. From our vantage point, it is hard to overstate how important getting up to speed on Chinese technological innovation is to any global investor who allocates capital to the Technology and/or Consumer sectors. This knowledge base is also critical to a better understanding of the current U.S.-China trade debate, and why we believe this debate is much more significant than just the world’s two largest economies arguing about terms of trade. Meanwhile, in Europe we think that Berlin has clearly emerged as the Continent’s Silicon Valley, and the significant opportunity set that we see across private Technology investments in the region make us even more bullish that European Private Equity can handily outperform European Public Markets. Further details below.
4. We expect more geopolitical volatility ahead, and we now assign a 50% probability to a Hard Brexit. The potential temporary dysfunction from a disorderly departure, particularly as it relates to business uncertainty in the private sector, likely deserves more attention than it is getting from investors. Therefore, we are of the mindset that U.K. investments should demand one of the highest risk premium of any developed economy today, and as such, we are encouraging hedging the majority of one’s positions in the currency market.
5. Given the uncertainty, we think that the opportunity to buy complexity at a discount remains outsized. Interestingly, though, Asia seems to be gaining on Europe in terms of the ability to transact. Beyond just acquiring positions through the public markets (which is becoming a more relevant opportunity set for PE firms), our conversations in Beijing with senior executives now lead us to believe that there is a forthcoming wave of deconglomeratization in China that could soon rival what we are seeing in Europe these days. Simply stated, multinationals are increasingly of the mindset that doing business in China as a foreigner is getting tougher, not easier. If we are even partially right, this opportunity could be quite meaningful to Private Equity, Real Estate, Credit, and Infrastructure over the next five to seven years, we believe Looking at the bigger picture, our asset allocation tilts towards investments that are linked to nominal GDP, have collateral against them, and generate upfront cash flow. As a result, we remain overweight Real Assets, Global Infrastructure in particular. We also remain constructive on more flexible mandates across both liquid and illiquid investments, and as such, maintain our increased allocations to both Actively Managed Opportunistic Credit and Special Situations. Finally, we continue to overweight Private Equity in size (300 basis points), as our work shows that the value of private investments grows more important later in the cycle.