Category: Economy

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.

Riding high on stocks? Aiming for high finance? Beware of the Dutch disease.

Long legged blondes

White Sensation Parties

Windmills

Picturesque landscapes

Art

-What’s not to like about Holland?

Well, free drugs and (almost) free women are perhaps debatable, except to us ahimsas.

After workout, September 15, 2015

 

What’s not, is ‘Dutch’. And, no, I’m not talking about the people or their guttural language, but about the Dutch disease.

This short (5-minute, tops) post is all about the risk of losing one’s way and letting a windfall gain get the best of you.

 

The Dutch disease

“The Dutch disease” sounds better than it is. Trust me.

The old double-D is usually reserved for countries that get a windfall gain by striking oil, gold, diamonds or some other natural resource.

The discovery is supposed to be an unequivocal positive for the country, but most of the time, several dormant negatives are strengthened and actually make matters worse than before:

  • Politicians struggle for power over the the newfound wealth, breeding corruption and mismanagement.
  • The currency appreciates, strangling the export manufacturing sectors, while stimulating imports of (luxury) consumer goods.
  • The trickle down wealth erodes productivity and creates a nation of leisurely shoppers and welfare addicts.

Once the process has run its course, the country suffers from inflation, high cost level, unemployment, low productivity, low adaptability, corruption, poor governance etc. And its right then that the cause of the Dutch disease, the natural resource discovery, is exhausted, leaving the country much more worse off on all accounts than before.

You know, when you’ve been double-D:d

 

The ZIRP version of the Dutch disease

Zero interest rates work much the same way, just worse, in particular when the entire world plays the same ZIRP (zero interest rate policy) game simultaneously. After the interest rate cycle has run its course, what’s left is a world of dysfunctional and disconnected speculators with zero useful skills, instead of educated, creative and productive people in a functional society.

The Greenspans, Bernankes, Yellens, Kurodas, Draghis and Carneys of the world, not to mention the Swedish “let’s go negative” full retard interest rate champion, Ingves, “discovered” the natural resource of ZIRP and made sure the entire world contracted the Dutch disease.

In effect, they went to the streets and gave every junkie, every person with gambling debts, every irresponsible wacko they could shake a stick at, a wad of dough and said “There, I hope you’ve learned your lesson. And if you haven’t, there’s more where that came from”

 

Your own strain of the 2D

At an individual level, a bull market combined with zero interest rates might even have made you specifically contract the Dutch disease.

Check if you tick any of these boxes:

  • You think a quarter point interest rate rise would hurt your finances
  • You’re not even considering rising interest rates; “Why would they raise if it’s bad?”
  • Your mortgage is more than five times your annual disposable income
  • You’ve run up a sizable student loan or car loan without really gaining any useful skills
  • You actually don’t have a reliable income, since you left your job to “invest on the stock market”
  • You aren’t worried your real job skills are fading, since trading is going so well
  • Your only holdings are story stocks (no profits or no revenues, world domination plans, advertising dependent, story company clients only)

If just one or two of the statements above resonated with you, you should get checked for Dutch disease.

The risk is clear and present that you are financially fragile and couldn’t cope with a normalization of the economy (including 6% policy rates, 50% lower stock prices, and a decimation of finance related jobs and the professional support services that go with them), let alone an undershoot with even higher interest rates, costs (inflation) and lower stock prices and reduced dividends.

Oh, and then there is the creeping issue of automation that will kill off office workers, taxi and truck drivers and many other blue and white collar employees, outside the world of finance.

Feeling worried yet? Butterflies in your stomach?

 

Freakonomics

Here’s a tip for you:

Check out the Freakonomics podcast from October 16, 2014. It’s called “How Can Tiny Norway Afford To Buy So Many Teslas”.

It tells you how Norway finally cured itself from the Dutch disease, on the third time round of windfall oil gains. Now the Tesla is the most sold car model in Norway, and with only 5 million inhabitants, Norway is Tesla’s largest market outside the U.S.

Before that, they fucked up twice when oil prices increased (Norway found oil in 1969, and temporarily prospered during periods of rising oil prices before sinking back with a case of DD).

 

Don’t be that guy with the Dutch disease (Summary and conclusions) 

I’m sure you’ve heard several stories about people winning the lottery, only to be broke a few years later, with high debts, no job, no skills and no friends.

Don’t be that guy.

Low interest rates, surging stocks, increasing house prices etc. are like winning the lottery, like so many sirens of the sea luring you into stagnation and apathy.

Not even I am safe, despite my wealth, perhaps because of it… Remember, it’s not paranoia if they’re really after you.

Instead, make yourself change resistant and future proof:

  • Keep your skills updated, study online, use the abundance of free resources, such as Stanford, MIT, Khan, Codecademy, etc. Here is a list of 144 sites for that!
  • Keep your contacts up to date. Meet IRL, have fun, discuss what you would do if your income dried up, keep networking on LinkedIn
  • Keep your investments diversified
  • Check your spending while you can, instead of waiting until you have to (the latter will be much worse). Is that car really that fun or are you just trying to impress somebody?
  • If you’re still in school, think about which industries might be most resilient to automation and de-financation
    • Hint: It wont be stock brokering, stock research, portfolio management or algorithmic and HFT trading
    • It won’t be car or truck manufacturing either.
    • As discussed before, however, it might be psychology, design, marketing, programming, and as always, various forms of healthcare (unless your government has already ruined that market).
Tell me more how you plan to buy happiness with your stock winnings

Yes, that’s right, even when things are going your way, interest rates are low, jobs, dividends and profits come easy, you’d better Always Be Investing. Most of all, make sure life’s journey is enjoyable and not dependent on becoming or staying ‘rich’.

If this article resonated with you. If you liked it, if you want more… Why not leave your e-mail address with me, i.e., subscribe, and I’ll send you my free eBook on finance, and weekly updates in my newsletters?

And, please, feel free to share this article or my site with anyone.

Why the government fears deflation and you shouldn’t

“Deflation – what’s in it for me?”

I guess that’s the first thought in the morning for most people. And rightly so.

Why?

  • For one, it’s coming (well, unless we get inflation instead – or more likely: both).
  • Second, it has everything to do with your job security, savings, loans, investments, wealth and future living standards; in short your life.

If you thought (not) chasing the stock market at highs was unnerving, deciding on buying gold or not was stressful, or that increasing automation and the death of jobs sounded scary, wait until you understand deflation.

Takeaways:

  • Falling prices are not bad
  • Avoid debt
  • Deflation is actually the remedy
  • You can expect higher real income
  • Negative profit margins and cheap stocks
  • Cycles cycle
  • Huge public debt spells catastrophe and depression
  • Who wins? Make sure it’s you

4 reasons the government wants you too to fear deflation

  • Exacerbates debt. Deflation makes public debt repayment more difficult (debt is nominal and fixed, and if the price of everything else rises, then tax revenues increase too).
  • Can’t be taxed. Another way of saying that is that a wage increase can be taxed, regardless of your real income trend, whereas falling prices and constant wages can’t.
  • Lowers GDP. Deflation reduces nominal GDP (lower prices of everything produced) while debt (nominal, remember?) stays the same (actually it most likely rises quickly due to the typical budget deficits during deflation, stemming from less tax revenues and higher stimulus expenses). Thus the debt/GDP ratio rises in deflation, and with it the risk of higher interest rates and default.
  • Ruins banks. Just as the real value of public debt increases during deflation, private debt does too. Your mortgage keeps growing in relation to your (falling) wage. Sooner or later first you and then the banks become insolvent.

Consumption is not postponed due to falling prices

You often hear people say that deflation makes people postpone purchases, which in turn reduces corporate revenues, leading to layoffs and yet less consumption.

In the real world, however, we all know that falling prices on cell phones, computers and other electronics, e.g., stimulate even more sales and earnings. Despite absolute certainty of rapidly falling prices, we line up during iPhone launches and beg to buy at the most expensive prices possible.

In addition, the things we want and need to consume we buy anyway: food, clothes, transportation and so on. However, investments, in particular speculative “investments” and luxury might and should be postponed.

 

Asset prices will fall and that is good

What does happen is that the prices on assets like stocks and houses fall in a deflation – first from frothy levels to normal, and then sometimes undershoot and become cheap.

What should you as an investor or consumer think of falling prices? Very good, of course:

  • Cheaper housing? You can buy a bigger one.
  • Cheaper stocks? You can buy more of them and then earn dividends for several decades, as well as see prices increase to normal and even expensive levels after you bought cheaply.
  • Cheaper gold and other commodities? You can buy more jewellery, more of the products that are made from iron, oil, grain, sugar etc.

 

Those with too much debt deserve what is coming

…unless you bought with too much leverage of course. If you let evil and greedy politicians and ignorant central bankers fool you into borrowing to buy overpriced assets, then you’ll be in trouble – or at least you’ll be stuck with whatever assets you already have.

Newcomers and other unleveraged people, however, will be able to invest their savings in cheap stock or buy living quarters at firesale prices.

Lessons

Okay, so what’s in it for you… reading this article, I mean, apart from being a little more knowledgeable, a little better prepared and inoculated vs. the deflation is bad propaganda?

Here is what I want you to take away from this post:

Falling prices are not bad. You know this in your heart. It’s only if you are too indebted it can be bad. Or, possibly if you are looking to scale down from a large house to a smaller, then the difference will be a little smaller too.

Hence, avoid debt to the extent that it will chain you to your current asset base. As long as you have unencumbered assets left after the price falls you should be able to scale up and then ride the comeback with more than you had going down.

Deflation is actually the remedy for a sick economy. Deflation should be welcomed. It punishes speculative borrowing and investing, while making prices more reasonable for the poor (but debt-free).

Higher income? It is difficult to ask for a raise, even in a strong economy (not least in these death of jobs and automation galore days), but it’s even harder for an employer to lower your wage for a normal non-performance related job – even in a deflation. Actually, if enough people fall below a certain standard of living (due to their own mistakes) and have no more venues for borrowing left, they will demand and get wage increases(!), which will cut deep into the currently bloated corporate profit margins. If you are debt-free you can still tag along the potential wage increase train among falling prices.

Negative profit margins and cheap stocks. Also, remember that, if you are looking for cheap stocks already. Many companies will lose money sooner or later due to less sales and higher wages – that can be difficult to remember at the peak. On top of it all, a wage spiral can turn into a rate rise spiral making life for both lenders and debtors even more difficult. Don’t be that guy.

Cycles cycle. However, as difficult as losses are to think of at the peak, record margins are far from mind at the trough. If you have cash ready, bargains should be plenty at the bottom. They usually are, even if it’s been unusually long since the last time. Fortunes are made or lost depending on your correct anticipation of the inherent cyclicality in most things.

Just one thing – debt! There actually is one very big drawback of deflation. If debts are already (too) high (public debt, corporate debt, household debt, stock market margin debt, bank leverage, hedgefunds/Private equity leverage) and a large part of the economy depends on stock brokering, fund commissions, loan administration, housing etc., then a lot of people will soon find themselves unemployed and with unemployable skill sets.

Depression. That will cause lower tax revenues, increase state and federal costs (food coupons…), cause civil unrest, calls for higher tax rates, not to mention make selling products and services to all those people all but impossible. Retail chains, restaurants, travel agencies, airlines, taxi drivers, you name it… Everyone will feel the pain. And you too, because the ones mentioned will have second order effects on your employer or your business or you directly almost no matter how far you are from the epicenter in the money business.

Who wins? It’s not the end of the world though. Even in Spain and Greece life goes on, more or less as before, despite 25% unemployment (>50% youth unemployment). People still have to eat just about the same number of calories as before and preferably buy their food as cheaply as possible and cook it themselves, so farmers and groceries should prosper. I’m sure you can come up with several more industries to hide in, no matter how deep the crisis becomes. Alcohol and tobacco? Water and electricity utility companies (oh, no,… loaded with debt unfortunately).

This article also ties in with the post on negative interest rates I wrote in February. Check back on it for a few quick points on education, mortgage and stock market strategies in a NIRP world.

 

Summary

  • Plan your debt level to not get crushed in the coming deflation (or high inflation and surging interest rates)
  • Be ready to pick up bargains (e.g., keep a Quatro Stagione investment portfolio now – including cash, physical gold and possibly attractive but undeveloped land), by having unencumbered assets or cash and a basic idea of what industries and single stocks you dare buy when there’s blood in the streets
  • Make sure you are self sufficient or have employable (preferably non-financial) skills.
  • Be prepared to argue for higher wages, even in a deflation. People will lose their jobs, but the valuable ones will keep theirs, and with higher pay (if needed to cover living costs)
  • Think critically. I don’t have the exact answers. Keynes definitely didn’t. Yellen and Obama certainly don’t have a clue. Neither do academics, your teacher or Nobel prize winners. Howard Marks might. Raoul Pal too. Maybe Marc Faber can weigh in, or Kyle Bass, Jeremy Grantham, Peter Schiff, Steve Keen, Vitaliy Katsenelson or even John Mauldin, Fred Hickey or John Hussman.
    • Search for and read the works of these guys, or just bookmark mikaelsyding.com and subscribe to my newsletter and I’ll help you as best I can to stay up to date.
  • We are in a grand experiment right now; the biggest money printing experiment ever. I’d say the last big one was during the last days of Rome*. That was fun. Whether we’ll end up in a devastating debt-deflation or a likewise ruinous high-inflation environment remains to be seen. Quite likely both.
    • *Oh, don’t forget Germany in 1923, Zimbabwe recently and right now Venezuela and Argentina, among others.
  • Uncertain technology. Layered on top of this debt fueled oligarchical and nepotistic economy is an accelerated technological evolution, possibly leading to a productivity boom never seen before, or an automated hell and death of jobs.

 

May you live in interesting times

Unfortunately you do, whether you like it or not.

The economy is in a transition phase from one semi-steady state to another. It’s payback time after 100 years of the US Fed with increasing money and gold manipulation and a belief in central planning. Thus, the coming 10 years will probably be very difficult and stressful. After that however, humanity might be facing a new spring and golden era, powered by the Singularity enabling technologies: nanotech, biotech, robotics and AI (or GAIN = Genetics, AI, Nanotech).

Life was pretty simple there a while: Make a reasonable effort in school, get a job, work yourself upward, borrow a little to buy a house and pay back the loan in a few years.

That life is no more. Education doesn’t guarantee a good job, robots are (slowly) taking over, low interest rates (and thus elevated prices) mean you have to borrow huge amounts just to pay for school and a house, becoming a debt slave for life and risking bankruptcy at even a tiny increase in interest rates.

Money printing, budget deficits and run-away derivatives markets cause systemic risks that could wipe out the dollar, lead to gold confiscation, increased taxes, lower welfare and so on.

I’m not trying to scare you, just open your eyes to a few possible adverse outcomes of a number very long trends that are simultaneously reaching critical states. 

Sounds complicated? Why don’t you just subscribe to my newsletter instead and future-proof yourself that way? Simple.

However, you are still the one who ultimately will have to manage your debts, skills, income and investments. Don’t trust the government, don’t trust your banker, don’t trust me. Trust no one. (Retard’s Playbook)

Death of money

For further in depth reading I recommend Jim Rickards’ book The Death Of Money. It’s a bit heavy here and there (when reading around midnight I often fell asleep after just a page or two), but most of it is very informative, exciting and inspirational.

The last few chapters with 3 scenarios to ponder, 7 signals to watch and a few pieces of investment advice are particularly good.

To prepare for the coming deflation/inflation/social unrest, watch out for disorderly hoarding of physical gold and changes in the price of gold and the dollar, structural changes in the IMF, system crashes, the Chinese trust Ponzi scheme unraveling and a few others.