Monday, August 28, 2017

Holding stocks even if one is Bearish

"Well the globe is divided between essentially super bears and super bulls. I belong to the super bears but I have equity exposure because you have to think it through and you are very negative about the world and you do not want to hold everything in cash. Basically since 2009, we have not reduced but increased the debt level and we have in addition created a rise in inequality. 

The inequality benefits the very wealthy people but the wealthy people as a percent do not spend a lot of money and so the economy in this environment of increased wealth inequality is not performing particularly well. 

The markets have gone up substantially, we have an asset bubble driven by credit and obviously, the markets have become quite vulnerable. Having said that, if I look at the markets around the world what is striking is how expensive US stocks are compared to European companies and especially compared to companies in emerging economies. I would prefer to own international equities, European stocks and Asian stocks compared to say US stocks." 


Thursday, August 24, 2017

Better to invest in select Indian stocks than the broader Indian Index

"I have been relatively positive about India for the last 12 to 18 months. I have applauded the Reserve Bank of India for keeping interest rates relatively high and stabilizing the currency. Since then the Indian market has significantly outperformed other markets. 

It is the second best performing market in Asia after South Korea which is surprising because South Korea has the potential of getting involved in a war but nevertheless it has been the best performing market in US dollar terms. 

In the Indian market, if you look at the composition of the index, the leading stocks are relatively expensive with frequently over 50 times earnings and so I am not that keen on the index anymore, but within the market. there are still some sectors that are relatively attractive and I still maintain what I have been saying for the last one and a half years that India would outperform the US over the next five to 10 years."


Wednesday, August 23, 2017

The US Fed will probably not reduce its Balance Sheet

"With the Federal Reserve, we don't know for sure what the impact will be. There is no clear co-relation between the movement of interest rates, between period of quantitative easing and tapering off. I do not believe that the Fed will reduce its balance sheet, but just in case they did, I am not sure that bonds will collapse and that interest rates will go up. 

There are many other factors. Everybody has been bearish about government bonds in the US, Europe and Japan. In the case of Japan, people have been bearish about Japanese government bonds for 15 years and what has happened is that interest rates kept on going down. So, we don't know exactly where we stand. 

The bond market in the US in my opinion would rather suggest that the economy is not that strong. That is the message from the bond market. If we look at the bond market in the US, the 10-year is yielding 2.228% at present. Now in France the yield is 0.72%, in Germany 0.45%, in Italy -where everybody said the country is bankrupt -the yield is 1.99%. 

In Japan, that has the biggest government debt as a percent of the economy of any country, the yield on the 10-year JGB is 0.05%. Bonds is a very complex issue and that has little do with immediate Fed action. 

In fact, the bond market doesn't like monetization. In other words, they don't like QE1, QE2, QE3. The bond market thinks that it is inflationary."

via indiatimes

Monday, August 21, 2017

US markets have limited upside

The US market is very expensive, and as markets become more expensive, they become more vulnerable to outside shocks. Even if there is no crash, the potential for American shares is extremely limited.What has driven the index is a narrow group of stocks -the FANG stocks and also the semi-conductor stocks -but the typical stocks haven't performed particularly well. 

I recommend a diversified portfolio of assets consisting of real estate, stocks, bonds and precious metals.With the equity portion.

Wednesday, August 2, 2017

Marc Faber VS Alberto Gallo

Recently, a Bloomberg column by Alberto Gallo caught my attention for its insights about the “Minsky Moment.”
According to Gallo, "In his theory on financial markets' fragility and instability, the late Hyman Minsky argued that ‘from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control.’ Following the 2008 crisis, he inspired the term ‘Minsky moment’ to describe a sudden market collapse that follows the exhaustion of credit."
Gallo thinks that, "Today, we may be approaching a second Minsky moment. After the 2008 debt crisis, central bankers reacted with unconventional tools. If the problem was excess debt, the remedy applied was to lower interest rates and buy large quantities of it. Quantitative easing helped to avoid an even deeper recession, but it didn't solve the root causes of the crisis. Global debt levels are up 276 percent in the last decade to $217 trillion, or 327 percent of GDP, according to the Institute of International Finance. But this time around the issue isn't only excess debt – it is also that prolonged loose monetary policy may have left us with at least three collateral effects. The first is a misallocation of economic resources. By keeping rates at record-low levels, central banks have made it easier for inefficient firms to survive, as in a rising tide that lifts all boats. The second is a rise in wealth inequality, where the wealth effect from rising asset prices benefited asset owners and the old more than the young and the poor. The third is a suppression of risk premia and volatility across financial markets.”

I agree with most of what Gallo has to say, except that there is actually a lot of volatility already, which manifests itself in different asset prices simultaneously (except in the S&P 500), which has produced some unpredictable results. If you consider how the asset purchases of the ECB and the BOJ have vastly exceeded the Federal Reserve’s balance sheet expansion in 2016 and 2017, you would have assumed in advance US dollar strength and not US dollar weakness (though since the beginning of the year, this report has repeatedly argued that the US dollar was grossly overvalued).

The point is that we had plenty of volatility already within stock, commodity, bond and currency markets. The US dollar and the Euro are the world’s most actively traded currencies and between May of 2016 and the end of the year, the Euro lost more than 10% against the US dollar. This year the Euro has recovered and has so far gained 12%. Given the size of this market and its economic and financial importance I would regard these movements as very volatile.

I am actually bringing up the subject of volatility because some investors will argue that markets no longer make any sense. To this I would respond that frequently markets will move "without making sense" at the time of the initial move. But later, when we look back at market moves they make perfect sense. Therefore, when I see such a large move of the Euro against the US dollar I ask myself if the market is not implying that the Fed’s rhetoric about tightening monetary conditions is just what it usually is in the case of central banks: empty talk by some "ignoranti" with no or little action following through.

In the next twelve months, making money from equities will become trickier than in the first seven months of this year as some sectors, markets, and individual stocks do well while others decline. In the US, I would expect the FANG and related stocks to perform poorly, whereas mining, fertilizer, and commodity related companies (including oil) perform relatively better.

via gloomboomdoom