Thursday, May 1, 2014

Where are we now?

Howard Marks often cites the use of a pendulum to try and understand where we are, or rather, where we are headed... Away from pessimism or towards euphoria? or somewhere in the middle?

I think we are currently in the middle. We are nowhere near euphoria.
However, certain markets or assets are in odd places...

Have been talking for 2 years about the asset price bubble in China; finally it seems that China is trying to rebalance itself. Chronicled quite well in the news right now, and debated by Pettis in his book, Avoiding the Fall.

After a long time, I am going to try and write a little bit about what's happening.

Canadian house prices are at all time highs and canadian household debt to income is way above where US' was in 2007 as chronicled here. This asset price issue has been noted by quite a few fund managers.
Now, Canada is related to China for its export of natural resources which China has been using (may be) to fuel its credit binge and potentially hoarding (up until now) some of the stuff imported.

China is trying to reduce credit growth, and potentially free up interest rates, to close the gap between savings and investments. Capital investments in China ought to reduce, and a big pile of bad loans ought to be disclosed soon. In the last 5 years, net exports have barely been a portion of GDP; GDP growth has been fueled by a growth in credit towards unproductive fixed assets. The USd 3 Tn of reserves can only be used externally, not internally unless there is a big revaluation of the RMB.

Japan, is doing something unprecedented. Most of its debt is owned domestically, and yields below 100 bps. However, the new stimulus programme is trying to raise inflation in order to spur spending and inflation. So, the paradox is that a JGB holder will try and sell holdings and invest in higher yielding assets. So, how does Japan finance its budget, if newer JGBs have to be issued at higher coupons, and Debt to GDP is already well over 200%. International investors or speculators could easily cause a very big move in the Yen, the repercussions of which I cant understand.

Issues with US' monetary and fiscal policy are well known.

My understanding is sketchy, but there are difficult issues to deal with.

Howard Marks is right.
It's time to be cautiously optimistic.

Of course, as has happened in the past, nothing radical might happen for a long time, until it does.

Kyle Bass, Jim Chanos, Seth Klarman and Prem Watsa are very worried.
All of them are usually correct.

Thursday, November 14, 2013

Friday, August 9, 2013

China GDP growth


If one takes a step back and removes accepted wisdom, one may be able to rationalise a little better?

According to the US, the 9th largest economy in the world is India.
The top 8 economies in the world are of between USD 2 Tn and USD 15 Tn annually.
7 of the top 8 economies have been growing at below 3% p.a. for the last 5 years or so.
The second largest economy has somehow been growing at more than 7% a year in real terms.

Now, why should that happen? Sure, investment in fixed capital is the major reason. And fudging of data can be another plausible reason.

My point is simple - there is nothing wrong with a USD 7-8 Tn economy growing at 1-3% a year.
It is only our psychological anchoring to China growing at 8% + a year that makes us fear a slowing China. If a man in a coma woke up and saw this chart, he would say that either China has been faking it or it is bound to revert to the mean.

Furthermore, in terms of pricing, globally, markets have realigned by falling industrial commodity prices. Equity markets have cooled off. We have a new oil and gas revolution. The problem is in terms of an inverse pricing concept as cited in the GMO letter. If the risk free rate is artificially lowered globally, a 12 PE for example, which was historically an acceptable price can be construed as too expensive; it could also be called 'reaching for yield' in the sense that super-low bond yields cause investors to chase assets which do not yield acceptable rates of returns for the risk they possess.

Anyway, my belief is that two or three years from now, if China grows at 2% a year, there is more cause for jubilance than paranoia.

As an investor, what would you prefer, as spoken brilliantly by Howard Marks in his new memo, global confidence that nothing can go wrong as seen in 2007 or heavily cautious optimism in 2013?

Japanese and American monetary systems are the other elephants in the crowded Mumbai local train coach.