Various macro and market thoughts ahead of midsummer and Brexit

Length: 941 words (short)


It’s Monday!

If you read this about the same time I publish it, it’s Monday!

Isn’t it great to start a new week, happy, well slept (dry fluffy pillows, cold feet etc.), ready to greet another prosperous five days of great personal and financial investments?


Summary: What’s going on at the US Fed, how good or bad is a Brexit for stock markets, what’s Japan’s Kuroda up to and where does China fit into all this?

My three pillars are: short stocks, buy gold, be ready for single stock bargains in the ensuing calamity


Kill points

By the way, did you know that tickling is about learning where the “kill points” are? Cats, dogs and humans play and tickle each other to safely learn exactly where the body is most vulnerable – where you can get to the heart, arteries or important inner organs without going through bone or other protection.

Right now the U.S. Fed is tickling at the interest rate area to see what happens, while the UK is trying out the EU’s potential kill points with a referendum on Brexit or N(o)exit. Meanwhile Japan’s Kuroda seems intent on ruining his country forever.

Despite its own version of insanity (shadow banking, bad debts, empty investment projects), China actually is the one major world power that seems to even think about the end-game (and is piling up gold and making oil trade arrangements etc. to prepare for a post-dollar, post-crash economy).


Central bankers always crack me up

-Remember when central bankers weren’t all that important? That was fun.

-Remember the last few times they were important? Not fun at all:

In the 1920’s the infamous Havenstein wreaked complete havoc on the German economy and brought about the hyperinflation that wiped out the entire German middle class.

In the 1920’s and 1930s the U.S. Fed did all they could to set up, prolong and exacerbate the depression. In the 1970’s Volcker had to take the federal funds rate to 20%, in order to kill off the inflation caused by too slack policies by earlier Fed chairmen.

During the last twenty years, central bankers have grown increasingly important, starting with Greenspan’s “irrational exuberance” in 1996 and getting worse, more or less every year, as Greenspan, Bernanke and Yellen have presided over ever more retarded money printing policies – only trumped by Japan’s Kuroda.

Sweden, Denmark, Holland, the UK and Europe’s ECB have done their best to follow suit, and even lead the way in some particularly deranged experiments with, e.g., negative interest rates.


Wag the dog

So, the Fed is pretending to raise interest rates, which it hopes will “wag the dog” and create an optimism that makes the economy lift itself up by the hair.

The only effect even just one quarter of a percentage point rate rise have had though is to accelerate the overdue economic downturn. The strong dollar is hampering exports, and the slightest probability of higher interest rates have hurt investment sentiment.

Another quarter point hike would signal a rising policy rate trend, no matter how dovish* Yellen talks on the subsequent press conference. That would cause a massive reversal of carry trades, draining emerging markets of hot dollars, causing their markets and currencies to fall and the USD and possibly U.S. stocks to rise (albeit temporarily).

-I would keep all of my short positions on a second policy hike.

*remember when there was such a thing as a hawkish central banker? Most people in the markets today have only ever known “dovish” or  “very dovish” CBs

If they don’t raise rates, it’s just back to normal, and quite similar to the dovish crash cycles of 2001-2002 and 2008


Nexit?

I think the likelihood of a Brexit is quite low. However, I think people should be wary of what they wish for.

A Brexit would be followed by massive stimulus programs (temporarily good for stock markets), whereas a Nexit just means a lot of discontent people and a return to the status quo of a steady European economic decline.

I would buy on a Brexit dip and sell more on a Nexit surge.

Real economy effects of a Brexit? Who knows, but most countries manage pretty well on their own. I’m sure the UK will be better off in the end without being hamstrung by a sclerotic EU (that will break up sooner or later anyway)


What about “Kamikaze Kuroda”?

Japan: Oh, the first decade of QE didn’t work. Let’s triple it! Oh, that didn’t work either… must have been too little, let’s do more, let’s buy stocks as well.

Pundits: Japan never de facto tried QE (since they did so little). Hence, you can’t say it didn’t work. They have just now really tried it for the first time so let’s see how it goes.

Fact: 250% government debt to GDP, zero to negative growth, 6-7% budget deficit despite close to zero interest rate on its massive debts.

Japan: I know! I’ve got an idea: Let’s throw some more money at the problem and increase the deficit and the debts!

To understand the scale of the issue, no country has worked itself back from a debt/GDP of over 100% (very few from over 80%); and Japan already has around 250% and a large primary budget deficit and no growth.

Sure, they do have a lot of interesting robotics related companies, not to mention cheap P/Book<1 companies in various sectors, but the JPY is headed for a crash beyond comprehension sooner or later. No central banker has been as irresponsible as Kuroda ever without causing hyperinflation, a currency crash and default. Will he be the first, despite having the worst starting point? And a crash prone world economy environment to boot…

If you can hedge the JPY reasonably cheaply you might want to take a look at, e.g., some Japanese robotics companies. I, however, will wait this one out and look for opportunities after the fact. There never is any reason to rush into investments. There never is a reason to try to get rich in a hurry.

Patience is what I practice.


China Conundrum

It’s hard to know what the Chinese think, and what their long term plans are. Being communists they actually can plan for the long term, although history has shown they probably will make significant mistakes sooner or later

(and probably already have – just as with Madoff it takes a catalyst to reveal the extent of the disaster).

China is a riddle, wrapped in a mystery, inside an enigma.

China made its (final) move in 2008-2009 when it stimulated its economy heavily. They can’t afford to do it again.

The last few years China’s total debts have risen faster than anywhere else in the history of man. Every time the debt/GDP ratio have increased as fast as in China a crash has followed. When that happens China can’t pursue a similar stimulus program.

Just as with the other kill points in the global economy, if China falters it will catalyze a global re-set rather than be mitigated by strength elsewhere. The same goes for Europe and the U.S.

In earlier crashes there have always been some region or other that have been able to carry the burden if one region ran into trouble, but this time every major economy is linked, synchronized and equally laden with debt upon debt -hidden and exacerbated by derivative structures that are as complicated as they are devastatingly huge.

China has wasted money on investments without positive returns. The investments have made the economy look like it’s growing strongly and will grow into its “infrastructure”. However, next years growth have had to be manufactured in the same phony way. Over the years more and more resources have been wasted on pretend growth, while building up huge balances of bad debt.

Some of the infrastructure investments will prove useful but possibly 30-50% will prove bad or too early (which is just as bad since there will be no money for maintenance and the assets will be left to wither into oblivion)

Anyway, sure China is headed for a hard landing, but hey, so is everybody else. It’s just a question of when. The central bankers and authorities know they’re running an unsustainable system, the’re just extending and pretending to jostle for a good position at the negotiation table after the faeces have entered the air conditioner.

China and not least the US are hoarding gold, while simultaneously manipulating the gold price lower for a seat at the post-shit-hit-fan table. Gold is one of very few things that can function as a credible anchor in a global monetary re-set.

Yes, I’m buying gold

Last week, e.g., I bought a 500k USD stake in a gold royalty start-up company. I think it’s the best way for me to secure physical gold without having to store it, and a good way of avoiding the problems with ETF ‘paper gold’

Oh, I almost forgot. China just might kick off with a competitive devaluation once it’s done buying gold. That would make things really interesting. Or as Hugh Hendry said recently: “a Chinese devaluation would be game over and I’m jumping out the window”.


All real wealth will of course remain after the coming financial crisis. I’m not predicting Armageddon, just a financial crisis that’s a little worse than usual.

All trucks, all land, all ships, all buildings and factories etc. will still be standing. It’s just a question of who will own what in the end. Prepare for wildly fluctuating asset prices: real estate, currencies, interest rates (bond prices), gold, commodities, stocks. Prepare for high regulatory uncertainty, for plunging profits in many (most) instances, but surging in other.

The movements will be swift and unpredictable as trillions of dollars try to front-run and outsmart each other in jumping from asset class to asset class, until a new order has been reached. In that chaos I will cling to gold and shorts on the stock market, while aiming to buy single stocks at bargain prices, given that they have sound long-term business models and strong balance sheets and cash flow business models.

When?

China probably would like a couple of years more to purchase enough gold, and all other authorities will do whatever it takes to postpone the re-set for as long as possible. Some might even think a crash is avoidable, despite having pushed every conceivable economic variable further from their historical means than ever – not least debts, profit margins, deficits, valuations, interest rates (you know things that matter for investors), while pulling forward growth from the future and possible setting the stage for high inflation and low or negative growth. Hello the 1970s again!

May we live in interesting times with interesting central bankers


Summary

US rate hike – a catalyst for crashing EM and a stronger dollar – possibly stronger US stocks (temporarily). I would sell.

Brexit – be careful what you wish for. If the UK remains we’re just back to a slow steady decline and I would sell more on such a surge

Japan – It’s already game over there. They just don’t know it yet. There might be some cheap or otherwise interesting single stocks there, but you’d better hedge the currency.

China – they might just as well deliberately trigger the inevitable crash if it doesn’t happen by itself. They are playing for long term hegemony and are not short term rational”.

I’m buying gold – not just because of China, but because we are heading for very interesting times indeed.

Now: subscribe to my free newsletter, download and read my free e-book and share this article as widely as you can to help others from making mistakes the coming few days, months and years.

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4 Comments

  1. So how would you go about buying gold? I find the fees fur physical gold quite high, which has been putting me off for quite some time.

  2. Any update on your thoughts now that brexit and risk off? Do you think brexit is the catalyst to start a sustained downturn in global stocks?

    • Right now I’m undecided between the negative Catalyst view and the positive Stimulus view (i.e., the Brexit will trigger immense stimulus and catapult stocks higher)

      I will cover some of my shorts tomorrow, mostly to be able to sell again if there is a bounce.

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