Anti-elite clicks at your peril

Topic: gold, societal unrest, Davos, the credit cycle, macro reasoning

Summary: grab your gold and run for the hills when you see the Yellow Vests gathering

Reading time: 5 minutes? 10?


Kan du svenska? Är du intresserad av de praktiska tips om värdebaserade investeringar som jag sammanställt från mina 20+ år som analytiker och hedgefondförvaltare? Då är mitt veckovisa nyhetsbrev Finansbrevet värt att kolla upp. Ja, det är gratis.


When the Fed turned dovisher-er again last week, in order to stimulate the supposedly weak economy, expectations for economic growth in the US strengthened and the dollar consequently strengthened. A stronger dollar means cheaper imports and a lower trade deficit, and yet a stronger economy, reinforcing the stronger currency.

Alternatively, in the little longer run, the massive monetization of US deficits and debt leads to increasing inflationary pressures. More money chasing fewer goods in a stagnating economy, where the focus is turning toward finance instead of production, gradually leads to higher consumer prices and demand for higher wages.

It all comes to a head when the Yellow Vests of the world have had it with “the elite” leaving ordinary people behind.

Reasoning vs. the real world

Macro reasoning can take you in any direction you like. Financial market reasoning is even worse. There the logical jump from good is good to good is bad due to eventual overheating to good is good since the bad that comes from over-gooding will lead to policy measures that will turn all things good again is done in an instant.

The real world, however, doesn’t care about your reasoning, reflexivity be damned.

A Lööf in the eye of the storm

For now, we are enjoying a pause of sorts. We are in the eye of the storm, with more or less sensible political leaders like Trump, Macron and Löfvén-Lööf (the Swedish socialist leaning government that took five months of bickering to form) at the helm. Yes, sensible, moderate. Relatively speaking.

Just you wait and see what comes after if these boys and girls next door were to fail. Well, with “were to” I mean “when they will fail”. A deeper, more disturbing, nuance of populism is bound to color the political landscape in the wake of an increasing sense of injustice, where the crony-elite is perceived to be living off of the backs of ordinary citizens.

This is not a crisis of capitalism

There is nothing wrong with capitalism, nothing wrong with adults willingly agreeing to sell goods and services to each other, nothing wrong with the best producer, best satisfyer-of-wants, amassing huge wealth.

What is wrong, however, is when the banking elite is first allowed astronomical gains from risking other people’s money, and then after the inevitable crash are saved by the political elite in return for political funding in the next round. We are not experiencing a crisis of capitalism, what we’re seeing is a particularly nefarious brand of of socialism.

Crony central banking at the center

It may sound conspiratorical but it’s all the central bankers’ fault. Without their wanton manipulation of interest rates blowing bubbles in the economy and on the financial markets, and their setting the stage for subsequent crashes, politicians and central bankers wouldn’t be able to play the game they do.

Politicians want to win elections, so they promise more than they can keep. Central bankers willingly fund the difference between dreams and reality. The unrestricted money printing drives asset prices, which drives borrowing, which drives lending, which drives bank profits.

It doesn’t take many decades before the debts are too high to allow for a normal correction. Politicians and central bankers (as if they weren’t all politicians) then vow to do whatever it takes to salvage the situation they themselves created. And their solution is always the same: keep doing exactly what caused the problem — just at a bigger scale.

After longer time than a single human investor usually can or do care, the system re-sets. A new power, a new currency regime, new relative positions and prices. It’s not that the cycles are aeons, but half a human life is long enough to be forever on the financial markets.

You’re much too young boy

I personally know people who haven’t seen a single market crash and yet consider themselves market veterans. Imagine having only invested in stocks since 2009. You’d look upon ten years as a long time in the market, and twenty as looking back toward a completely and irrelevant era.

I first started talking about stocks sometime in 1985 when a friend told me about his investments. Around then I actually inherited a stock portfolio with some really old holdings: Aga, SKF, Asea, Sandvik and similar stocks. That’s 33 years ago. I have to look back an additional 33 years, to 1952, in order to feel what today’s newbies feel about the turn of the millennium.

Oz wizardry a case in point

Australia hasn’t seen a recession for 26 years. The continent has been riding the rising tide that is China, but that era might be coming to en end now. Imagine the unpreparedness of investors, banks and house buyers when a recession finally hits.

Try to imagine the repurcussions when one panicky domino hits another. Overleveraged consumers and house owners losing their jobs, banks failing, dividends being cut, pension funds falling underwater, selling begetting selling on the stock market, and cost cuts causing unemployment, in a vicious cycle not seen in more than a generation.

Try to imagine the policy response and the saving of the elite on unprecedented scales. Try to imagine the populism that ensues. That’s one more geographical win for the Yellow Vests.

The credit cycle is a cycle

Artificially low interest rates and money printing create a seemingly benign feedback loop over a handful of decades. But it’s just as misleading as the inflation leads to a stronger dollar narrative mentioned at the top of this article. Sooner or later the credit cycle shows why it’s called a cycle.

Healthy growth that was turned into a speculative boom and followed by stagnation and monetary magic morphs into deflation. Deflationary impulses are met with increasingly desperate fiscal and monetary policies that lead to a combination of populism and inflation. The latter wreak havoc with living standards and justice, not to mention financial markets, exchange rates and asset prices until a strong enough leader can set things “right” again.

Right meaning high enough interest rates to force fiscal prudency and a stop to rampant inflation.

At that point risk aversion peaks and liquidity (cash availability and willingness to lend and borrow) troughs.

At that point assets might be “cheap”, but only because you 1) truly can’t know how it will end, and 2) you don’t have any cash to buy assets for, and 3) banks won’t lend it to you. That’s the meaning of “it’s not your father’s market but your grandfather’s”. No matter, that‘s the starting point of another bull market, not the current multi-year topping process.

I hope. You never know. Perhaps buying stocks at 5x earnings won’t work. Perhaps social and political reasons force them to 3x before it’s over. Perhaps dividends will be illegal.

As Grant Williams pointed out in the latest Macro Voices podcast episode, what garners the most journalistic clicks these days are articles from Davos pointing out how much richer the elite has become since before the financial crash of 2008.

Pitchfork time

It’s all fun and games as long as the money illusion makes everybody feel rich. But when the wheels stop turning and you realize your increase was but a fraction of the increase in true prices, not to mention the multiples of that that befell the elite, then it’s pitchfork time.

The anti-elite clicks are accumulating. Populism is rising. You may not like what you see today, or support Trump, Macron and Lööf. But if they fail, Mordor and the winter of the seven kingdoms would be preferable outcomes to what’s in store.

The question is: will your holdings of physical gold (and mine) be a good or a bad thing in that environment?

Fundamentals aren’t enough

Fundamentals have been in place for years
What’s happening on the stock market? For starters, it’s not crashing. At least not yet. This is just a small correction. So far. The set-up in December 2018 is decidedly worse on all fronts than in, e.g., December 1999 and December 2007.

Valuations are higher (P/S type of multiples), growth is lower, slack in the economy is lower (record low unemployment), productivity growth is lower and keeps getting lower by the decade, interest rates are lower (can’t fall). On top of it all debts are larger and have grown faster than at any point in history — not only in the US but all over the world.

“Never go full retard, everybody knows that”

The correction in 2008-2009 was halted prematurely due to full retard level money printing and other globally coordinated stimulus. Central bankers and politicians pulled out all the stops in order to avoid a meltdown on their watch. Instead of fixing the poblem, they ended up stimulating moral hazard and asset prices more than the economy.

Maybe there is a way to repeat the indian rope trick. Maybe the current quantitative tightening can be turned into an order of magnitude more massive money printing than last time. Will one hundred trillion dollars suffice (it was 20T this time)?

Maybe.

Hello Africa?

However, don’t forget that the Greenspan put was already in place ahead of both 2001-2002 and 2008-2009, and they used it, slashing interest rates at unprecedented speeds, while the largest and most solid stock markets in the world still fell by over 50 per cent.

2 nuggets
Where’s the whale? Where’s the SocGen scandal, the Madoff, the Enron, the Bear Stearns subprime miss? The August 2007 hedgefund crash? That thing that tells you it’s really over?

There are of course more or less subtle signals all over the place: high yield bonds, BBB growth, gold/DXY, FANGs, Italian bond yields, market narrowing, technical dispersion and so on. But we’re still lacking that multi billion dollar speculative loss, the ponzi scheme revelation with systemic effects. Not even -85% for Bitcoin caused more than a marginal stir.

Who has been swimming naked?

My guesses for 2019
Nota Bene: these are not recommendations. Do your research elsewhere. I am not a certified financial advisor (anymore)

* Stocks keep falling
* Sell the rips, don’t buy the dips
* Gold treads water but might be gaining upward momentum. Either way there’s no use waiting for the ultimate bottom if it means gambling away a 5x upside to get a 20 per cent discount.
* Don’t forget about soft commodities if you like to trade. Corn maybe? Coffee. Covfefe?
* Central bankers turn dovish, which only makes investors more cautious
* Cyclicals, ETF holdings, large caps, companies with negative cash flows, tech stocks crash.
* Some banks in some regions fare better than other sectors owing to below P/B=1 valuations and too big to fail policies firmly in place. Nordea anyone?

My most humble regards,

/Sprezza

P.S. Check out the song “Jump” by Astrid S if you”re looking for an upbeat pop song
Karriär- och Finansklubben i “25 minuter” har uppdaterats med mina tankar (7 minuter ljudfil) om vad Fed egentligen signalerade i onsdags. Jag tror Powell var för dovish för marknaderna

Du kan hitta filen här

A few rules for life: trust no one

Topic: Never act (blindly) on recommendations. always do the math yourself, always make sure you understand the level of certainty of the premises and facts, the solidity of the logic, and the probability of the conclusion.

Discussion: A recommendation, be it regarding an investment or a life altering decision, should only be a starting point and inspiration for your own investigation; and preferably one of several such inputs

Rule of thumb: trust no one


As an investor and portfolio manager I received as many recommendations a day I had time to listen to. They proved “right” within a reasonable time horizon about half of the time, i.e., as recommendations per se they were useless. No matter, I still got tremendous value from my analyst meetings.

I never cared about the recommendations as such; I only listened to the facts that had been painstakingly collected and documented. If anything, I made it a point to pay extra attention to the points brought forward by analysts with a different conclusion than mine. I then constructed a bigger picture of all the various data sources I had access to, some conflicting, some supporting. Not least, I gauged what the weighted average of important analysts views were.

Owing to my particular vantage point as a billion dollar hedge fund manager with access to all the largest Wall Street firms, I thus had an informed view of both all the facts, and what all other players thought were the facts and what their recommendations were. Consequently, I could slightly more reliably than most other investors take outperforming positions. Despite my privileged and advantageous position, I still had to build my own models, draw my own conclusions from a wide array of data, and not least make assessments of the relevance and reliability of the information I received.


“Try pouring a ton of steel without rigid principles”


You wouldn’t put your hand through molten metal without understanding the principles, would you? Or pouring a ton of steel without all the facts. So, why would you invest your own or clients’ money without understanding the risks, the facts and the logic involved?

Investing is hard. Anybody who claims it’s not is either stupid or selling something. If it seems to good to be true, it is, so make sure you know what the relevant facts are, and how they interact causally for the required conclusion.


Please note that this principle is valid in all aspects of life and decision making — trust no one to make your decisions for you.