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"Macro" Musings


giofranchi

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I read this earlier and immediately fired it off to a few friends. A must read!  I included this quote as a teaser in sending it to my friends:

 

 

 

"It turns out that we can use Total Return EPS to do all sorts of interesting things: accurately predict future growth based on position relative to trend, decompose and visualize historical returns in terms of their contributing components, estimate profit margins during periods in the late 19th and early 20th century when the data necessary to calculate them was not available, construct new-and-improved Shiller CAPEs that allow for valid comparisons across history and across countries, and many more.  But those would be too much to discuss in one piece, so I’m going to save them for later."

 

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Great article.

 

This still suffers from a "trend" fallacy: that there has to be a trend to which the prices (or numbers in general) revert to. In fact, linear trend is completely artificial artifact of finding least squares linear approximation for series of numbers. It does not represent a causal or explanatory law (or even a theory). Like author shows himself, the numbers are not linear and only adjustments to numbers make the linear approximation more coherent. So unless there is a reason for the line other than "we took least squares approximation", there is no law that prices have to revert to it. They likely will, but it's possible that they won't and the least squares approximation will shift a bit instead.

 

Edit: note to myself: I have to remember the "the massive drops seen in 2003 and 2009 were the result of the application of accounting standards that were not applied to prior eras and that do not reflect true earnings performance".

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How crazy is this?

 

BOJ Helps Tokyo Stocks to Soar

 

The Bank of Japan’s aggressive purchasing of stock funds has helped Japanese shares climb to multiyear highs in recent months. But some within the central bank are growing uncomfortable about the fast-paced rally and the bank’s own role in fueling it.

 

[…]

 

The book value of the bank’s ETF holdings stood at ¥4.323 trillion as of the end of February, according to Bank of Japan data, and the market value is likely higher because of recent rises. The bank estimates the book value will reach about ¥6.8 trillion by the end of this year.

 

For comparison, Nippon Life Insurance Co. is the single biggest private institutional investor in Japanese shares, with ¥8.2 trillion in Japanese stock assets as of last December. Stocks listed on the first section of the Tokyo Stock Exchange have a total market value of about ¥550 trillion.

 

http://www.wsj.com/articles/forex-market-erupts-on-central-bank-moves-1426773181 [via Google]

 

I didn't know that the BOJ has been buying Japanese stock ETFs – and they want to expand it!

boj-equity-wsj.jpg.256e2abbb8797db3df88f0dd25b221e6.jpg

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Future opportunity?...

 

Albert Edwards Happy Not To Be The Only ‘Party-Pooper’

Society Generale’s Albert Edwards sees a kindred spirit when Ray Dalio compares today’s economy to 1937

Michael Ide, March 19, 2015

 

“While all around are euphoric we are rattling our chains with an increasing sense of imminent doom. I like to think I’m not the only party-pooper,” writes Edwards."

...

 

"Edwards doesn’t actually have a better alternative, he figures that the damage from QE is already done and the next recession is on its way, whether the Fed starts tightening this June or next year.

 

“It is indeed a dilemma but likely already too late to avert another crisis,” he writes."

 

 

http://www.valuewalk.com/2015/03/albert-edwards-ray-dalio/

 

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Great blog post that sums up the current situation nicely:

 

Why The Smart Money Is Beginning To Worry About The Downside

 

A month or so ago, I was struck by Ray Dalio’s comments at Davos. He seemed fairly concerned and the major media outlets didn’t really pick it up.

 

“It’s the end of the supercycle. It’s the end of the great debt cycle.” -Ray Dalio

 

What does this mean? I think the simplest explanation is that over the past several decades we’ve gone from a nation of savers who paid cash for things including homes and cars to a nation of spenders who use debt like mortgages, car loans and credit cards to pay for things.

 

And it’s not just on the consumer level. It’s also happened at the corporate level.

 

“Corporate debt was $3.5 trillion– in 2007, arguably a period and– many would describe as bubbly. It’s 7 trillion now. So it’s gone from 3.5 trillion to 7 trillion. As you know, most of that mix has been in more highly leveraged stuff, Covenant-Lite loans– high yield, that’s where the majority of the rise has been. And if you look at corporations have been using it for, it’s all financial engineering.” -Stan Druckenmiller

 

Government debt has also grown to multiples of GDP around the world. But it can’t keep growing forever.

 

http://thefelderreport.com/2015/03/04/why-the-smart-money-is-beginning-to-worry-about-the-downside/

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  • 2 weeks later...

10yr US Treasury Yield back below 1.85%.

 

VersialleinNY has recently posted the following quote:

This has basically never happened before in my whole life. I can't remember 1½ percent rates. It certainly surprised all the economists. It surprised the people who created the life insurance industry in Japan, who basically all went broke because they guaranteed to pay a 3% interest rate. I think everybody’s been surprised by it, including all the people who are in the economics profession who kind of pretend they knew it all along. But I think practically everybody was flabbergasted. I was flabbergasted when they went low; when they went negative in Europe – I’m really flabbergasted. How many in this room would have predicted negative interest rates in Europe? Raise your hands. [No hands go up]. That’s exactly the way I feel. How can I be an expert in something I never even thought about that seems so unlikely. It’s new territory….

 

“I think something so strange and so important is likely to have consequences. I think it’s highly likely that the people who confidently think they know the consequences – none of whom predicted this – now they know what’s going to happen next? Again, the witch doctors. You ask me what’s going to happen? Hell, I don’t know what’s going to happen. I regard it all as very weird. If interest rates go to zero and all the governments in the world print money like crazy and prices go down – of course I’m confused. Anybody who is intelligent who is not confused doesn’t understand the situation very well. If you find it puzzling, your brain is working correctly.

--Charles Munger

 

Know who predicted this?... Mr. Gary Shilling

 

If you want to spend some time thinking about the macro picture, I would strongly suggest to read The Gary Shilling Insight… You probably don’t need much else! ;)

 

Cheers,

 

Gio

 

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Know who predicted this?... Mr. Gary Shilling

 

If you want to spend some time thinking about the macro picture, I would strongly suggest to read The Gary Shilling Insight… You probably don’t need much else! ;)

 

Cheers,

 

Gio

 

Back in 2003 he predicted 10 years of deflation and he got that wrong given that we haven't yet had any after 12 years.  However the interest rate portion of his forecast was correct.

 

Now he is predicting a return to normal GDP growth.

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Great blog post that sums up the current situation nicely:

 

Why The Smart Money Is Beginning To Worry About The Downside

 

A month or so ago, I was struck by Ray Dalio’s comments at Davos. He seemed fairly concerned and the major media outlets didn’t really pick it up.

 

“It’s the end of the supercycle. It’s the end of the great debt cycle.” -Ray Dalio

 

What does this mean? I think the simplest explanation is that over the past several decades we’ve gone from a nation of savers who paid cash for things including homes and cars to a nation of spenders who use debt like mortgages, car loans and credit cards to pay for things.

 

And it’s not just on the consumer level. It’s also happened at the corporate level.

 

“Corporate debt was $3.5 trillion– in 2007, arguably a period and– many would describe as bubbly. It’s 7 trillion now. So it’s gone from 3.5 trillion to 7 trillion. As you know, most of that mix has been in more highly leveraged stuff, Covenant-Lite loans– high yield, that’s where the majority of the rise has been. And if you look at corporations have been using it for, it’s all financial engineering.” -Stan Druckenmiller

 

Government debt has also grown to multiples of GDP around the world. But it can’t keep growing forever.

 

http://thefelderreport.com/2015/03/04/why-the-smart-money-is-beginning-to-worry-about-the-downside/

 

 

 

 

 

+1

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  • 2 weeks later...

Another sobering look at the deflation scenario...

 

http://www.cbc.ca/m/news/business/topstories/is-u-s-fed-chair-janet-yellen-creating-a-zombie-economy-1.3050229

 

But as a consumer, the current negligible interest rates enticed me last week to upgrade my 2005 Toyota for a 2015 model, financing the difference for 0.99% over four years.  And the dealer only made about $1,000 over his cost (and he swallowed the cost of bringing the vehicle from another dealer 150 miles away!)

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Interesting view on china and biotech stocks:

 

http://www.brontecapital.com/files/amalthea/Amalthea_Letter_201503.pdf

 

Maybe i should increase my short exposure a little bit more.

 

Ha ha surprised to see you can post a John Hempton piece oh here without getting torn apart!  But fascinating work and scary for China if true.  I like the little details e.g. about the parking!

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Look at it this way: If 3 trillion dollars of negatively yielding Euroland

bonds are used as the basis for discounting future earnings streams, then

how much higher can Euroland (Japanese, UK, U.S.) P/E’s go? Once an

investor has discounted all future cash flows at 0% nominal and perhaps

(–2%) real, the only way to climb up a yet undiscovered Everest is for

earnings growth to accelerate above historical norms. Get down off this

peak, that F. Scott Fitzgerald once described as a “Mountain as big as the

Ritz.” Maybe not to sea level, but get down. Credit based oxygen is

running out.

 

At the Grant’s Conference, and in prior Investment Outlooks, I addressed

the timing of this “ending” with the following description: “When does our

credit based financial system sputter / break down? When investable assets

pose too much risk for too little return. Not immediately, but at the

margin, credit and stocks begin to be exchanged for figurative and

sometimes literal money in a mattress.” We are approaching that point now

as bond yields, credit spreads and stock prices have brought financial

wealth forward to the point of exhaustion. A rational investor must indeed

have a sense of an ending, not another Lehman crash, but a crush of

perpetual bull market enthusiasm.

--Bill Gross

 

That's what also Watsa talked about during the FFH AGM: "not another Lehman crash, but a crush of perpetual bull market enthusiasm"... Stock prices that go down and stay down for a long period of time.

 

Cheers,

 

Gio

Bill_Gross_Investment_Outlook_May_2015.pdf

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I think both Watsa and Gross miss Buffett's point about the best place to be in this type of environment is stocks and if interest stay low (a point about which both Gross and Watsa agree) that stocks are cheap.  If interest rates go up (a view which neither Gross or Watsa hold), stocks are modestly expensive.  The concept of expensive stocks for both Gross and Watsa is based upon reversion to a much higher level normal interest rates.  This view has cost Fairfax a good amount over the past few years and is one of the few areas I disagree with them. 

 

One inconsistency with this view is the large amount of equity holdings in emerging markets.  If the scenario plays out the way they suggest, deflation leading to bankruptcies etc. , the EMs will be hurt more than anyone else as the flow funds into these countries will reverse.

 

Packer

 

Packer

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I think both Watsa and Gross miss Buffett's point about the best place to be in this type of environment is stocks and if interest stay low (a point about which both Gross and Watsa agree) that stocks are cheap.  If interest rates go up (a view which neither Gross or Watsa hold), stocks are modestly expensive.  The concept of expensive stocks for both Gross and Watsa is based upon reversion to a much higher level normal interest rates.  This view has cost Fairfax a good amount over the past few years and is one of the few areas I disagree with them. 

 

Maybe… But I am not convinced. Therefore, I hold both FFH, which will perform satisfactorily if Watsa and Gross are right, and other stocks, which will perform well if Watsa and Gross are wrong.

 

Imo in this environment certainties might turn out to be very costly.

 

One inconsistency with this view is the large amount of equity holdings in emerging markets.  If the scenario plays out the way they suggest, deflation leading to bankruptcies etc. , the EMs will be hurt more than anyone else as the flow funds into these countries will reverse.

 

Well, if you’re referring to India, I think India’s economic environment is quite different from the rest of the world: low level of debt, great demographic trends, an infrastructure system that is still underdeveloped. India’s stock market might be overpriced right now, like all the rest, and that’s why FIH’s assets are still in cash + bonds. That will change when true opportunities present themselves.

 

Cheers,

 

Gio 

 

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And to counter some doom and gloom:

 

http://ec.europa.eu/economy_finance/eu/forecasts/2015_spring_forecast_en.htm

 

Inflation is expected to remain close to zero in the first half of 2015, mainly due to the effects of the fall in energy prices. Consumer prices should, however, pick up in the second half of the year and even more so in 2016 as domestic demand strengthens, output gaps narrow, the effects of lower commodity prices fade, and the depreciation of the euro triggers higher import prices. Annual inflation in both the EU and the euro area is expected to rise from 0.1 % this year to 1.5 % in 2016.
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