I find the soothing talk a little scary

[kevin4u2]

the Q2 GDP was propped up due to inventory build and the payback from that could lead to a low Q3 or Q4 GDP print. I agree that we are manufacturing $1 of growth by borrowing more than $1. The deleveraging which was supposed to happen after 2009 has not really happened and the debt level now is >trillion dollars higher. Due to all this I believe that the worldwide rates could stay low for much longer (till the market loses confidence in the central bankers, however that is not a near term risk imho). And I think that the financial repression that comes due to low rates would continue to force investors into seeking higher risks leading to inflated equity prices.

 

What is wrong with owning good businesses such as INTC, GM, LVLT, GILD, Malone's, etc.

I don't see much of your point here about debt and deleveraging? You say of debt has gone up by >1 Tn! No deleveraging! Ok which debt? How much has GDP moved during that time? Debt has definitely gone up since 1920s too. Are we more leveraged now than then? You may want to pay closer attention to these things.

 

Btw, household debt to gdp has gone down from 98% in 2009 to 80% now. Sure looks like deleveraging to me. I'm not gonna spend time now pulling the corporate debt numbers but those have gone down too. So how exactly is deleveraging not happening?

 

Regarding financial repression as you put it, I see no shortage of sophisticated private investors lining up to buy US treasuries.

 

I don't think you have a clue as to what original mungerville is talking about.  Since the bursting of the so called credit bubble, global debt has continued to rocket ahead by 57 trillion dollars (through Q2 2014).  That means the total global debt to GDP is now close to 300% while back during the last crisis it was 269%.  There has been no bursting of the debt bubble, no deleveraging. 

 

Debt is the problem, it is driving the growth.  Without ever increasing debt, developed economies are screwed.  You are correct that households in the USA have deleveraged as a % but they have not in Canada and many other developed economies.  You relying on one of very few data points that have deleveraged since the last financial crisis.  I would pull the corporate data if I were you and especially the government.  US government debt is up almost 10% annually since the last credit crisis.  That more than offsets any deleveraging among households. 

 

Meanwhile in China, debt to GDP has increased from 158% to 282% (through Q2 2014).  No big deal.  Total debt in China has grown from $USD 7.4 trillion to 28.2 trillion since the last crisis.  Keep in mind that China's GDP is $10 trillion per year.  Stop and think about that for a second, its almost unbelievable.         

 

How big is the credit bubble going to get?

[original mungerville]

I admit that I don't understand the issue -- but genuinely I am amazed that all that QE did pretty much nothing to the gold price.  Perhaps it permanently propped up a gold price that was already in a bubble (but isn't anymore after the QE).  Just don't know.

 

Possibly, yes that may be the case, or my theory may be correct. Obviously Gold is very hard to value - other than when the price is well below production costs. I just think its value is the inverse of the value of currency and the inverse of the confidence in central banks and I can't value those things. Or I could be totally totally wrong and there are other forces at play which I do not understand. But there are multiple experts, hedge fund managers, etc, who have bet on Gold over the past several years and have been wrong thus far - at least in $US terms...In several other currencies I think Gold has only had one or two down years in the last 13 or so. Gold is up this year relative to several currencies, just not relative to the $US. Same for last year.

[rb]

I admit that I don't understand the issue -- but genuinely I am amazed that all that QE did pretty much nothing to the gold price.  Perhaps it permanently propped up a gold price that was already in a bubble (but isn't anymore after the QE).  Just don't know.

I'm fully with you on this. I don't really understand the gold bugs. For them it's never a good time for gold to decline. If the economy is doing good gold should go up because the money supply is going up. If the economy if doing poorly gold should go up because... well fear!.

 

I kinda figured that it's kind of a waste of time trying to figure it out cause gold miners don't perform well. The best performing asset in that industry has been physical gold but once you count the negative carry from storage that hasn't performed that well either. So what's the point?

[rpadebet]

I can't believe people are talking gold again. Forget it. That trade is done. It is useless thinking about it.

 

We are in a world now where debt is high. No one wants to deleverage as it kills the local economy. So they all print money. But they can't print all at the same time, that would cause inflation. They can't have that either.

 

So they print some. Someone else across the globe feels the pain. Now those guys print some. Someone else feels the pain. So it has gone and will be going. There might never be inflection point.

 

This is muddle through economics. Hopefully modest growth and some manageable inflation will bring about real deleveraging in 20-30 years.

 

Lenders don't want to eat the loss, borrowers don't want to pay. End result is everyone pays for the losses little by little through below par growth and inflation. Dario calls it beautiful deleveraging. I call it stuck in the rut. Our investing careers will be defined by QEs.

 

In the U.S. Households and corporates have delevered since 2009, but govt levered up, so we did modestly okay. For govt to delever someone else has to lever up, maybe it's Chinese govt turn now...this is a version of passing the hot potato around..

 

 

[original mungerville]

The gold miners are in the shitter relative to Gold, they make the oil producers look like they are in a bull market relative to Oil.

 

The gold miners have indeed pissed away capital over the past 15 years and have been horrible investments, but over the past 3-4 years investors started getting pissed and management started to adjust. So they aren't pissing away as much as they used to and they are cheap relative to the gold price and oil (one of their most important input costs).

[rpadebet]

The gold miners are in the shitter relative to Gold, they make the oil producers look like they are in a bull market relative to Oil.

 

The gold miners have indeed pissed away capital over the past 15 years and have been horrible investments, but over the past 3-4 years investors started getting pissed and management started to adjust. So they aren't pissing away as much as they used to and they are cheap relative to the gold price and oil (one of their most important input costs).

 

I thought you were going to say the gold miners make the shale drillers look like Charlie munger.

 

 

[original mungerville]

I can't believe people are talking gold again. Forget it. That trade is done. It is useless thinking about it.

 

We are in a world now where debt is high. No one wants to deleverage as it kills the local economy. So they all print money. But they can't print all at the same time, that would cause inflation. They can't have that either.

 

So they print some. Someone else across the globe feels the pain. Now those guys print some. Someone else feels the pain. So it has gone and will be going. There might never be inflection point.

 

This is muddle through economics. Hopefully modest growth and some manageable inflation will bring about real deleveraging in 20-30 years.

 

Lenders don't want to eat the loss, borrowers don't want to pay. End result is everyone pays for the losses little by little through below par growth and inflation. Dario calls it beautiful deleveraging. I call it stuck in the rut. Our investing careers will be defined by QEs.

 

In the U.S. Households and corporates have delevered since 2009, but govt levered up, so we did modestly okay. For govt to delever someone else has to lever up, maybe it's Chinese govt turn now...this is a version of passing the hot potato around..

 

Ya OK, you are 100% sure of that? I am not 100% but your case is my base case. I am advocating that people take a small percentage of their portfolio and search for cheap asymmetric deflationary (eg, FFH provides a free call option on deflation while providing some business growth in the base case scenario) and inflationary (precious metals / miners) insurance - say 10% and 10%. Then go value invest with the other 80%, and personally I would hedge about 33% to 50% of that amount depending on how bullish or bearish you are at any point in time. In this manner, you won't get killed if the base case doesn't hold while your hedging costs are limited (FFH gives you business growth which could offset in losses in your precious metals over time in the base case scenario so we might call that a wash). If you only hedge 33% of the rest, that is not that costly and the opportunity cost of the 20% in FFH and precious metals is not great because the cost of borrowing that 20% is so low in the base case.

[rb]

The gold miners are in the shitter relative to Gold, they make the oil producers look like they are in a bull market relative to Oil.

 

The gold miners have indeed pissed away capital over the past 15 years and have been horrible investments, but over the past 3-4 years investors started getting pissed and management started to adjust. So they aren't pissing away as much as they used to and they are cheap relative to the gold price and oil (one of their most important input costs).

So should we just assume that after 20 years of stupidity the gold miners have found the road to Damascus and they will be good stewards of shareholders money or is it a safer bet that they'll continue to go back to old way after a brief period of contrition? Everyone is free to do what they want with their money. I personally don't buy the new and improved gold miners story. If I'm wrong I may miss on some profits. I'd rather have that than piss away capital.

[rpadebet]

Yes, I think it's most likely scenario.

 

In my opinion Risks come from "black swan" events like major world war, massive natural disaster, uncontrolled terrorism, super bug. Call it inflection point or reset.

 

I don't think risks come from central bankers or politicians losing control. so I would if possible hedge the way taleb had suggested. Deep out of the money options. It's too expensive to continuously do it though. And btw if any of those events happen, our portfolios would be the last thing we would worry about. We would be happy to come out alive.

 

Secular high inflation or secular deflation I don't think is likely.

[rpadebet]

The gold miners are in the shitter relative to Gold, they make the oil producers look like they are in a bull market relative to Oil.

 

The gold miners have indeed pissed away capital over the past 15 years and have been horrible investments, but over the past 3-4 years investors started getting pissed and management started to adjust. So they aren't pissing away as much as they used to and they are cheap relative to the gold price and oil (one of their most important input costs).

So should we just assume that after 20 years of stupidity the gold miners have found the road to Damascus and they will be good stewards of shareholders money or is it a safer bet that they'll continue to go back to old way after a brief period of contrition? Everyone is free to do what they want with their money. I personally don't buy the new and improved gold miners story. If I'm wrong I may miss on some profits. I'd rather have that than piss away capital.

 

Just 20 years? I think it requires a special gene to be gold digger !!

 

[rb]

The gold miners are in the shitter relative to Gold, they make the oil producers look like they are in a bull market relative to Oil.

 

The gold miners have indeed pissed away capital over the past 15 years and have been horrible investments, but over the past 3-4 years investors started getting pissed and management started to adjust. So they aren't pissing away as much as they used to and they are cheap relative to the gold price and oil (one of their most important input costs).

So should we just assume that after 20 years of stupidity the gold miners have found the road to Damascus and they will be good stewards of shareholders money or is it a safer bet that they'll continue to go back to old way after a brief period of contrition? Everyone is free to do what they want with their money. I personally don't buy the new and improved gold miners story. If I'm wrong I may miss on some profits. I'd rather have that than piss away capital.

 

Just 20 years? I think it requires a special gene to be gold digger !!

Sorry I don't want to invest time to go longer than that. As you say, I think the results may be similar  ;)

[original mungerville]

So you are 100% sure of the base case and every gold miner on the globe will be poorly managed going forward. Alright, I'm going to bed.

[rb]

I don't think you have a clue as to what original mungerville is talking about.  Since the bursting of the so called credit bubble, global debt has continued to rocket ahead by 57 trillion dollars (through Q2 2014).  That means the total global debt to GDP is now close to 300% while back during the last crisis it was 269%.  There has been no bursting of the debt bubble, no deleveraging. 

 

Debt is the problem, it is driving the growth.  Without ever increasing debt, developed economies are screwed.  You are correct that households in the USA have deleveraged as a % but they have not in Canada and many other developed economies.  You relying on one of very few data points that have deleveraged since the last financial crisis.  I would pull the corporate data if I were you and especially the government.  US government debt is up almost 10% annually since the last credit crisis.  That more than offsets any deleveraging among households. 

 

Meanwhile in China, debt to GDP has increased from 158% to 282% (through Q2 2014).  No big deal.  Total debt in China has grown from $USD 7.4 trillion to 28.2 trillion since the last crisis.  Keep in mind that China's GDP is $10 trillion per year.  Stop and think about that for a second, its almost unbelievable.         

 

How big is the credit bubble going to get?

I think maybe you shouldn't throw stones this fast. I was stalking about the US as the poster was talking about numbers from the US. Do I think that we in Canada have a problem have a problem and keep out heads in the sand? Yes! Though most of the people I meet disagree with me. Does China have a debt problem? I don't know but I have a feeling they're working they're way there.

 

If you want to talk about why we need debt to generate economic growth, I think that we may get to Summer's thoughts about secular stagnation and why income doesn't find its way its way into demand despite the closed loops of the macro economy. Then we get to issues of public policy about addressing deficiencies in demand that I don't think are in the scope of this thread nor things that may be enjoyable for you to talk about.

 

But let's look at the US a country where I think they did a poor job of managing this downturn but I also think that they handled it among the best (speaks volumes about the rest of us). They had massive private sector deleveraging. Of course in that environment government debt should go up - the government has to step in to smooth demand. It's the correct thing to do otherwise you have an uncontrolled deleveraging and that's how you get a great depression and those are no fun for anyone.

 

So between 2009 and 2015 you have households going from 98% debt to GDP to 80% - a significant deleveraging. Non financial corporate debt went from 45.4% of GDP to 43.7% not as dramatic but debt to equity ratios in companies improved quite a bit (not gonna spend much time pulling those numbers now) so deleveraging there. Now during this time total government debt (all levels) increased from 77.36% of gdp to 102.85% - that's 4.86% CAGR nowhere near your 10% claim. Unless you are talking about the stock of debt vs ratios though it is weird that you speak of in ratios for everything else but once you get to US gov't debt you move to stocks of debt don't you think? Let's look at those anyway. From 2009 to 2015 the total public (again all levels) stock of debt $11.1 Tn to $18.1 Tn. That's 8.5% CAGR even for the stock of debt. Also less the your claim of 10% CAGR. Again I find highly suspect you switch from rates to stocks.

 

I would suggest that before you accuse others that they don't have a clue and cherry picking numbers, maybe you should have your numbers in order.

 

P.S. The US has had significant fiscal tightening in the past 4 years. The economy is still operating below potential output. When it comes in equilibrium it is quite likely that it will have a budget surplus.

[yadayada]

I dont think markets will crash. Only if China show really really bad figures. But their central bank still has a lot more room then our central banks. And wages have a lot of room to still grow over there in the longer run.

 

Reason it won't crash? There is no where to put your money. That will keep markets propped up. Too many people who have no idea what to do with their money. If it goes down a bit, it will be propped up again. If yields would rise, it could get ugly though.

 

Honestly this is such a shitty environment. Government debt spending is ridiculous. At some point that will have to stop? They will run out of borrowers to fund their deficits? If something cannot go on forever, it won't. At some point the US will have to make close to a trillion $ budget cut, because there are no more people left to borrow from, and you will see a sharp up turn in yields. At some point Japan and Italy and France and GB will run out of borrowers. With the multiplier effect it seems you could see large drops of 5-10% in GDP then?  The only question is when. So no reason to not invest.

 

The scary thing is, the longer it lasts, the more ugly it will become. If US debt grows another 5 trillion, Europe gets more out of control, and Japan is already fucked, the situation will become a lot more ugly. You could see a wave of government defaults and bond haircuts in the developed world. That would be the first time in history.

 

If you spend twice as much as comes in and interest is half your government budget, no amount of money printing gets you out of that without doing serious damage to your economy.

[meiroy]

What bad figures?

 

OK China GDP is probably half or less than official numbers. The impact is already in the market via drop in commodities for a long time now.  Commodities were HIGH to begin with due to massive over-investment with little economic value. So now that it is reduced (the bad capital allocation), commodities are going down. This is good for China and good for the world.  How is this bad? It's not. Good 3% GDP is much better than shitty 10% GDP or whatever. If THIS is why the market is reacting than it will pass because it will not show in future US economy numbers and people will wake up.  So many economists just don't get it, including famous blogs, and just declare it as deflation due to reduced demand when it's obviously not the case.

 

Yesterday fixed rate ceiling on >1 year deposits was abolished. This is HUGE on so many levels.

 

The crash we are having surely has some mechanical (is that the right word?) aspect to it. We'll learn about it soon enough I guess.

 

Regarding the question about all the macro talk, the answer is because it's so much FUN and it's the best thing after sex and we are not allowed to post naked women here so that leaves macro talk. So that's why.

 

[yadayada]

Regarding the question about all the macro talk, the answer is because it's so much FUN and it's the best thing after sex and we are not allowed to post naked women here so that leaves macro talk. So that's why.

YES! ;D As long as you don't let it affect your investing too much I dont see how it can hurt.

[maverick]

the Q2 GDP was propped up due to inventory build and the payback from that could lead to a low Q3 or Q4 GDP print. I agree that we are manufacturing $1 of growth by borrowing more than $1. The deleveraging which was supposed to happen after 2009 has not really happened and the debt level now is >trillion dollars higher. Due to all this I believe that the worldwide rates could stay low for much longer (till the market loses confidence in the central bankers, however that is not a near term risk imho). And I think that the financial repression that comes due to low rates would continue to force investors into seeking higher risks leading to inflated equity prices.

 

What is wrong with owning good businesses such as INTC, GM, LVLT, GILD, Malone's, etc.

I don't see much of your point here about debt and deleveraging? You say of debt has gone up by >1 Tn! No deleveraging! Ok which debt? How much has GDP moved during that time? Debt has definitely gone up since 1920s too. Are we more leveraged now than then? You may want to pay closer attention to these things.

 

Btw, household debt to gdp has gone down from 98% in 2009 to 80% now. Sure looks like deleveraging to me. I'm not gonna spend time now pulling the corporate debt numbers but those have gone down too. So how exactly is deleveraging not happening?

 

Regarding financial repression as you put it, I see no shortage of sophisticated private investors lining up to buy US treasuries.

 

I don't think you have a clue as to what original mungerville is talking about.  Since the bursting of the so called credit bubble, global debt has continued to rocket ahead by 57 trillion dollars (through Q2 2014).  That means the total global debt to GDP is now close to 300% while back during the last crisis it was 269%.  There has been no bursting of the debt bubble, no deleveraging. 

 

Debt is the problem, it is driving the growth.  Without ever increasing debt, developed economies are screwed.  You are correct that households in the USA have deleveraged as a % but they have not in Canada and many other developed economies.  You relying on one of very few data points that have deleveraged since the last financial crisis.  I would pull the corporate data if I were you and especially the government.  US government debt is up almost 10% annually since the last credit crisis.  That more than offsets any deleveraging among households. 

 

Meanwhile in China, debt to GDP has increased from 158% to 282% (through Q2 2014).  No big deal.  Total debt in China has grown from $USD 7.4 trillion to 28.2 trillion since the last crisis.  Keep in mind that China's GDP is $10 trillion per year.  Stop and think about that for a second, its almost unbelievable.         

 

How big is the credit bubble going to get?

 

rb, there you go. If you want to read up further, here it is:

 

http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging

 

[maverick]

I am a newbie writer to this board, though I have been reading all the posts here since a long time. I tend to agree with most of what original mungerville has to say. I am myself painfully long the gold miners. I was even longer but have been cutting my longs after realizing that I was wrong in my assessment last year that gold has bottomed. Right now I believe that gold has more downside and could easily go below $1,000. However, mungerville is right that gold will shoot up when the markets lose confidence in the central bankers. However, I don't believe that to be an imminent risk. In the near term any bounce in gold should perhaps be faded.

As you say, you are a newbie on this board (I'm not a veteran either) so don't take this as I'm picking on you. But why do you think that it's a wise idea to invest in gold miners. You should have a better business/economic case than oh QE, or markets will loose confidence in central bankers.

 

Ericopoly has a very good post of physical gold vs. QE.

 

I'm going to look from the side of the gold miners - what you actually bought. Firstly in the past 5 years there were a lot of projects developed by gold miners that assumed a $1,500 price for gold to be viable. Those projects subsequently had a lot of cost overruns. Why do you think it's good to hold those in current price environment for gold (you could argue upward leverage to the price of gold.... ok).

 

But let's look at the performance for gold miners. Barrick - the largest. Back in 1999 (the furthest back google finance lets me go) was $28 a share. Today is $9.39. You may argue I cherry pick data but all the miners look different shades of bad. Back in 1999 the price of gold was about $300 an ounce now it's say $1,100. So you have a case where the price of your product went up 267% and your stock price went down by 76% is that the business you want to put yourself in? Do you think that if Coke can triple its selling price its stock would go down?

 

Btw in that period BRK.B went from $35/share to 127.79 today a 265% increase and you didn't need to do much work there or think too much about the FED.

 

rb, I went long miners last year mistakenly believing that gold has bottomed. I started cutting my position size after I realized that I was wrong and that gold has not bottomed. My current view is that gold could go below $1,000. Deflation comes before inflation sets in. I will try to go long once again after I am convinced that gold has found a bottom or is close to bottoming. mungerville is right in pointing out that loss of confidence in currencies could push gold higher.

[CorpRaider]

I admit that I don't understand the issue -- but genuinely I am amazed that all that QE did pretty much nothing to the gold price.  Perhaps it permanently propped up a gold price that was already in a bubble (but isn't anymore after the QE).  Just don't know.

 

It's all weird.  I guess the QE is ending up almost totally offset in terms of money supply (or the impact thereof on the economy) by the building of capital on the banks' balance sheets.

[rpadebet]

There you go, Fed starting the walk back on hikes. I give them couple of months to get to QE4 from here.

[rb]

Let's play a bit of market guessing game. Do you think the bottom is gonna fall out of the market at the close like it did in past sessions?

[rpadebet]

Whatever you think will happen, the opposite will happen - that's my prediction

[TwoCitiesCapital]

Let's play a bit of market guessing game. Do you think the bottom is gonna fall out of the market at the close like it did in past sessions?

 

I've got limit orders to sell my SPY puts just in case. Planning to take some money off the table and the maturity forward and the strike price down for another 12 months of protection.

[Liberty]

Whatever you think will happen, the opposite will happen - that's my prediction

 

The market will do whatever causes the most confusion to the most people.

[rb]

The market will do whatever causes the most confusion to the most people.

 

Ain't that the truth!