RIsks from Analysts and Economists
Never stand too close to a drug analyst. You risk not only disease, but also being shot. Thomas Gilbert Sr, the investment fund manager, was apparently shot by his son in posh Beekman Place yesterday. Beekman Place is a few blocks from my NYC Sutton Place home. I ran into Mr Gilbert occasionally at the circuses where biotech start-ups pitch their ideas at potential investors.
After the shooting I opted to spend some time away from investment gurus in a firmly Labourite household. There economists Sybille and Frank (not their real names) held forth yesterday night.
Sybille, just made a Dame (female Knight), started out as an adolescent Marxist rebel in a Labour family household and it still shows 50 years later. Her Majesty the Queen provided what the Brits call a “gong” because Sybille pushes in committees for more spending on government programs. I approve of some of her pushes, for infrastructure spending on housing and transport to put people to work improving their living and travel conditions, although it really is a way to pay unionized workers more.
But I am appalled by her banging on about the need to spend more than budgeted by the coalition govt on the National Health Service, a British left-wing sacred cow. What the NHS really needs is not a huge inflow of money but a small disSuasive charge for visiting emergency rooms so people cease stopping by for trivial complaints. The French have what is called “le ticket moderateur”.
If there is a fee for a hospital walk-in in place of appointment with the doctor for a cold or an ingrown toenail, it will end the congestion and delays that keeps seriously ill and injured Britons from getting accident and emergency care with less than a 4-hour wait.
But designing such a fee presents a challenge to stalwart lefties like Sybille who believe in universal free healthcare as a sacred right of Britishers. This right does not include dental care, so poorer Brits have lousy teeth. Nor does it cover hearing aids, or eyeglasses. Anyway, I can't vote against Dame Sybille, not being British. And she probably won't run for a Labour seat as she has more influence behind the scenes.
And what you might ask is her husband Frank up to? He sits on various boards and city livery guilds advising them on labour relations for a high fee, a mini version of Tony Blair.
More for paid subscribers starting with a biotech report not relating to the late Mr Gilbert, along with news from Israel, Canada, Britain, Spain, Germany, Hong Kong, China, Japan, Jordan, Ireland, Mexico, Swtzerland, and the USA. Plus lots of fund news after the close of 2014. There will be no blog Weds. when we fly back to the USA.
Fearless Fosdick Forecasts
Today's blog features forecasts by our special correspondent, Fearless Fosdick, who, aided by his abilities in reading Tarot cards, stars, crystal balls, hands, and entrails, will forecast the best stocks for the coming year based on his hunches.
Featured Fearless Fosdick's fifteen forecasts for '15 follow, or FFFFFFFF:
the US dollar cannot keep it up. After rising 17% against other major currencies last year, the pool of analysts has reduced the Greenback's average growth estimates to a mere 4% this year. Me, I go further. The dollar will fall in 2015 against major currencies by 3 or 4% in the second half after the Fed finally does raise interest rates. This will reverse the rent-seeking inflow of global of cash to the US$ and the USA because trade and profits will be hurt by an expensive currency.
The best performing market in 2014 will not repeat the exploit. Make an Exodus from Egypt which in the past 18 months became the place to invest. The Sisi regime attracted money fleeing other Middle Eastern areas where ISIS threatens stability. Sisi is now The Nile denial to ISIS. We tried Egypt, but an Arab hand acquaintance, questioned a mere few months before the Cairene karoom, replied: “are you mashugga?” So I tossed my crystal ball into the sea at Wood's Hole. Big mistake. The worst developed country market (not counting Russia) was Portugal where there will be a reversal in 2015.
Europe is getting desperate, actually a good thing. The failure of half-hearted quantitative easing may open the way for a serious bond-buying exercise and even the launch of multilateral euro-denominated bonds to finance infrastructure and inflation, in return for nominal national reforms. A push to a common bond market and other reforms is long overdue.
The age of aggregation has not ended yet. There will be more mergers in the pharmaceutical sector. There will be additional acquisitions in energy. There will also be more takeovers in telecommunications. If this is not enough to keep investment banker bonuses up, there will also be underwriting, for new share issues, secondaries, bonds, and leading-edge lending, particularly to those most in need of the ready: emerging markets.
The mysterious miasma over Asian economies at this time, as we still have not reached the Chinese New Year, prevents me from forecasting the future in Japan, China, and India. After the Year of the Pig has grunted forward, I will cast my astro-charts anew and they may become clearer.
However, even if China barely grows (its December purchasing manager index is barely in the black at 50.1%) I am certain that another 10 million or so Chinese will enter the middle class, whatever that means in China. Welome fellow bourgeois! Oink oink. However the top oligarchs there and in Russia will become less vulgarly ostentatious to avoid calling attention to their misdeeds. I mean, who really needs 154 Swiss watches or 42 uninhabited apartments?
A high dollar makes for better business for Canada and Mexico, first responders to US demand.
There will be political crises and regime change in Thailand, Saudi Arabia, Brazil, and Colombia. The latter country, according to my favorite Colombia-born elf, Frida, beomes our top pick for good regime change. Regime change in the other lands places may go wrong. In Britain, the son of a foreign-born Marxist is not leading the masses leftward with a red flag but with a ballot paper. That is an improvement but the UK polls are still pretty tentative, the Paddy Power plc odds are not set, and my crystal ball is cloudy.
On South Africa I say: Cry, the Beloved Country. I am allowed to quote others.
In fulfillment of the Zionist dream, Israel in 2015 has become a normal country with gangsters and whores replacing zealots. Its people can vote for their pocketbooks over their ideals, for leftist populist price-cutters opposed to pro-capitalist modernizer land-snatchers. Israeli socialism is dead on Kibbutzim but alive and well in supermarket checkout lines.
Compared to the malignant rise of the European right-wing, hating foreigner immigrants, Muslims, and, sometimes even Jews, Israeli populism appears benign. You cannot be prejudiced against foreigner refugees in Israel because almost every Israeli is of immigrant stock. The same is true of the USA but American triumphalism has a short historic memory. To avoid 1930s-style nasties, serious economic moves to boost job levels are needed all over both regions.
More people will die of Ebola but a preventive vaccination is coming. Meanwhile in developed countries, a treatment based on blood from survivors will become standard operating procedure.
There will be no crashes of airplanes owned by Malaysian carriers. Other countries' airlines may still crash, however.
However more computers will be hacked than ever before.
Vladimir Putin will cling to power by behaving better. I hope. Everyone hopes.
More for paid subscribers from a few places where people are also working this week: Canada, Israel, Germany, Chile, Pakistan, Australia, and the USA. Among those bored by eating and drinking are some of our reporters who like me cannot resist filing, so we have news from Frida Ghitis from Latin America and Martin Ferara from Canada on the UK. And from Me on Pakistan.
Happy New Year, readers!
The latest tables on our performance have been posted, and we are probably not even going to celebrate with Chinese food, because our local Chinese carryout near Mudchute Manor is closed for the day.
The closed position table which is visible to all on www.global-investing.com is the last one we will post with 2011 trade results, as it gets unwieldy with too much historic data. You may view the tables on www.global-investing.com, our website. Remember that the spreadsheets are easier to view if you click on the "printer-friendly" button.
More for paid subscribers follows:
Last El Buen Fin
On this last day of 2014, there is no way that stock markets can produce a portfolio gain for us matching that of the annual rise frompassive investment in the Russell 5000 index, the benchmark assigned to www.global-investing.com by (Mark) Hulbert's Financial Digest, a Dow-Jones publication which tracks newsletter performance. In my opinion, it doesn't matter that much. Our goal is not to beat the broadest US market index, or even to match it. The past year was a good one for Wall Street, but We are in a different niche.
Mr Hulbert warned yesterday about putting your investments in last year's winners. They will not be next year's winners. That means less USA and China going forward, folks. He wrote:
“How could the winners have subsequently performed so awfully? The culprit is risk: The annual performance sweepstakes are almost always dominated by high-risk strategies that try to hit home runs every time at bat. Though, occasionally, those advisers hit a ball out of the park, more often than not they strike out, leading to huge losses for their clients.”
Were our aim to match the Russell, we would simply buy an exchange-traded fund attempting to do so. In fact, to save transaction costs, index-tracking ETFs usually do not buy all 5000 positions and miss some of the smallest and fastest rising (or falling) stocks, and tend to underperform. They also incur unexpected costs when a stock is removed from the Russell or added to it.
There are several good reasons for investing internationally regardless of our alleged failure to do as well as Wall Streeet writ large in 2014:
Long-term, diversification makes sense. There are under-represented sectors in US markets ranging from oilfield services to waterworks, from cellphone payments systems to Sharia-compliant banks, from makers of e-cigarettes to multi-sector family-controlled holding companies, from potash miners to logistics operators in countries lacking a transport system, from tar-sands to lithium, from bookie shops to truly global banks.
Do you want to be in these industries or services? Do you want to ignore them entirely? Our goal is to at least consider the opportunities.
Going global also allows an investor to benefit from market trends outside the USA, in 2014 for example the rush by US firms into deals for avoiding tax by “inversions”. An all red-white-and-blue portfolio wouldn't have made money from these monster cross-border deals. Other merger and acquisition trends, for example in European telcos, also went on with minimal US corporate involvement.
Over the course of years, holdings in obscure nooks and crannies of foreign markets have returned megabucks because of acquisitions, not always originating from the US. We also often wind up owning very valuable assets which we barely noticed when we bought, like a Chinese internet search engine or a minority stake which the majority owner wanted to nab.
To be sure, offsetting those gains in the last year was the huge collapse in commodity prices, oil, copper, iron ore, and raw materials for fertilizers or chemistry like bromine and chlorine. Gold, which I consider a portfolio ballast, will probably end the year flat from its start. But the greenback soared against almost all currencies. Wall Street out-bulled almost all markets from countries with a decent currency. (The rise in Caracas and Buenos Aires shares was to offset the collapse of their pesos and doesn't count.)
Being congenitally sceptical, we avoided all the pricey global IPOs in the US market, notably that of Aliababa, which is up sharply. My reasons were the dual class shareholding structure, which kept BABA from listing in Hong Kong, not a particularly scrupulous market normally. And the fact that we have a double-play in Chinese Internet already.
IMHO neither the US$ nor the Dow-Jones will repeat these exploits in the year to come, because trends cannot grow to the sky. Reversion to the mean is a law of economics. So 2015 may well pay off for the intrepid investor who leaves the Land of the Free with part of his or her portfolio.
Meanwhile there are compensations for the international American. Take yields, for example. Non-US markets have to lure investors in by giving them a tasty return, which is normal even for London where I am writing from. Americans invest directly and via insurance and pension and other funds as a matter of course; Britons have to be convinced. Canadian closed-end funds trade at mouth-watering discounts from their assets, because our neighbors to the north mistrust equities. Euroland people do too.
The case for global investing is not made by the statistics of a single year. Anyone can be a one-hit-wonder because he got lucky over the short term.
Happy New Year to all.
More for paid subscribers follows from Britain, Israel, Denmark, Switzerland, China, India, Germany, Panama, Bermuda, and Hong Kong.
On Sports and Bancos
With extreme difficulty we went to the Saatchi Museum in Chelsea to see the latest hot modern art from emerging centers like Russia and China. The difficulty reuslted from whole chunks of the London Transport System being closed for works during the holiday season. We had to take slow buses to China.
The best bit of the Saatchi show was not the statement art, among other things a banal-looking Chinese wallpaper design which when you looked closely at it was made up wholly of sentences each including the banned English f-word. This is a family publication so you have to guess. There also were lots of formica kitchen relics, for some mysterious reason.
Best was the art about advertising, in fact where the Saatchis made their money. All booklets (£1: I passed) were available in English, Russian and Chinese, aimed at the culture-vulture bimbos attached to London Oligarchs. I think they are laying low. There were a couple of furred and diamond-decked Chinese ladies in perilously high heels but I am not sure if they weren't with the gallery.
Anyway, Lenin's face boosted Coke. Malevich was written in the type font of the Marlboro man. About the tricks of advertising, it takes one to know one.
Who watches the watchman? Who investigates the investigator? This ancient puzzle sprang to mind on news that the latest Chinese corruption inquiry has snared the fellow who led the investigation into how Glaxo-SmithKline bribed Chinese doctors and hospitals to prescribe its pills. Chinese medics got trips to medical congresses in fun places like Las Vegas or Paris. They also got payments for useless alleged learned articles.
GSK has taken full responsibility for these misdeeds but it now appears that a deal may have been struck between the miscreant doctors and the detective. That is not the only good news for Glaxo about which we write today.
Paid subscribers should read on. We have news fromGermany, Malaysia, Switzerland, Ireland, Britain, Brazil, Spain, Portugal, and Panama.
On Rembrandt and A Year To Forget
“Hendrickje, I feel another self-portrait coming on. Bring in the funny hats.” That New Yorker cartoon came to mind at the National Gallery exhibit, Rembrandt: The Late Works, which we viewed yesterday.
The Rembrandt show was challenging, because the Financial Times reviewer claimed that despite heavy vetting, many works shown were not by the financially stressed Rembrandt, but by his school of apprentices. He allegedly signed and sold them off to raise ready cash.
The exhibit assembled etchings and paintings from Dutch, US, French, German, Hungarian, Canadian, Australian, Swedish and Swiss museums, plus British private collections and museums. Many poffered “late Rembrandts” were not hung because of the controversy.
Yet at the packed exhibit the language I heard most was Dutch. The Dutch, trained to recognize genuine Rembrandt works as their country owns most of them, seemed to think they were really by the Master,
Rembrandt worked hard on his technique, particularly for etchings, experimenting with different expensive papers, from Persia, China, and Japan, though he was bankrupt late in life. He fiddled with the ink and the pressure too.
His painting researches were wide and global. He not only harked back to works of other Western masters Caravaggio, Raphael, Rubens, and Titian, but also to “erotica” by Annibale Carracci. For some Old Testament paintings, Rembrandt drew upon the conventions, dress, and turbans in his book of Mughal miniatures, seeking an Oriental touch, however un-historic. The East India Company brought the Golden Age Dutch not merely spices and silk, tea and porcelain, but also exotic art.
Today's Financial Times reported on companies glad their awful 2014 is nearly over, among them Tesco and Barclays Bank, UK shares we sold in time, and also Petrobras, RWE, and Prada which we never owned. More for paid subscribers about a cluster of mixed news from companies we still own.
No Sunday Tables
There will be no updated tables today as I will instead be closing out the whole year 2014 on New Year's Day. More for paid subscribers follows:
I hope that my BT repair on Tuesday will make it easier to work on the Internet. The UK phone and internet service is utterly appalling and customer service is handled by very nice Indians who have no control over the UK repairers who are feting Christmas all week long. It may have been privatized but it still feels like a relic of state public service which places the state over the public and provides little service. We in Mudhcute Manor are in what is called the doughnut, the area of the East End which surrounds but its not part of the global financial center at Canary Wharf. Communications are at Bangladeshi levels even on the strip of bourgeois non-Council (project) apartments buildings along the Thames.
Deck Us All With Boston Charlie
The above headline is a quote from Pogo.
There will be no blog tomorrow and none the day after either. Apart from Christmas, the British also make a holiday of the day after which, mysteriously, is called Boxing Day. The theory is that is when you put the presents you plan to re-gift the following year back into their boxes.
We have one trading note today and a couple of minor news items from Britain, Ireland, Israel, Portugal, Dubai, emerging bond markets, Denmark, and Florida.
The Last Night Before Christmas Eve and of Chanukah
The No 12 El Buen Fin is a bit about reformers, a second political risk alongside monetary policy, discussed yesterday. My theme was suggested by a play we saw last night, King Charles III, a pseudo-Shakespearean romp into the future, but with echoes of the past: ghosts, monologues in iambic pentameter, high life and low, betrayals, and a wise-clown kebab-seller. Like Prince Hal he finds that:
This new and gorgeous garment, majesty,/
Sits not so easy on me as you think.
The world is full of leaders with a program of hot ideas for running the government better even before King Charles can step up in place of his mother.
In office already are “Princes of Progress” Cameron, Abe, Peña Neto, al-Abadi, Martelly, Draghi, Sisi, Xi, Modi, Hollande (and Macron), and yes, Pope Francis, and oh, not to forget, Obama, each of whom nabbed the political top job in his country (big enough to count) trailing clouds of big change plans. Each man then proceeded to execute slowly, badly, or not at all. Widodo and Sebsi are soon going to join them up there on the stage.
As an outsider investor, I tend to restrain my enthusiasm for new-broom leaders. Been there, done that. I will always be tempted to invest in a country where a reformist is at work, and always will regret being taken in after a time has passed.
The universal problem with reforms is that they easier to promote with the voters who matter--the general public, the leaders of the only political party, army brass, other guys with the guns, an obscure committee-- than to actually implement. In practice, the guy with the top crown (they are all guys) may not be quite as helpless to craft policy as the British Monarch in the play we saw last night. But even in a dictatorship he doesn't get a free hand either. Stuff like other guys defending privilege or rackets or loot gets in the way of the reform programs.
Entrenched bureaucracies practice what Pope Francis (one of the better reformers) calls “ existential schizophrenia”. The reformers wind up suffering “spiritual Alzheimer's”, another papal neologism, which means forgetting what they set out to do.
So as we move from the dead of winter toward a brave our world led by men with big plans, your editor recalls how many previous great marches forward faltered or failed. Happy New Year.
Today's blog has news from Britain, and it is not good, from where I am hanging out over the holiday season, along with developments in Mongolia, Saudi Arabia, Spain, South Korea, Canada's British Columbia and the other Colombia, Israel, and The Netherlands. We are short of news and also having abominable problems with Brit Internet as everyone has gone on line to shop for last minute stocking-stuffers or 8th-day Chanukah presents.
El Buen Fin: Financial Repression
The eleventh el buen fin is about macro-economic policy, government-led financial repression. It is typified by the 2% yield on US 10-yr treasury bonds, but refects current policy in most developed economies following the global financial crisis. The idea is to dispossess those placing capital in fixed-income low-risk bonds or bank accounts. Regulations and central bank measures fix things to reduce to meager levels their return on present-day fixed income placements. The idea is to force these little old ladies to put their money at risk and help the economy grow.
It will continue in Europe and in the US probably until mid-summer 2015. Is it good policy?
The victims, in theory, are rentiers nobody has much sympathy for. However, in fact many victims, the so-called ''takers'' (as tagged by Mitt Romney), are aged or disabled pensioners with little spare cash whose benefits are under siege, and welfare recipients needing income, rent, or food subsidies for their kids. These payments depend on pools of funding and prior year surpluses earnings enough return for government and institutions (insurance or pension plans) to pay. nOW they are not earning these returns. And are not borrowing more to cover the needs.
In some European Community banks and in all Swiss ones, an extraordinary reversal of norms has resulted. Deposit must pay a fee to put their money in the bank. To the best of my knowledge, except via ridiculously low yields, the same charges do not yet apply to bond interest or stock dividends or in the USA.
But US repression includes zapping shareholders in Fannie and Freddie, and letting some muni bonds sink. It also requires letting banks fill the gap, by delaying the Dodd-Frank Law's “Volcker rule” which attempts to reimpose Glass-Steagall distinctions between a bank[s role as a deposit-taker and its high-risk derivatives desk.
A distinction has been made, however invalid, between sterile bank deposits and supposedly more productive stock, bond, and derivative investments. In most of the countries practicing financial repression, it is an alternative to other mistakenly discredited measures that might have been used to reboot economic growth. They are now believed to be useless or counter-productive.
One is the classic Keynesian remedy of running government deficits to push money out into the economy to create jobs, build schools, roads, and public amenities. This spending, alas, also wastes money on boondoggles or to arm for war. However the deficit spending hodge-podge got the world out of the Great Depression. It worked badly with bad consequences, but it worked.
Now however deficit spending is a no-go for political reasons. Germany and some strong-currency-booster allies will not allow desperate southern European countries to spend their way out of recession. The split has grave political risks, but is also anachronistic. Germany is fighting the wrong war, not the current economic malaise, but the 1920s inflationary excesses which preceded the Great Recession and probably did not cause it.
In the USA, balancing government budgets is a shibboleth for fiscal hawks. They imagine their locality or country is like a household which risks falling into debt. In the world of amateur finance, this is called “printing”, a theory that governments want to dispossess the citizenry by debasing the currency with inflation. It ain't happened. Over the past 5 years or so austerity has been imposed on the major industrial economies, squeezing wages and benefits. Hawks rule the roost.
Yet the present-day danger is not inflation but deflation. Central banks struggle to push interest rates up to discourage saving and encourage spending. If people expect interest rates (and prices) to fall they delay spending until later. Jam tomorrow will be cheaper than jam today so today we simply eat our bread without spread. We need to expect some inflation to avoid the dreaded Japanization of our economies: repeat of Japan's decades-long debilitating shrinkage of demand from inescapable persistent deflation.
Feeding into the deflation risk is what sounds like good news: lower oil and commodity prices. This supposed boon is made up of happy circumstances (like the US shale boom and more fuel-efficient autos and lighting) and red-flag dangers. The dangerous side of low commodity prices is the lack of demand, another symptom of low or negative growth.
Deficit spending in the 1930s was accompanied by other policies now even more heretical: trade protectionism AKA “beggar my neighbor''. One country's tariff boosts result in retaliatory measures from others. As cross-border trade flows are blocked when each country aims at autarky (making everything it needs to consume at home even on a small scale), ever greater inefficiencies arise. This makes everyone worse off.
But just because we are avoiding the Smoot-Hawley tariff error doesn't mean we are backing free trade. In fact the Doha Round ot tariff cuts died early in the Global Financial Crisis and now lots of interim barriers to trade like anti-dumping rules and export subsidies have proliferated. Cross-border services like Google or smartphone usage have been blocked by government regulators on grounds of privacy or security, that is merely a cover for new-style protectionism. I am not talking about the Chinese blocking Internet connectivity for political reasons but about having to buy a plethora of SIM cards to use your cellphone. Or how you no longer can use US browsers or search engines without here in England. It is all been done for the greater good to e sure, but it generates business for local service providers.
Moreover, protectionism is not only about traded services. Money is also less moveable. New rules about money movement ostensibly to stop tax cheating have made cross-border investment harder, subject to more regulatory obstacles. To do almost anything in banking or investing now requires a paperwork mass to satisfy regulators that you are not a US person—even if you aren't one and have never been one or have ceased being one. For those like me who proudly wave the Red, White, and Blue, you are unwelcome. But the same tests are being applied to anyone who wants to open an account. This is another form of financial repression, in my view.
In fact the plethora of new policies adopted globally are untested. The world is in uncharted territory. With interest rates barely above zero (except in Eurozone and Swiss banking where they are below zero) there is no margin for cutting rates further. So the experiment had better work!
More for paid subscribers from Europe, Canada, Brazil, The Netherlands, Denmark, Belgium, Cuba, and Mozambique.