Wednesday, February 29, 2012

Marc Faber March 2012 Market Commentary

LIANYUNGANG, CHINA - AUGUST 10:   A staff memb...
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Marc Faber has just released his March 2012 market commentary on the website.

This month report is entitled "When we are no longer able to change a Situation, we must change ourselves", possibly referring to the massive debt load of western economies and the change of attitude required in those economies.

There is one attachment with this monthly market commentary (MMC):

  • "China's Leadership Transition - Social Stability May Require a Stronger Renminbi" by Kieran Osborne, Director of Research of Merk Investments.
In this free report, Kieran Osborne describes the current political system in China (2012 will see a new leader) and analyses different metrics of China economy (inflation rate, bonds issuance, currency swaps ...) that may impact the Chinese Yuan.

He concludes as follows:
Any marginal change in the governance of China is likely to have far reaching implications. Most notably, we expect an increased focus on developing the Chinese middle class and domestic economy over time, with less reliance on the export sector. In turn, political and economic realities are likely to force Chinese policy makers to allow the RMB to appreciate, to help manage domestic inflationary pressures, and thus maintain social stability. We consider that China has the ability to allow its currency to appreciate and put in place steps towards a free-floating framework, due to increased pricing power resulting from manufacturing of a wider range of value-added goods. Indeed, we have seen steps put in place to ready the country for appreciation of the currency, including conducting scenario analyses on local businesses, while concurrently increasing the internationalization of the currency. China is likely to become a global financial hub and a more attractive place for global business, as a bi-product of such initiatives. Such dynamics are likely to lead to ongoing strengthening in the Chinese currency over the foreseeable future.
If I can find a summary, I'll post highlights of the Gloom Boom Doom market commentary, although in recent months it has been hard to find.

Friday, February 24, 2012

Jeremy Grantham's Quarterly Newsletter February 2012 Summary

Jeremy Grantham, GMO, has just released its Quarterly Newsletter entitled "The Longest Quarterly Letter Ever" a 15 pages report divided into 3 parts in contrast to his previous Letter "The Shortest Quarterly Letter Ever" with 4 pages only.

Part I: Investment Advice from Your Uncle Polonius
In the first part, which he could also have called "the 10 commandments of the individual investor", he gave 10 recommendations:
  1. Believe in history - Be patient and fair for assets to be at or below fair value
  2. Neither a lender nor a borrower be - Avoid leverage because it impacts an investor greatest asset: Patience
  3. Don't put all your treasure in one boat - If you diversify, your portfolio will be much more resilient
  4. Be patient and focus on the long term - Wait until markets are very cheap before making your move. Individual stocks usually recover, and markets always do.
  5. Recognize your advantages over the professional - Again, patience is your asset. Professional cannot wait to career and/or business risk (losing one's job or clients due to short term underperformance). You can afford to wait several years, professionals can't.
  6. Try to contain natural optimism - This is especially true for Australian and US investors that do not like to hear bad news
  7. But on rare occasions, try hard to be brave - You can't take bigger risks than professionals when markets are extremely mispriced even though it may come with pain in the short term.
  8. Resist the crowd: cherish numbers only - If you see your neighbors get rich during a bubble, do not jump on the wagon, follow some simple ratios that can help you estimate the markets over/udner valuation.
  9. In the end, it's quite simple.  Really - Workout simple ratios and follow them. For example, the meaning reversion of profit margins and price earnings ratios. GMO does that for the 7-year market forecast.
  10. This above all: To thine own self be true - Know yourself.  If you are easily influenced by others and cannot resist temptation during a bubble, you should NOT manage your own money.
Part II: Your Grandchildren Have No Value (And Other Deficiencies of Capitalism)

In the second section of the newsletter, Jeremy Grantham talks about the shortcomings of capitalism and how it focuses on short term gains and ignore long term pain. Examples are the current debt and resources depletion. The other problem is that capitalism buys (political) influence as was the case with tobacco companies that also insisted smoking tobacco was harmless, and now with energy companies that try to misinform the public and influence regulations.

The main problem, however, is capitalism inability to process finite resources and maintain rapid economic growth as it is mathematically impossible. Many people would cry foul if you say that a decline in population is necessary so that we can live peacefully. Some scientists also estimated that if Indian and Chinese were to catch the average American lifestyle, we would need 3 planets to live sustainably.

To conclude, he says that capital does thousands things better than other systems, but the 2 or 3 where it fails, could bring it down.

Part III: Investment Observations for the New Year

In the last part of the newsletter, he reflects on the year 2011 where most markets ended basically flat. Most equity markets are currently close to fair value, except the S&P 500 with expected returns of only 1% per year.

Overpricing exists in debt markets however. He sees great opportunities in avoiding duration in fixed income and recommend to underweight the most of the US market as a whole.
  • Inflation Hedges
 Although inflation is not an issue right now, it will certainly rear its ugly head soon enough.He recommends stocks, and especially things in the ground such as oild and copper as well as forestry and farmland. He also thins Gold may be a good hedge
  • Resources
Farmland has gone up a lot recently, especially in the US, and GMO is looking for opportunities in foreign markets.

On the other end, natural gas is dirt cheap and the natural gas to crude oil ratio (BTU equivalent) is now 14% which is the lowest in 15 year. Anybody with a brain should look into investing in natural gas. Unfortunately,  he did not give any specifics.

He also said that Gold producers look cheaper than Gold itself.
  • European Complexity
GMO could not comment on the European issue specifically because they do not consider themselves experts in "sovereign debt-regulation-political-monetary mess". However, one or two other companies  - which have a good track record on those issues - seem to be more worried than the rest of the market.

Finally, he gave GMO recommendations for the year ahead:
  • Heavily underweight U.S equities, but not the high quality quartile, which is almost fair price. Non-quality equities, in contrast, have a negative imputed 7-year return after their handsome rally in the last 3 months through to mid-February.
  • Slightly overweight other global equities, which are almost fair price, down from a little cheap at year end.
  • In total, be about neutral in global equities. Yes, there is more than our normal fair share of potential negatives lurking around, but on our data: a) most of the negatives are reflected in stock prices; and b) all fixed income duration is dangerously overpriced. This last situation is, of course, engineered by the Fed, which hopes to drive us all into taking more risk, notably by buying more equities. I hate to oblige, but at current equity prices it just makes sense to do what they want. As mentioned earlier, equities are also good long-term hedges against inflation.
  • Underweight as much as you dare long-term bonds, especially higher-grade sovereign bonds.
  • In the long term, resources in the ground, forestry, and agricultural land are attractive, but come with the usual caveats of the risk of short-term over pricing, so average in.
You can read the complete newsletter for free on GMO website.

There is An Obvious Bubble in Gold (or Not?) has interviewed pedestrians in California following the Gold Bubble talks and asked them if they purchased Gold in the last year(s).

There were too few people in this video to make it statistically relevant, but still, none of the persons interviewed purchased Gold, although some bought Gold stocks (which they already sold) and one bought Silver.

It's quite difficult to have a bubble when there are few buyers. In 2000, during the Nasdaq bubble, individual investors' behavior was much different. I remember Marc Faber saying that during a new year party in 1999/2000, a woman asked him what he would buy. He answered that he liked treasuries, and the woman replied that treasuries would only return around 6% per year, whereas she could get 10% to 20% day-trading on tech stocks.

Thursday, February 23, 2012

Hugh Hendry: Watch Out for Hyperdeflation

Barron's has posted the transcript of an insightful interview with Hugh Hendry, Electica  where he talks about hyperdeflation, China's potential hard landing, and his take on Japan (Companies are doomed, but the Japanese Yen could rise to 50 Yen per US Dollar). He's also very bullish on agriculture commodities and related companies. 

Here it is (emphasis mine):
Barron's: What makes a great macro fund manager?
Hendry: First and foremost, an ability to establish a contentious premise outside the existing belief system, and have it go on and be adopted by the rest of the financial community. My great hero is [Caxton Associates' founder] Bruce Kovner, who was able to imagine the dollar falling to 100 yen—when the rate was 200. I am an existentialist. To my mind, the three most important principles when it comes to investing are Albert Camus' principles of ethics: God is dead, life is absurd and there are no rules. Of course, that's a doctrine of promoting the individual. You own your own decisions. As CIO of Eclectica, with $700 million [under management], I have no engagement with the sell side.

Where do you find yourself outside the existing belief system today?

In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.
When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.

China's great opportunity is taking place within the U.S. fiat system, and so the consequences are perhaps less stark than in 19th-century America, which had stops and starts and many depressions, though with an overarching prosperity. China has not had that volatility.
If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China's swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

You've already had a hard landing—in the Chinese stock market.

I should add something else that is contentious—U.S. quantitative easing [that eventually sent more money flowing to China], promoted because America had two sharp recessions and pursued orthodox policies, and had very little to show in the creation of jobs.

The policy was very successful. China now has inflation. Minimum wages have grown 20% annually for the past three years. This has encouraged the Chinese to tighten monetary policy. When you have bubbles and you tighten, bad things happen. China's stock and property markets are weak, a side-effect of quantitative easing. We may now have the pricking of the Chinese bubble. A year or two down the line, it could have enormous repercussions for the global economy.

How does one play it?

The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it's proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can't. That's why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I'm speculating that hyperdeflation happens before hyperinflation. What's the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that—and Europe—the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can't have all your assets in real assets, in case we get that hyperdeflation event.

That view would be consistent with interest rates staying low forever.

Last year, our fund made 12%, mostly from investing in the short end of interest-rate curves, on the presumption that rates will remain low forever. The risk premium in fixed income was huge, but the performance of global macro last year was quite disappointing. Most people understood Europe, but chose to bet on the euro being weak, which is a hard trade, because there's no risk premium or carry in foreign exchange.
This time last year, British interest rates were at a 300-year-low at 0.5%, and if you asked an investment bank to guess where rates would be in three years, it was betting above 4%. The figure today is more like 1.3%.

So how do you make money?

Would you believe that the AIG strategy of selling too much credit protection in risky assets like mortgage-backed securities is alive and booming today in Japan? It doesn't concern mortgages. It is credit-default swaps on individual Japanese corporations.

Do you seriously believe Japanese corporations are going to fail?

Clearly, they can and do go bust. I'm buying the CDS on investment-grade Japanese corporations because of the overpricing anomaly. Japan had a bust 20 years ago, and yet today the banking stocks, relative to [Japanese bourse] Topix, are making fresh lows. If I'm a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I'm willing to pay 50 basis points for five-year protection on this same company. So suddenly, the yield has gone from 1% to 1½%. Compare that to five-year Japanese government bonds, yielding 30 basis points. The bank thinks: This is a great trade! Japanese steel companies are investment-grade and won't go bankrupt. So, the bank gets this huge yen yield, and thinks it is not taking any risk. You'd better believe it will sell way too much of that good thing.

One of my partners told me about Japanese steel: Here is a country with no energy, no iron ore or coal, yet it's the largest exporter of steel in the world, exports half its output. To put that in context, China manufactures 700 million tons of steel and exports perhaps 30 million. Japan produces 110 million tons and exports 40 million. As long as Asia is strong, they are fine. But if Asia hiccups or reverses, plant-utilization rates go from very high to very, very low very quickly.

Then we discovered that Warren Buffett owned shares of South Korea's Posco [5490.S. Korea], and that Korea was the biggest importer of Japanese steel, but Posco and Hyundai [5380.S. Korea] are building huge, integrated steel plants. They have a surplus of steel capacity and—guess what?—they're exporting to Japan, because the yen is so strong.
Initially, I wanted to buy a three-year, out-of-the-money put on Nippon Steel. My broker said, "I've been in a 20-year bear market; my boss will kill me." Then I thought, being long credit protection is being long volatility. I redialed his credit counterpart. I said: "I'm thinking of purchasing up to a billion yen of five-year credit-default swaps in Nippon Steel." The first thing he said was, "Would you consider 10 billion?" So one part of the bank is banned from selling volatility, and the other part is having a party. I bought reams of the stuff.

In August 2010, we set up a stand-alone fund to buy this credit protection. You no longer pay 50 basis points, you pay 130 basis points. U.S. Steel credit protection is more like 650 basis points, because in America, people are cautious on selling protection on such volatile businesses. They don't share that worry in Japan. It could make them very, very vulnerable.

Any other potential disaster catalysts?

Continuing yen appreciation; an exogenous shock—like a run on the Italian bond market; a slowdown in China; a sharp Asian recession. Japan is confronted by a European sovereign-type loss of confidence in the JGB market. We bought protection on steel names, and also on businesses with a huge sensitivity to the yen. I think the yen could soar from these levels [about 79 to the dollar] into the 60s, if not the 50s, with further dislocation in European sovereigns or a China hard landing.

From the early 1960s almost, Japan began recording current-account surpluses. Unlike Germany, it always invoiced in dollars.

So Japan is short its own currency, and has an enormous private-sector hoard of foreign assets. If the Nikkei falls, and your hedge and private-equity funds fall, pension funds in Tokyo will have fewer yen assets, but their liabilities will be the same. So they'd have to sell some overseas dollar assets and retrade them back to yen. If we have a series of bad events from China to Europe, that will express itself in a very strong yen rally.

What other names have you bought protection on?

Shipping companies, such as Mitsui OSK [9104.Japan]. The only place in the world one can buy credit protection on the shipping industry is Japan. These are very leveraged businesses, and there was overbuilding. We have protection in Nippon Sheet Glass [5202.Japan], which bought Pilkington. We have protection in trading companies like Sumitomo[8053.Japan] and Marubeni [8002.Japan]—companies leveraged, opaque and very geared to the global economy.

We've barely discussed Europe.

We are partly playing it (Europe) through Japan. If events kick off again in Europe, the correlation across all [global] asset classes will go to one. So the steel CDS is 130 basis points, while to insure against default by the French government, I'd be paying the same amount. Which is riskier? A very leveraged steel company that can't tax you? Or a government that can? Our bearish bets are largely outside Europe. As for Greece, the end game will be the Greeks rejecting austerity. The euro is nothing but a gold standard lacking flexibility, and all the onus is on private citizens to take the pain. Eventually, a Greek politician will say, 'Vote for me, and I'll get us out of this system.'

What else do you own?

In the next 12 months, we'll see further pathological swings in investor sentiment. Despite my reservations, I'm modestly long equity-market futures, some nonindustrial commodities, and some bullish fixed-income positions. We are very bullish agricultural commodities and agricultural equities, and hold a global basket of businesses—with interests ranging from fertilizer to farm equipment.


Via Barron's.

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Wednesday, February 22, 2012

Jim Rogers: Gold Going Much Higher In This Decade

ET Now interviews Jim Rogers on the 23rd of January 2012.

They asked him about commodities following the monetary easing by China, and he replied that natural resources such as silver, rice and natural gas usually benefit during periods of massive money printing. If the world economy gets better, there will be shortages, if it does not, they will print money. He owns more precious metals than base metals however.

If there is a conflict with Iran, everything will go down initially, except maybe crude oil, but this would be positive for Gold in the long term. He sees many people in Washington want to do something about Iran, and it looks like something will happen even though it's sheer madness.

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Wednesday, February 15, 2012

GEAB 62: Euroland 2012-2016 : Perennisation of a New Global Power Contigent On Democratization

Here are the highlights of GEAB 62 (February 2012) entitled "Global Systemic Crisis: Euroland 2012-2016 : Perennisation of a new global power contingent on democratization":
  • Global Systemic Crisis: Euroland 2012-2016 : Perennisation of a New Global Power Contingent on Democratization. The Euroland will come out stronger of the crisis as long as people are involved in the Euroland project (and not just technocrats).
  • 2013 : End of the US Dollar Supremacy in Global Commercial Transactions. The decreased amount of commercial transactions in US dollars will be the main trigger of the demise of the dollar, not USD currency reserves by foreign powers.
  • 2015 – The Great Slump of Western Real Estate. LEAP 2020 forecasts important price correction for real estate in western economies by 2015. (Excerpt from a book to be published in March 2012)
  • January 2012 GEAB $ Index: The US dollar accelerates its loss of value against the currency basket €, ¥, Ұ et R$.
  • Strategic and operational recommendations. Many currencies will fall sharply, mind where you keep your Gold, solutions for Greece, winter stock market returns were a travesty and the coming great collapse of Western residential real estate.
  • The GlobalEurometre - Results & Analyses. 69% of respondents (vs. 58% in January 2012) expect an important fall in the value of the US Dollar in the coming months.

The full GEAB 62 (PDF format) is available to LEAP 2020 subscribers for 200 Euros per year (10 + 6 issues).

Monday, February 13, 2012

Gold Outperformed the S&P 500 For the Period 1965-2012

I've seen an article on Fortune magazine written by Warren Buffett that shows the graphics on the right showing the S&P 500 outperformed Gold since 1965.

Warren Buffett also explained his preference for stocks as follows:

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Considering peak oil is around the corner, Exxon Mobil may not be the best example ever, as it might be worth zero in 100 years, along with lots of other stocks 9if not all stocks). But let's go back to the subject of the S&P 500 outperforming Gold since 1965. I have edited an excel spreadsheet to calculate the return of the S&P 500 including dividends since 1965 (but excluding fees and taxes) as well the same return with Gold (again excluding premiums and taxes) and drawn the chart shown below (Click to enlarge).

 There are two interesting facts:
  1. Gold and Stocks appear to work in cycles, with period where stocks massively outperform Gold and vice versa. A logarithmic chart would show Gold is just at the onset of this cycle and should go much higher vs. stocks in the S&P 500. So there is no "Gold is better than Stocks' or "Stocks are better than Gold", there are just wealth cycles.
  2. If I find the same result as Fortune for Gold appreciation since 1965, I just find 100 US dollars invested in the S&P 500 in 1965 would have returned 3370 USD whereas Fortune found those 100 USD would have turn into 6072 USD. I also reinvested dividend (at the end of the year) in stocks for each year.
Either my data is wrong or the way I calculated is incorrect. I used the S&P 500 price and dividends data by Robert Shiller (averaged per year) and for Gold I used both Kitco and
For the formulas, you can check the S&P 500 vs Gold - 1965 - 2000 Spreadsheet.

So if I'm correct, Gold clearly outperformed the S&P 500 (including dividends) during that period. To be fair, if they had chosen 1950 has the starting we may have a different story.

Sunday, February 12, 2012

Marc Faber: Greece Is Not Relevant, China Is.

Marc Faber is interviewed by Fox Business News on the 10th of February 2012.

He explains that Greece is just a small appetizer to a much larger crisis. The market are currently overbought and there should be a correction in February / March the extend of which is yet to be seen. He said he bought shares in Singapore, Thailand and Hong Kong in November / January 2011 (Visit Marc Faber Picks at 2012 Barron's Roundtable for details).

He's also bullish on real estate in the US, he would buy a house as it is very cheap now. He gives an example of a nice 5-bedroom house in Phoenix that sold for 120,000 USD.

Finally he says China is the major issue in the world with most indicators pointing to bad economic times.

Friday, February 10, 2012

Jeremy Grantham Q4 2011 Australasia Update Summary

Jeremy Grantham, GMO, has just released a long 54-page update.

First there are several tables showing the 2011 performance of GMO's Trusts that seem to cover virtually all markets around the world.

He reviews the Australian market for Q4 2011 (lower interest rates, market slightly up...) and gave GMO's outlook  that is the potential for the Australian market to rally further thanks to low valuations (PE: 10) and despite global growth worries and earning downgrades.

After that, he gave his reviews of the global markets (European market and Emerging market weak due to the EU debt crisis while US markets outperformed as the US is seen less risky by investors) and provided GMO allocation strategy:
  • Maintain Quality bias. Quality gave back a bit of its outperformance this quarter, but the game is in the early innings still. High quality stocks still trade at attractive levels, and the general defensive posture of quality still remains appealing given all of the uncertainties surrounding global prospects,
    dysfunctional governments, and horrific bond yields. 
  • Bias toward Value in EAFE (Europe, Australia, Far East). We’ve also begun to bias our international portfolios toward Value. One cannot characterize this as a “big bet,” but valuations are such that we are beginning to see attractive spreads between Growth and Value in international equities.
  • Reduce exposure slightly to emerging markets. We funded some of the flows into EAFE both
    through cash proxies and from Emerging equities. Continued concern surrounding China’s economic
    bubble and a likely inability to deflate it without contagion effects gave us pause.
  • Continued bearishness on bonds. We are literally running out of superlatives to describe how much we hate bonds. Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long-duration portfolios loom, and monetary policies globally certainly have added to the specter of rising yields. 
  • Invest in conservative absolute return strategies, where available. Ideally, absolute return strategies are often a pure play on manager skill. Therefore, the return streams should have little correlation to the movements of the markets. Such investment instruments can provide equity-like returns, while helping to diversify other parts of one’s portfolio.
Then he switched to Emerging markets explaining that they underperformed their developed
counterparts in 2011. This was at odds with their relative macroeconomics with emerging economies making a lot more progress than their developed counterparts in regaining their pre-crisis growth trend.

For 2012, with slower growth and lower inflation, emerging market central banks begin the year significantly more open to monetary easing which is one of the reasons they are positive on the asset class this year. The other reason is valuations as after dropping about 20% over the course of the year emerging markets enter 2012 significantly cheaper than their historical averages.

You read the complete report which is available for free on GMO website.

Friday, February 3, 2012

Marc Faber: Stocks to Correct After April

Marc Faber is interviewed by Bloomberg TV in Hong Kong on the 2nd of February 2012.

He talks about his recent investments (stocks in Hong Kong and Thailand) and his views on the markets in 2012. He expects February to be somewhat weaker than January, followed by another rally in March/April, before a more meaningful correction starting around May.