Tuesday, September 29, 2015

We will see inflation again because of the Fed

Well you know it is like in a bubble. The bears are right and the bulls are right but at different times. Every bubble will go up and then eventually the bubble will burst and then you know prices collapse. So during the bubble stage the bullish people are right and during the collapse the bears are right, but at different times. This is the same with deflation and inflation; I think both will be right, but at different times. I believe that most people have a misconception of what inflation is. In other words most people, they think of inflation as an increase in price of goods they go and buy in the shop over there and over there, at the butcher and at the baker and in the grocery store and so forth when in fact this is just one of the symptoms of inflation.

You can have inflation that manifests itself in sharply rising wages, this hasn’t taken place but if you look globally, say in China, wages have gone up substantially or you take Thailand, wages have gone up substantially. Or it can manifest itself in rising commodity prices. Well I mean commodity prices have been weak lately but the oil price is still close to 50 dollars a barrel and it was at 12 dollars a barrel in 1999 and gold is still around 1000 dollars and it was at 300 dollars and below in the 1990's, the low was at 255 dollars. You understand? A lot of things have been weak recently but they are still up substantially compared to the past.

Or you take bond prices, in other words bond prices go up when interest rates go down. Bond prices in the last hundred years have never been this high; in other words interest rates have never been this low on sovereign debts. Or you take equity prices, ok some markets are down, mostly the emerging markets whether it is Russia or Brazil or the Asian markets, they are down from the peak but they are still much higher than say ten or fifteen years ago. Or you take property prices, it depends which properties but most property prices, for example if you look around here in Switzerland, the prices are much much higher than they were fifteen, twenty years ago.

Even in some areas, they may have come down a bit but in luxury areas there are record prices. Or you take the Hamptons, or Mayfair in London, or Chelsea in London, Kensington and so forth, prices are very high compared to say twenty years ago. Or you take paintings, art... I mean when I grew up and I started to work in 1970 in New York, in New York at that time a Rothko painting was offered to me for 30,000 dollars. I didn’t buy it because I thought why would I pay 30,000 for something like this! Now a Roscoe is maybe ten, twenty, thirty million dollars and I have a Warhol, it is not a big painting but nevertheless I bought it for 300 dollars in the 1970s. You understand? Prices have gone up dramatically, so if someone says to me, well there is deflation, I tell him, well tell me in what? You know, Hong Kong property prices, Singapore property prices, even Bangkok, Jakarta and so forth, all have been grossly inflated.

Therefore I think we have to re-examine the definition of inflation whereby maybe we have some sectors of the economy that are deflating, like if we measure wages inflation adjusted, they are all going down in the western world because a) the consumer price inflation that the Federal Reserve and Europeans report has nothing to do with the cost of living increase, the cost of living increases and we have studies about this, in most American cities are rising at between 5 and 10% per annum and if you include insurance premiums, health care costs, education costs and so forth.

So these prices are going up strongly. Or taxes, indirect taxes like tunnel fees or bridge tolls and so forth, all that is going up much more than the CPI and this is where people have to pay for to actually go to work and live. This is then reflected, this kind of inflation is reflected in a diminishing purchasing power of people, that’s why retail sales are relatively poor in the US despite of the fact that we are six years into an economic expansion. I am always telling people, you know when I started to work I didn’t have to be smart because if I put my money on deposit with the banks or bought government bonds they were yielding 6%.

Then from 1970 to 1981 interest rates continuously went up, so the compounding impact was very high. Now if I am a young guy, say your age; then I want to put my money on deposit, I am being F*d essentially by the banks because they are not paying me anything. If I buy ten years US treasury notes I am getting a yield of less than 3%; 2.3% at the present time and it was below 2% six months ago. So how can I really save? How can I make money? I want to buy a house ok?

Then you have to pay a huge price and the mortgage rate may still be around 4% you understand? So it is still relatively high interest rates on mortgages and one of the reasons that new home sales are not particularly strong is that young people just don’t have the money to buy it because a) they are also burdened with student debts. So I mean these are all issues that are very complex.

My sense is that knowing the central banks, and knowing the way that they think, what will come up when they realise that the global economy is not healing but actually back into contraction under the influence of the neo-Keynesians like Krugman, they will say, you know what?

We haven’t done enough, we have to do much more, and then they will print again and that is why I think that eventually we could have high inflation rates and a renewed increase in commodity prices.

They will print again and that is why I think that eventually we could have high inflation rates and a renewed increase in commodity prices.

Monday, September 21, 2015

Japan printing money because it has no choice

In America many cities are basically bankrupt as well as some states or semi states like Puerto Rico. Then, have a look at Japan, the Japanese situation is very serious in the long run because if interest rates, they are now on 10 years JGBs 0.03% but already at these very very low rates, Japan pays, I think close to 45% of tax revenues go to payment of interest on the debt. Now if the interest rates went up on JGBs to say 1%, all the tax revenues would have to be used to pay the interest on the debt! 

In my view, Japan has no other option but to print money or default and that will then imply that the Yen will then become weaker and so forth.

*Last update : Sep 21, 2015

Wednesday, September 16, 2015

Vietnam an outstanding growing economy for long term

In Asia, one country that stands out as having great economic potential is Vietnam.

And by the way the whole Indochinese region with Vietnam in the east and then north west with Laos, south west with Cambodia and then Thailand, Myanmar, India, Bangladesh and in the north China, and in the south Malaysia, Singapore... that whole region with over 500 million people has tremendous growth potential and Cambodia at the present time is a boom town, a boom country because it is also politically related, the Japanese and Koreans invest a lot of money as well as the Americans and the Chinese so they all compete essentially because Cambodia is strategically important.

Vietnam has a very strong export performance, the stock market has performed very badly for the last few years like China, until a year ago, properties have come down but in my view they are now bottoming out. The Vietnamese people are hardworking people not like say easy going like the Thais or the Indonesians or Filipinos, so I believe the country has a great potential.

Monday, September 14, 2015

Thursday, September 10, 2015

Regulations hurting economic growth

As an aside, according to Agence France Presse, the Labor Department just reported that Americans on average saw income decline for the second straight year in the 12 months.......

“The average pre-tax income fell 0.9 percent from the same period a year earlier, to $64,432. But broken down into quintiles, those in the top 20 percent of incomes saw their money stream grow by 0.9 percent to $166,048 on average. Every other group lost ground, with the bottom 20 percent losing the most: their average income dropped 3.5 percent to $9,818.” These are facts, and they don’t depend on any starting points, as Shaoul maintains.

It is commendable that the Fed has decided to sponsor more research on wealth and income inequality — and is well understood 20 years after income and wealth inequality began to increase sharply.

Now, we at least know what Fed chair Yellen means when she says that the Fed’s policies are “data dependent.” (William Dudley commented in regard to increases in the Fed Fund rate: “How we react after lift-off is going to depend on the market reaction that we get.”)

But I shall now get to the point I really wanted to make about Fed- sponsored research and the Fed’s consultants. I am on the board of several companies and I am amazed at the number of consultants, lawyers, accountants, and auditors a company has to employ in order to be compliant with all the regulations. Similarly, a fund manager has to spend an enormous amount of time in order to be recommended by consultants such as Cambridge Associates.

Now, it seems to me that this entire consulting business is largely driven by increasingly complex laws and regulations, which frequently change, as well as by people who are no longer willing to take personal responsibility for their actions.

In fact, people frequently cannot assume responsibility for taking their own decisions, without employing consultants to do so on their behalf, simply because they would then open themselves to the potential for some serious litigation by disgruntled shareholders or government regulators.

But, as the American poet and essayist Adrienne Cecile Rich (regarded as one of the most influential poets of the second half of the 20th century) opined, “Responsibility to yourself means refusing to let others do your thinking, talking, and naming for you; it means learning to respect and use your own brains and instincts; hence, grappling with hard work.”

My point is this: Regulation an a jungle of laws increase the cost of doing business significantly and are stifling overall economic growth.

Wednesday, September 9, 2015

Emerging markets vs USA valuations

In terms of relative value I don’t think emerging markets are cheap cheap but I think the return expectation I would have over the next seven-10 years by investing in emerging markets would be much higher than say US stocks.

The US market is overhyped and expensive in terms of valuation from a historical perspective.

Monday, September 7, 2015

QE4 effects on inflation, commodities

Should the Fed implement QE4 (increasingly likely in future), I think that the additional liquidity could flow into commodities, consumer price inflation, and especially into precious metals. 

Tuesday, September 1, 2015

World economies heading to a slowdown [VIDEO]

Start at the 2:00 minute mark to hear Marc Faber's interview