"Macro" Musings

[giofranchi]

Grant's Take on the Markets

OCT 10, 2013 | 9:51 AM EDT

 

Please do not disparage me for being cautious. I can smell what is in the oven just like you but I occasionally open the oven door and peer at what is inside. Something they do not like at all but I do it nevertheless. What is being baked up is hardly the stuff of a square meal and I fear undernourishment. I remain cautious.

 

 

Just great! Far from disparaging your cautious stance! Instead, many thanks for “opening the oven door” and let us also “peer at what is inside” for a while, Mr. Grant!

 

giofranchi

 

[giofranchi]

Knowledge is not merely a source of wealth; it is wealth.

 

Very interesting essay by Mr. George Gilder!

 

 

giofranchi

EVA+10.11.2013+NA.pdf

[rijk]

is it just me or is this list getting kind of short?

 

on the bright side,.. if you like to review companies at multiple year lows, you have a lot of free time these days......

 

regards

rijk

 

 

 

http://www.gurufocus.com/52weeklow.php?&datespan=5y

[giofranchi]

Time to take bets on Frexit and the French franc?

 

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100025783/time-to-take-bets-on-frexit-and-the-french-franc/

 

Mrs Le Pen's EMU withdrawal plan is based on a study by economists from l'École des Hautes Études in Paris led by Professor Jacques Sapir. It concludes that France, Italy, and Spain would all benefit from EMU-exit, restoring lost labour competitiveness at a stroke without years of depression.

 

Their working assumption is that the eurozone's North-South imbalances have already gone beyond the point of no return. Attempts to reverse this by deflation and wage cuts must entail mass unemployment and loss of the industrial core.

 

This is basically what Mr. Charles Gave has been saying for years...

 

 

giofranchi

 

[giofranchi]

Goldman: Entire S&P Move Higher Is Due To Multiple Expansion; Shiller P/E Says 30% Overvalued So... Buy

 

http://www.zerohedge.com/news/2013-10-19/goldman-entire-sp-move-higher-due-multiple-expansion-shiller-pe-says-30-overvalued-s

 

giofranchi

[nwoodman]

A great interview with Australian Fund Manager,  Matt Mclennan, who runs about $80b at First Eagle

 

http://www.afr.com/p/business/financial_services/interview_transcript_first_eagle_qgIOfuxoKGFCgUuKQDbUaM

 

I particularly liked this section on Aussie banks and the housing sector:

 

Q: Australia’s banking sector accounts for about 30 per cent of the sharemarket index and the majors rank among some of the most profitable institutions in the world. Are you investors?

 

"We haven’t been investors in the Aussie major banks because the raw equity-to-asset ratios, as opposed to the ratios calculated using risk-weighted assets, are lower than our comfort zone. We also haven’t been there because there is an element of dependence on wholesale funding in the business model.

 

We’ve felt that it’s been a pretty good time for Australia – there has been a fair amount of cumulative credit growth over the last generation – and if you look at the reserves-to-loan losses inside the banks it’s pretty low in the scheme of things.

 

A lot of people would argue it’s been a successful, oligopolistic, and well-regulated market. But the risk-reward for us investing in an environment where the private sector has built fairly high levels of debt and the structural tailwinds for the economy are becoming structural headwinds, has made it non-compelling for us to spend a lot of time there. There are better non-brainer opportunities for us around the world.

 

We’ve also had limited investments in banks as a whole because we’ve had a fairly healthy scepticism for the world’s financial architecture. Where we have invested in banks they typically have conservative loan-to-deposit ratios, high equity-to-assets ratios, and lower leverage than what you find in Australia.

 

We like banks that focus on regional lending with wide net interest margins and which have big fee earning businesses attached to their balance sheets. Those are hard to find, and so banks have not been a big feature in our portfolio."

 

Q: You are clearly very knowledgeable on the Australian economy – what are your views on the resurgent Aussie housing market?

 

It is interesting to me when you hear a politician [recently Joe Hockey] saying this is not a housing bubble – that is just a supply-constrained market.

 

At the end of the day, I think the Australian housing market is instinctively on the full side of fair value in a situation where the natural constituency, the marginal buyer, is already quite levered.

 

I don’t understand why people feel the need to say a market is not in a bubble. I don’t think that’s a prudent approach when you see large levels of leverage and fairly low rental yields. While I get it that you want to support confidence, I don’t know what the upside is in talking down legitimate risks.

 

We’ve always made money by not losing money. Ultimately you feel far more confident when a management team tells you what it is worried about than when it displays complacency.

 

 

-------------

 

For those that are interested this was the "we're different" interview with Australian Treasurer, Joe Hockey,  that is referred to above

 

http://www.macrobusiness.com.au/2013/10/in-new-york-hockey-defends-housing-bubble/

[dcollon]

Mark J. Grant on Germany:

 

The Drop Dead Day has Come and Gone

 

September 22, 2013 has now passed and the German elections are over. The coalition government is still not formed but what I predicted has taken place which is a new and much harder line from Germany. The days predating the election were filled with nicey-nice comments and no one, in any country, wanted to upset Ms. Merkel and we had four months of a self-imposed European calm. That now has ended.

 

The recent German comments on the European banking system and just who will take the hits if necessary are an explicit example of the new Germany where the use of German money will only be tolerated as the last resort; the very last resort. The only group not mentioned in the most recent German pronouncements were the depositors and that is still an open question but equity owners, junior and SENIOR debt holders will clearly be tagged before the use of public funds if any bank is found wanting. The Netherlands has also joined in this opinion and there is no democracy here as any country can veto any different kind of legislation pushed forward by the periphery countries or by Mr. Draghi. As a matter of inference the recent letter sent by Mr. Draghi to the European Commission was flat out rejected by Germany where he requested the use of the ESM funds prior to losses forced upon senior creditors.

 

As is often the case in politics one must read between the lines to understand what is happening and the upcoming bank stress tests to be performed by the ECB are examples in point. The first two European bank stress tests were a joke and if not a joke then a cosmetics commercial. The blush was brought out and applied and then the eye liner was carefully put on and then they used a big fluffy brush for the talcum powder and every blemish was hidden and disguised. The look was declared perfect and all of the shades blended in wondrous harmony.

 

Then we had Dexia and Bankia and smaller banks in Austria and the Netherlands and finally the entire Spanish banking system and the make-up had turned grimy and blackened while it ran sadly down the face of the Continent. Nothing but a cover-up while the female underneath it all was ghastly and scarred.

 

Now it has been argued that things are better because yields have come down since the first two bank charades. "Bah Humbug," says the Wizard. What has taken place is the implementation of the new European strategy where every penny that could be found in the national coffers was used to buy bonds of the sovereign and of the national banks. The national banks of the periphery countries loaded up on their sovereign debt while the pension funds followed the same tactic and Real Estate securitizations and bad loans worth pennies on the Dollar were packaged and sold to the ECB and money loaned at face value.  Everything and anything was declared risk-free and money was loaned as if these instruments were codified by the Gold Standard but, as is always the case when the make-up wears thin, the blush smudges drearily as the evening comes to an end.

 

I have always said, and I still maintain, that you can cover things up and hide reality all that you like but that there is always a last Harrah where someone has to pay the losses. Now with the advent of the new bank stress tests conducted by the ECB and not a German make-up artist, some of the truth may come out and Germany, I am quite sure, has monitored the real health of the banking patients and is preparing for the unmasking which is why the recent statements by them have been made.

 

Italy, Spain, Cyprus, Greece, Portugal and Ireland will all join the chorus calling for the greater European good. The chorus they will sing will be, "You pay, You pay, Not us, Not us," but the German elections are now over and the melding clay has fomented and turned to cement as foretold. The Draghi put was always conditional and the condition was the political will of the countries in the European Union and the German Finance Minister has made the German position quite clear; crystal clear. Make no mistake in your thinking, if the Germans do not want something to be done then it will not be done and bail-ins will take place long before the use of any taxpayer money now.

 

What the ECB may reveal is unknown but what is now explicitly known is the reaction of Germany to any and all problems in the banking sector. The use of any pooled funding such as the ESM will only be used as a last, and I would bet, terrible resort with pounds of flesh extracted for its use. With national coffers full of their own debt all across the Southern nations of Europe and a capacity for more support at de minimis levels I expect a spike in sovereign yields in the forthcoming months.

 

The Piper always gets paid in the end!

[rijk]

pe10>25

 

regards

rijk

[giofranchi]

1 picture is worth 1000 words, right?

 

giofranchi

[Packer16]

Unless I am missing something, $400 billion of margin compared to a US market capitalization of over $18 trillion doesn't seem to be to big of a deal.

 

Packer

[giofranchi]

Unless I am missing something, $400 billion of margin compared to a US market capitalization of over $18 trillion doesn't seem to be to big of a deal.

 

Packer

 

Maybe… Anyway, I wouldn’t define 2007 as the end of “5 years of conservatism and prudent behavior”… And margin debt today is higher than it was in 2007… It might not be too big of a deal, but it makes me think nonetheless!

 

giofranchi

 

[Packer16]

I believe the issue in 2007 was with mortgage debt not margin debt.  You can make an argument that margin debt should be higher today because interest rates are lower and cheaper than other forms of debt, namely mortgage RE and other forms of unsecured debt.

 

Packer

[giofranchi]

On a micro level I agree: if you have a great idea, now is a good time to borrow! But on a macro level, I am not so sure… How is it possible that everyone has some good idea?!

 

Anyway, I guess margin debt is just a way to judge how much complacency there is in the stock market right now. Therefore, I think it is useful as a comparison between market tops and bottoms. Of course, every time things are a little bit different… And there is always some apparently good rationale to believe this time things will work out better… But... let’s just say that it made me think nonetheless! :)

 

giofranchi

 

[CorpRaider]

Probably just increases odd of a good, normal 20% correction turning into a 40% "crash".  It won't precipitate, but it will likely exacerbate.

[meiroy]

http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-369335/

 

"Employing unusually sharp language, the U.S. on Wednesday openly criticized Germany’s economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy.

 

In its semiannual currency report, the Treasury Department identified Germany’s export-led growth model as a major factor responsible for the 17-nation currency bloc’s weak growth. The U.S. identified Germany ahead of its traditional target, China, and the most-recent perceived problem country, Japan, in the “key findings” section of the report.

 

The U.S. is itself dealing with persistently weak U.S. growth and has faced complaints from some countries about its attempts at overcoming sluggish growth, including the Federal Reserve’s stimulus policies. Finance leaders have also taken aim at the U.S. over the global economic impact of fiscal wrangling between the White House and Congress, including the government shutdown and debt-ceiling fight.

 

The Treasury Department, with the latest report, has now criticized the world’s three largest economies after the U.S. for their economic policies.

 

The focus on Germany represents a stark shift in the Obama administration’s economic engagement with one of its most important allies. Since the early stages of the euro-zone debt crisis in 2010, U.S. officials often avoided public criticism of Germany given its central role in keeping the currency bloc intact. President Barack Obama and his top officials worked carefully behind the scenes to prod Germany without antagonizing it publicly.

 

The currency report comes at a time when officials in Berlin and Washington are already clashing over other issues including allegations about U.S. spying."

 

This is big, read the entire article.

 

This is what Soros and many others have said for a long while now, it's the first time that USA officials start to address it.  An optimistic would say this is the first step for a recovery in Europe, where Germany will have to face its own local policies and take upon itself higher unemployment in order to save Europe. A less optimistic person would put their helmet on and buy some canned food.

 

[jberkshire01]

Dylan Grice's latest: http://www.edelweissjournal.com/pdfs/EdelweissJournal-014.pdf

Edelweiss_November_2013_-_The_Language_of_Inflation_–_By_Dylan_Grice.pdf

[worldaccordingtoGARP]

I typed up some of my notes from the Economist's Buttonwood gather. These cover a wide array of topics on the macro landscape around the world:

 

http://compoundingmyinterests.com/compounding-the-blog/2013/11/5/navigating-the-global-economy-buttonwood-gathering-2013.html

[Ham Hockers]

I typed up some of my notes from the Economist's Buttonwood gather. These cover a wide array of topics on the macro landscape around the world:

 

http://compoundingmyinterests.com/compounding-the-blog/2013/11/5/navigating-the-global-economy-buttonwood-gathering-2013.html

 

Good stuff

 

Would be curious to hear about your conversations on Canada's housing market

[worldaccordingtoGARP]

That was over lunch with a Canadian economist. Immediately upon learning he was Canadian, I asked "so...is Canadian housing a bubble?" He laughed, smiled, nodded and said "of course." He felt Carney was aware of this, had said words to the effect that it was happening, and warned people to cool it in housing, but no one wanted to listen. He felt people are entirely delusional about housing right now and responded to talk that it was a bubble with hostility while shrugging it off. (very much in tune with Shiller's definition of a bubble from my write-up) He wasn't quite sure what the catalyst would be that makes it go pop, but believed downward pressure on commodity prices could have ripples through the Canadian economy that finally does in housing.

[stahleyp]

http://money.cnn.com/2013/11/06/investing/wealthy-investors-cash/index.html?iid=Lead

 

"In fact, investors are on track to put the most money into stock mutual funds and exchange traded funds since the technology bubble burst in 2000, according to data from investment research firm TrimTabs"

[Guest hellsten]

2005:

http://epeus.blogspot.com.au/2005/12/key-indicator-for-bubble.html

 

When expensively educated, fashionable young graduates start showing up in your field, you're in a bubble.

 

Lewis describes this in the investment banking business, when his entire Yale graduating class applied to become investment bankers.

 

2006:

http://www.nysun.com/business/equities-swing-with-harvard-mbas/43220/

 

Mr. Soifer tracks how many Harvard Business School graduates choose market-sensitive jobs each year. If 10% or less of that year's class take jobs in investment banking, investment management, sales & trading, venture capital, private equity, or leveraged buy-outs, it's a long-term ‘buy' signal.

 

If 30% or more take such jobs, it's a long-term ‘sell.'

…

This year, some 37% of Harvard Business School's graduate found work on Wall Street, up from 30% a year ago and 26% for the Class of 2004. The trend suggests that Wall Street is becoming bloated and the American economy is ripe for a slowdown.

…

"Historically, the Harvard MBA indicator has been more prolific as a source of sell than buy signals, "Mr. Soifer wrote.

 

Today:

http://online.wsj.com/news/articles/SB10001424052702303661404579180152676790032

 

Elite business-school graduates are increasingly heading to work in technology over finance as the lingering aftereffects of the financial crisis—along with Wall Street's long hours and scaled-back pay—sends newly minted M.B.A.s elsewhere.

…

Tech companies, which once may have dismissed business-school graduates as smooth talkers with PowerPoint skills, are warming to M.B.A.s who may be able to help lead their fast-growing operations as they mature.

…

Overall, Amazon hired nearly 40% more M.B.A.s from the class of 2013 than it did the prior year, says Janelle Donaldson, who heads M.B.A. recruiting for the online retailer.

[ERICOPOLY]

Here is a macro musing for you...

 

 

I see parallels of today with the 1970s.

[giofranchi]

"Stocks As A Lagging Indicator" by Mr. Charles Gave

 

 

Gio

EVA+11.8.2013+NA.pdf

[Guest hellsten]

Here is a macro musing for you...

 

 

I see parallels of today with the 1970s.

 

With years of training I could dance like this guy:

#t=136

 

But I'm lazy so I would probably just try to coattail him and get lucky…

 

http://brooklyninvestor.blogspot.com/2013/11/what-to-do-in-this-market.html

 

I think what many fear is a 1970s like situation; interest rates and inflation flying out of control, stocks going down a lot or staying flat for a long time, stagflation etc.

 

Outsider CEOs and owner-operated businesses tend to be good businesses and remember, those outsider CEOs had tremendous track records even through the bad times.  If the best hedge against inflation or bad times is a good business, then outsider CEO businesses must be great hedges.

[giofranchi]

CAPD showing even more overvaluation than CAPE:

 

http://www.mebanefaber.com/2013/11/07/are-stocks-overvalued-cape-vs-dividends/

 

 

Gio