Blog Archive
Topic: gold, societal unrest, Davos, the credit cycle, macro reasoning
Summary: grab your gold and run for the hills when you see the Yellow Vests gathering
Reading time: 5 minutes? 10?
When the Fed turned dovisher-er again last week, in order to stimulate the supposedly weak economy, expectations for economic growth in the US strengthened and the dollar consequently strengthened. A stronger dollar means cheaper imports and a lower trade deficit, and yet a stronger economy, reinforcing the stronger currency.
Alternatively, in the little longer run, the massive monetization of US deficits and debt leads to increasing inflationary pressures. More money chasing fewer goods in a stagnating economy, where the focus is turning toward finance instead of production, gradually leads to higher consumer prices and demand for higher wages.
It all comes to a head when the Yellow Vests of the world have had it with “the elite” leaving ordinary people behind.
Reasoning vs. the real world
Macro reasoning can take you in any direction you like. Financial market reasoning is even worse. There the logical jump from good is good to good is bad due to eventual overheating to good is good since the bad that comes from over-gooding will lead to policy measures that will turn all things good again is done in an instant.
The real world, however, doesn’t care about your reasoning, reflexivity be damned.
A Lööf in the eye of the storm
For now, we are enjoying a pause of sorts. We are in the eye of the storm, with more or less sensible political leaders like Trump, Macron and Löfvén-Lööf (the Swedish socialist leaning government that took five months of bickering to form) at the helm. Yes, sensible, moderate. Relatively speaking.
Just you wait and see what comes after if these boys and girls next door were to fail. Well, with “were to” I mean “when they will fail”. A deeper, more disturbing, nuance of populism is bound to color the political landscape in the wake of an increasing sense of injustice, where the crony-elite is perceived to be living off of the backs of ordinary citizens.
This is not a crisis of capitalism
There is nothing wrong with capitalism, nothing wrong with adults willingly agreeing to sell goods and services to each other, nothing wrong with the best producer, best satisfyer-of-wants, amassing huge wealth.
What is wrong, however, is when the banking elite is first allowed astronomical gains from risking other people’s money, and then after the inevitable crash are saved by the political elite in return for political funding in the next round. We are not experiencing a crisis of capitalism, what we’re seeing is a particularly nefarious brand of of socialism.
Crony central banking at the center
It may sound conspiratorical but it’s all the central bankers’ fault. Without their wanton manipulation of interest rates blowing bubbles in the economy and on the financial markets, and their setting the stage for subsequent crashes, politicians and central bankers wouldn’t be able to play the game they do.
Politicians want to win elections, so they promise more than they can keep. Central bankers willingly fund the difference between dreams and reality. The unrestricted money printing drives asset prices, which drives borrowing, which drives lending, which drives bank profits.
It doesn’t take many decades before the debts are too high to allow for a normal correction. Politicians and central bankers (as if they weren’t all politicians) then vow to do whatever it takes to salvage the situation they themselves created. And their solution is always the same: keep doing exactly what caused the problem — just at a bigger scale.
After longer time than a single human investor usually can or do care, the system re-sets. A new power, a new currency regime, new relative positions and prices. It’s not that the cycles are aeons, but half a human life is long enough to be forever on the financial markets.
You’re much too young boy
I personally know people who haven’t seen a single market crash and yet consider themselves market veterans. Imagine having only invested in stocks since 2009. You’d look upon ten years as a long time in the market, and twenty as looking back toward a completely and irrelevant era.
I first started talking about stocks sometime in 1985 when a friend told me about his investments. Around then I actually inherited a stock portfolio with some really old holdings: Aga, SKF, Asea, Sandvik and similar stocks. That’s 33 years ago. I have to look back an additional 33 years, to 1952, in order to feel what today’s newbies feel about the turn of the millennium.
Oz wizardry a case in point
Australia hasn’t seen a recession for 26 years. The continent has been riding the rising tide that is China, but that era might be coming to en end now. Imagine the unpreparedness of investors, banks and house buyers when a recession finally hits.
Try to imagine the repurcussions when one panicky domino hits another. Overleveraged consumers and house owners losing their jobs, banks failing, dividends being cut, pension funds falling underwater, selling begetting selling on the stock market, and cost cuts causing unemployment, in a vicious cycle not seen in more than a generation.
Try to imagine the policy response and the saving of the elite on unprecedented scales. Try to imagine the populism that ensues. That’s one more geographical win for the Yellow Vests.
The credit cycle is a cycle
Artificially low interest rates and money printing create a seemingly benign feedback loop over a handful of decades. But it’s just as misleading as the inflation leads to a stronger dollar narrative mentioned at the top of this article. Sooner or later the credit cycle shows why it’s called a cycle.
Healthy growth that was turned into a speculative boom and followed by stagnation and monetary magic morphs into deflation. Deflationary impulses are met with increasingly desperate fiscal and monetary policies that lead to a combination of populism and inflation. The latter wreak havoc with living standards and justice, not to mention financial markets, exchange rates and asset prices until a strong enough leader can set things “right” again.
Right meaning high enough interest rates to force fiscal prudency and a stop to rampant inflation.
At that point risk aversion peaks and liquidity (cash availability and willingness to lend and borrow) troughs.
At that point assets might be “cheap”, but only because you 1) truly can’t know how it will end, and 2) you don’t have any cash to buy assets for, and 3) banks won’t lend it to you. That’s the meaning of “it’s not your father’s market but your grandfather’s”. No matter, that‘s the starting point of another bull market, not the current multi-year topping process.
I hope. You never know. Perhaps buying stocks at 5x earnings won’t work. Perhaps social and political reasons force them to 3x before it’s over. Perhaps dividends will be illegal.
As Grant Williams pointed out in the latest Macro Voices podcast episode, what garners the most journalistic clicks these days are articles from Davos pointing out how much richer the elite has become since before the financial crash of 2008.
Pitchfork time
It’s all fun and games as long as the money illusion makes everybody feel rich. But when the wheels stop turning and you realize your increase was but a fraction of the increase in true prices, not to mention the multiples of that that befell the elite, then it’s pitchfork time.
The anti-elite clicks are accumulating. Populism is rising. You may not like what you see today, or support Trump, Macron and Lööf. But if they fail, Mordor and the winter of the seven kingdoms would be preferable outcomes to what’s in store.
The question is: will your holdings of physical gold (and mine) be a good or a bad thing in that environment?
Topic: Never act (blindly) on recommendations. always do the math yourself, always make sure you understand the level of certainty of the premises and facts, the solidity of the logic, and the probability of the conclusion.
Discussion: A recommendation, be it regarding an investment or a life altering decision, should only be a starting point and inspiration for your own investigation; and preferably one of several such inputs
Rule of thumb: trust no one
As an investor and portfolio manager I received as many recommendations a day I had time to listen to. They proved "right" within a reasonable time horizon about half of the time, i.e., as recommendations per se they were useless. No matter, I still got tremendous value from my analyst meetings.
I never cared about the recommendations as such; I only listened to the facts that had been painstakingly collected and documented. If anything, I made it a point to pay extra attention to the points brought forward by analysts with a different conclusion than mine. I then constructed a bigger picture of all the various data sources I had access to, some conflicting, some supporting. Not least, I gauged what the weighted average of important analysts views were.
Owing to my particular vantage point as a billion dollar hedge fund manager with access to all the largest Wall Street firms, I thus had an informed view of both all the facts, and what all other players thought were the facts and what their recommendations were. Consequently, I could slightly more reliably than most other investors take outperforming positions. Despite my privileged and advantageous position, I still had to build my own models, draw my own conclusions from a wide array of data, and not least make assessments of the relevance and reliability of the information I received.
"Try pouring a ton of steel without rigid principles"
You wouldn't put your hand through molten metal without understanding the principles, would you? Or pouring a ton of steel without all the facts. So, why would you invest your own or clients' money without understanding the risks, the facts and the logic involved?
Investing is hard. Anybody who claims it's not is either stupid or selling something. If it seems to good to be true, it is, so make sure you know what the relevant facts are, and how they interact causally for the required conclusion.
Please note that this principle is valid in all aspects of life and decision making -- trust no one to make your decisions for you.
Topic: "Read more books" is great advice
Discussion: However, it often leads to the wrong kind of action
Conclusion: Read fewer books of your usual type, e.g., fiction, and more of something different, e.g., non fiction.
[Amazon Affiliate Link to The Fabric Of Reality -- a science book for laymen, yeat with an immense scope]
"Read more" usually means you should read more books about economy, history, philosophy, science and so on. Unfortunately most people who are on the receiving end interpret it as "read more of what I'm already reading, which often is crime or drama", while what they really need is a huge dose of biographies, science, investing or economics litterature.
The problem is that neither the advisor, nor the advisee realize they have different perspectives of what reading means.
It works both ways by the way. Here's how:
If you usually only read facts and research, you could really use the change in perspective and inspiration that some good sci-fi or fantasy could provide.
So, whenever you get the impulse or recommendation to read more, make sure to read elsemore, i.e., more of something else. In addition, be sure to clarify this distinction whenever you recommend somebody else they read more.
Speaking of reading, you can always find my reading lists (past and present) here under Recommendations. Some of the best books I've read in 2018 include (you can find details about those, as well as my most urgent top 30 of what to read next under Recommendations) :
- Sapiens
- The Fourth Turning
- From Zero To One
- The Fabric Of Reality
- Peak
- Signals
- Utopia
- More Money Than God
- Fed Up
- The Death Of Money
- Beyond Blockchain
- After On
- The Bobiverse trilogy
So, for the holidays this year, wish for books in a genre you typically don't spend much time on. Relax with some jaw dropping and inspirational good quality science fiction if you're an avid economics and investment books reader; or try a biography if you usually read crime and drama novels.
P.S. If you haven't yet checked out David Simpson's amazing hard sci-fi series Post-Human, there's no time like the present! (my all time favorite sci-fi book [Amazon affiliate link])
P.P.S. Or, alternatively, check out Peter Schiff's incredibly pedagogical How An Economy Grows... (my all time favorite non-fiction book [Amazon affiliate link])
Don’t be a mechanical turk
“A mechanical fruit is no fruit at all. The anti-social and hyperviolent rapist in A Clockwork Orange is a despiccable human being, but still a real, live person. SPOILER ALERT: At the end of the movie he is broken down, his (evil) spirit killed, replaced by a well-behaved clockwork. The message is that clockwork predictability has no human value, even compared to diabolic freedom of action”
My shortest version possible for getting things done, and done well
Start with your why, your purpose
-Without a driving force, you’ll never put enough effort into the endeavor
Aim low, start early and small, Wu Wei
-Avoid apathy, fatigue, being overwhelmed, just take one small step at a time, maybe even telling yourself you’ll quit right after…
Just One more
… then take just one more small step
Systematic feedback
Record, analyze and improve
More detailed rules:
Celebrate every small win
Grit
Stick it out until the end; keep grinding
Fail
Pick yourself up and keep going. Successful people are the ones who got up one more time than they failed
Course correct, use feedback
Do, correct, do again. Don’t make just one single big plan. Start small, start early, try, fail, analyze, course correct and keep grinding
Be systematic, record all insights and important information
Use a commonplace system
Growth mindset, Deliberate Practice: Peak, mental models
Integrate the knowledge that we can change and grow, we’re not set from birth. It’s not you who are being judged, it’s your ability to pick yourself up that counts, not your innate nature
Use a coach or mentor
You can’t move outside the box without somebody guidning you from the outside, noticing what you can’t. You can never see your own blind spots
Ignore what other people think
Never mind criticism; who are they anyway?
Seek variation, novelty
Learn new things
Meditate
Know thyself, know your driving forces, motivations, purpose
Take care of your body at least as well as your mind
Sleep, food, exercise
Be quiet
Experience silence, boredom, let your mind wander
Socialize
Recent research shows people who socialize less die earlier on average
Reason
Use logic, not feelings — the latter are for experiencing, not creating
Mental models
Make mental tools to get to the next level, where you design ever more sophisticated models
Prioritize with Bubble sort
Compare two and two, not all at once when having trouble prioritizing
Intuition + verification = accountable Blink
Trust your intution to provide interesting starting points, but not for providing solutions
It’s a PROCESS
You’re never done, and be thankful for that
Debate religion, spirituality, the supernatural
Debate it, but don’t discard it out of hand. Debating impossibilities hones your logic and rhetoric
Disregard what you can’t change
Put it away and focus on what’s important
Break it down with the 5 why:s
Problems, obstacles and challenges usually consist of ridiculously easy steps, if you go deeply enough. Ask why five times.
Song of the week (electronic trance kind of, instrumental Robyn): An analog guy in a digital world (for work, focus, meditation, enjoyment). Thank me by leaving a rating or review for Future Skills on iTunes
P.S. Just for fun: check out my awesome, world record-breaking all electrical ESURF jetboards on Facebook (pictures, videos, and more)
Topic: there is always a good opportunity to invest somewhere
Conclusion: I'm a perma bull, and you probably should be one too
Hi,
"I felt like a one-eyed person, lacking depth of vision, stumbling around, missing half the picture, often being blind-sided and having to correct my inputs and bearings. It still beats everybody else though, in this land of the blind."
There's always something to be happy about
The grass is always greener where I am, or how does that saying go again?
I am what you would call a perma bull; I'm always happy about something, looking forward to things to come, enjoying planning for them, or simply relishing in whatever activity I've chosen for the moment.
The world of investments works in the same fashion; there is always a good opportunity to invest somewhere. At any one point there is a fixed amount of wealth (people, tools, machines and assets), even if the amount of debt and currency associated with that wealth varies. Over time, wealth usually rises (more people, more tools, more buildings, more dug up gold and gems). The receipts (e.g., dollar bills) on that wealth always need to go somewhere, bidding up the price for that particular piece of wealth - and that's where you want to be exposed.
It's never exactly clear where the dollars are going next, but sometimes it's slightly less difficult than other times, to guess at a likely turn of events. In any case, there is always some asset being significantly underrated compared to other assets. Usually investors will find it sooner or later; first a few hesitant hands and later attracting the masses, thus with time making it overappreciated and promising low or even negative returns. By then, there are tremendous opportunities somewhere else.
Swedish Central Bank:
Our best estimate for a reasonable rate hike
50 000 basis points
Back in 1992, I had studied business administration, accounting, securities and derivatives valuation etc at Stockholm School of Economics for two years. From a macroeconomic perspective those were turbulent times: One of my professors actually suggested students change banks due to the risk of bankruptcy, and the Swedish central bank raised its policy rate by almost 50 000 basis points to 500 per cent.
Sprezza:
Buying call options on banks heading for state receivership
Meanwhile I was trying to buy call options on all but defunct Swedish banks.
Yes, I was a perma bull with no regard to the downside.
The year after, in 1993, I started buying tech stocks in earnest. My "well diversified" portfolio consisted of two stocks: Ericsson (the "safe" bet) and Måldata (a small IT consultancy; "to add some upside volatility").
In 1994, bears be damned, I became a finance pro: I took a job at a small brokerage, while the doomsday debt clock on the central square outside my window counted the steps toward default and ruin for the Swedish model.
Armed with DCF and CAPM models, straight out of my still warm textbooks, I promptly issued Buy recommendations on construction companies, medical technology firms, computer manufacturers and IT services and software companies. I even through in a few chemical industry companies in the perpetual Buy Everything mix back in 1994-1995.
A perma bull is hard to slow down apparently
In 1996 I took a new job as the head of IT research at Sweden's largest bank. By then I had become bolder than ever (albeit quite fitting, considering the budding tulip bubble IT boom), thinking others just lacked the right visionary capabilites that I had. My bullish research reports on mainly software companies knew no boundaries at the time, and soon I included so called internet consultancies and a Virtual Reality firm as well. Buy Buy Buy.
Visionary Sprezza
The LTCM and Asian currency crises in 1997-1998 didn't deter me the slightest: "Temporary!" and "Buy the dip!", were my mantras.
Toward the end of 1999, however, I finally realized things had gotten out of hand, and by February 2000 I threw in the towel regarding IT shares as well as my then employer, and moved to a hedgefund instead. With my sunny disposition there was always only upside (a start-up hedge fund in March 2000; what could possibly go wrong). For me, that is. For the market not so much.
And that recent LTCM hedge fundcrash in 1998? I couldn't care less. I was joining a "completely different" hedge fund. With only upside! (actually that turned out to be true -- or how does "European Hedge Fund Of The Decade 2000-2009" sound to you?
The three years that followed we (Futuris/Brummer) could do no wrong. E.g., there were always interesting new opportunities to sell short ridiculously valued and cash consuming IT companies. Despite personnel issues at our firm, perma-bull me saw only rainbows and gold all around and in the future. Sure, regarding the stock market, I thought many stocks would fall to just a tenth of their values, but every one of those were "special cases", and I never predicted doom for the economy or the stock market or financial system as a whole. I definitely was a bull. For me that is, and for the firm, and for short positions on tech stocks.
At the time, and quite often today too, I felt like a one-eyed person, lacking depth of vision, stumbling around, missing half the picture, often being blind-sided and having to correct my inputs and bearings. Yes, I actually gradually became aware of my shortcomings. It still beat everybody else though, in this land of the blind called finance.
In 2004-2006 I focused more on banks, hotels, cruise ships and professional services rather than purely on software companies; and boy was I bullish on banks back then!
There were buybacks to the tune of 7 per cent a year, and dividends at a similar rate on top of that, while P/B ratios were between just 1 and one and a half. Growth was fast, returns were high and credit losses were non-existent. Perma-bull as I am I bought everything, including the recycling company Tomra (Wait, what? Software, Banks,... and Tomra?) which gave me a 100% return in less than a year. What can I say, if you're bullish, you're bullish.
In 2006, my bullishness toward stocks waned, but I still managed to find a handful of promising small cap companies and took outsized positions in them. Bad move. Blind bull move. When markets started turning downward in the run-up to the bursting of the housing bubble, and onset of the financial crisis, those smaller companies proved very hard to sell.
"Yes, I'm currently perma bullish on gold"
Stock market bullish-me took a harder hit than ususal in 2007-2008, since I was 1) hit hard on a few long positions right before, and 2) I was proven right* on my house bubble thesis, as well as 3) made a killing on bank shorts* throughout 2008. I imagine gambling addicts are hooked by similar principles*.
* there is nothing more detrimental for an investor than being right on a bearish call
Since then, I'm still a perma bull in every aspect that counts, but not quite so much regarding public stocks. When they are expensive relative to sales, profits and the price of commodities and precious metals, I'd rather stay away and project my inherent and eternal bullishness on other things.
The Buying Opportunity Of The Decade
Actually, in the fall of 2010, when my partners were leaning towards going short again, I wrote a couple of memos (e-mails), where I called the situation "the buying opportunity of the decade", based on a lot of slack in the economy (exactly the opposite of the current situation).
Since 2015 I've regularly been called a "perma bear" (typically by people with less than 10 years of investing experience), and it's true I've had a very negative view of the prospectice returns for the stock market as a whole for a few years. On the other hand I've invested heavily in start-ups and scale-ups, all probably depending on the economy staying strong. At the same time I've increased my exposure to gold manyfold. Yes, I'm currently perma bullish on gold too.
I'm writing this as I once again saw somebody caliing John Hussman a perma bear on Twitter. Actually, dr Hussman's history is similar to mine; just longer, better and more objectively based on research. Still, being wrong-footed in just the latest up-cycle is enough to make people, with no understanding of the word, call out thoughtful and accomplished investors like him as "perma bears".
How about you? Is the grass always grener where you are? Are you too a perma bull like me? What does your bull/bear story look like? And if you don't have one, due to too little experience, I suggest you tread very carefully the coming years.
My most humble regards,
/Sprezza
P.S. Check out my interview on Future Skills with Erik Townsend from MacroVoices. That guy has a lot of wisdom to share about skills, education, analysis and much more. You can find a direct link to the episode here