|
|
Musings Report #6 2-6-16 2016 Investment Outlook: Year of the Red Monkey
You are receiving this email because you are one of the 500+ subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
2016 Investment Outlook: Year of the Red Monkey
As my friend G.F.B. recently reminded me, real life is consistently stranger than fiction, and this is one reason why economic/political predictions are so often completely off-base: it turns out that what we take as fixed and certain trends reverse course or crumble with little predictability.
How many pundits/experts predicted the 1991 collapse of the USSR in 1981? None. How many predicted 25 years of stagnation for Japan in 1990? How many in 1981 predicted China's rise to commercial/global influence by the year 2000?
More recently, how many pundits/experts predicted the collapse of oil from $100/barrel to a recent low of $27/barrel? I have yet to find even one. I certainly did not foresee this staggering decline in the core commodity of the global industrial economy.
Predictions of this sort are always abstract, and therefore easy to make: we don't really have any skin in the game.
One way to bring the abstract down to the real is to ask: where would you invest $10,000 right now? This question solidifies the parlor game of predicting the future into a game with the prospect of real losses.
Chinese New Year is February 8, and this ushers in the Year of the Red Monkey. I found this description of the Red Monkey quite apt:
"According to Chinese Five Elements Horoscopes, Monkey contains Metal and Water. Metal is connected to gold. Water is connected to wisdom and danger. Therefore, we will deal with more financial events in the year of the Monkey. Monkey is a smart, naughty, wily and vigilant animal. If you want to have good return for your money investment, then you need to outsmart the Monkey. Metal is also connected to the Wind. That implies the status of events will be changing very quickly. Think twice before you leap when making changes for your finance, career, business relationship and people relationship."
In other words, the financial world will be volatile, and few will have the agility and wile to outsmart the monkey.
This suggests a basic strategy: don't play in the markets at all. Sit this year out. Stay in cash and U.S. dollars.
What can we predict with enough certainty that we're willing to risk $10,000 on it?
While I am confident that oil and natural gas in the ground will eventually be worth much more than they're worth today, I have less confidence that I be able to pick the bottom in these markets. I am also wary of the risk in choosing companies in the energy sector: a company may own a lot of assets in the ground, but if the company is over-leveraged and over-indebted, it could still go bankrupt despite its trove of assets.
Like many people, I see gold and silver as assets that won't go to zero. But that doesn't mean companies engaged in mining gold and silver can't go to zero. If the company's assets decline in value, its debts remain at their current level; this is how companies become insolvent.
While gold is currently in an upswing, I have less confidence in judging the sustainability of this turn. Some technical analysts are still looking for a retest of $1,050. Others (for example, McClellan) see this recent surge as evidence of a near-term top in gold. Who can say with confidence these analysts will be proven wrong?
Here's what we can state with some confidence:
1. The global expansion of the past 7 years has been driven by extraordinary expansions of debt, especially in China.
2. China's expansion of credit has spilled over into the global economy, pushing commodities and real estate to the moon.
3. Commodities weakening so dramatically is evidence par excellence that China's rocket ride of exponential debt growth has ended.
4. In response to this sea change, everyone with wealth in China is transferring their wealth overseas--mostly to the U.S., Canada, Australia and Europe.
5. This flow of capital has inflated real estate globally in desirable locales.
6. Once this flow ceases, for whatever reason (everybody who could shift their capital has done so, new capital controls, etc.) the primary prop under global real estate will collapse.
7. This vast expansion of debt also inflated bubbles in bonds and stocks globally.
8. Few if any analysts correctly forecast the final bottoms in oil, stocks, real estate, etc.
As I note in the Market Musings below, China's credit expansion has traced out an exponential curve--a rocket trajectory that has seen total credit in China explode from a few trillion yuan into tens of trillions of yuan.
No wonder global assets have exploded as a result of this demand.
But nothing goes up in an exponential rocket-rise forever. We might sum up the risks in 2016 this way: the collapses from exponential curves tend to be spectacular.
We might also posit this investment truism: the more spectacular the collapse, the lower the probability that anyone can accurately forecast the timing of the collapse or the eventual final bottom.
The final bottom in any asset is only visible in hindsight, but history suggests that the more spectacular the washout, the better our chances of picking if not the final bottom, at least near the final bottom.
Monkeys aren't especially patient, and I wonder if the only strategy that can possibly beat the red monkey in 2016 is to be patient and await the inevitable fallout from the global collapse of credit growth.
Summary of the Blog This Past Week
The Chart of Doom: When Private Credit Stops Expanding... 2/5/16
The Opaque Process of Collapse 2/4/16
Why We Won't Have a "Lehman Moment" in the 2016 Crash 2/3/16
The Global Economy Could Fall Farther and Faster Than Pundits Expect 2/2/16
Stupor Bowl 2016 2/1/16
Best Thing That Happened To Me This Week
Family visit from my brother and sister-in-law from Europe. Great conversations, meals, wine and walks.
Market Musings: China's Debt Expansion is the Only Game in Town
I am reprinting the chart from Friday's blog because it really is the key chart for 2016: it reveals with crystal clarity that the only game in town in terms of inflating assets bubbles is China's expansion of debt.
This vast flow of trillions in new money has flooded the global economy, bidding up desirable assets everywhere.
As noted above, nothing goes up in an exponential rise forever. The collapses from exponential curves tend to be spectacular.
Also noteworthy in this chart: the diminishing returns on stimulus in the U.S. Tens of trillions of monetary and fiscal stimulus 2009-2015 resulted in a very anemic expansion of private-sector credit.
This suggests the next round of QE, helicopter money, shovel-ready projects, etc.--the whole bag of tricks from 2009-2015--will fail to stimulate private credit at all.
From Left Field
2.5 million men 'have no close friends': Stark new research shows chances of friendlessness trebles by late middle age... crisis of masculinity
For the Love of Mobile Money in Frontier Markets -- this is where digital currencies will come to dominate first...
After I Lived in Norway, America Felt Backward. Here's Why. -- question: how much longer can Norway afford this system?
Mexico City's water crisis – from source to sewer -- a story repeated globally in various variations...
How the Difference Between Your Experiencing Self and Your Remembering Self Shapes Your Happiness -- not sure this is really the critical factor, but worth considering...
The Seneca Effect: why decline is faster than growth -- oil followed this curve almost perfectly...
To Rebuild 'The Collapse Of Parenting,' It's Going To Be A Challenge
In a six-month period, 70% of detached homes sold in Vancouver’s west side went to Mainland China buyers -- last rush out the exit of the burning building?
Venezuela: Is There A Driver At The Wheel? -- a socialist-leaning visitor asks hard questions based on his observation in poor and middle-class neighborhoods...
Profs Agree: GPA Worthless -- grade inflation
Why critics of China aren’t safe anywhere -- spooky global network kidnaps critics and takes them back to China for imprisonment....
McDonalds Teetering On The Brink Of Financial Collapse -- not sure about this, but it certainly is struggling with larger issues in the economy and diet....
"Everybody, sooner or later, sits down to a banquet of consequences." Robert Louis Stevenson
Thanks for reading--
charles |
|
|
|
|
|
