Hi Maurice,
<<you cash holders are so lucky!>>
Yes, we are, because we get to watch the news with equanimity, not lose NAV in large dollops, bide our time, window shop, contemplate, reflect, and raid a few call and put premiums every-now-and-then, and count on becoming relatively better off over time, and absolutely better off after that.
<<You are paying much, much less tax than at the beginning of the year>>
Some of us do not have to pay any tax because we do not live under socialism, communism, or ‘Californiaism’. What we pay to help the less fortunate in transfer payments, we do so voluntarily. But I know what you meant by above:0)
The decrease in interest income over the past few months definitely warrant investigation on higher earning investment opportunities, but in and of itself, since the cash was never to be simply used for interest earning, but for parking and waiting, the reduction in interest on cash has not been a problem, given the benefits of ‘no anxiety’ and ‘no serious decline in purchasing power’. But, yes, you are right, the cash will have to be invested sooner or later.
<< Nasdaq capital gains … Dow … not much … capital gains there either.>>
Yup, the equity markets has been very exciting, but not rewarding for most over the past 12 months. For the rest, rewarding but nerve wrecking, and the rewards may be given up later.
In my recent conversations with money managers and some daring investors, the word ‘confusing’ came up a lot in their description of feelings. Doctors, airplane pilots, and money managers should not use the word ‘confusing’ in public.
<<Corporate profits are down [generally] so there is a tax cut there too. All the salaries going to dot.coms have gone, so there's no tax payable on those>>
Al the cuts may cause serious deficits in both government and private coffers, causing a malignant spiral of further cuts, until, like Japan money rate, there is no more to cut.
<<money printing … annoying … less income>>
The choice of ‘annoying’ is spot on for now, ‘pissed off’ will be the operative word later.
<<Cash holders … hope low interest rate don't last too many years>>
We are, or I am, waiting recession/deflation, where equity dividend, long bond interest, and real estate rental rates yield higher than they are now due to price collapse, finance-able by comparatively low short term borrowing by those able to borrow; alternatively, I am waiting for recession/inflation, where bond rates go through the roof and equity value go through the floor.
The present situation in the financial markets is not an equilibrium state, because the variables (employment, prices, credit quality, interest rate, equity value) are all moving relatively fast compared to history, with the interim steady-state (equilibrium) outcome not yet highly visible.
<<… interest rates went up … squeeze irrational exuberance from the stock markets … very successful … little pressure to increase interest rates any time soon>>
The equity markets, including the Nasdaq, is still high. There is no compelling value in equities or long bonds or real estate, and thus my negative attitude to taking any position in any markets except precious metal bit by bit. Short-term interest rate is dropping, in line with the Maestro’s drip feed of placebo brew. Long rates are holding pretty steady. Credit quality deteriorating. Inflation is visible. Deflation is also visible. Interest rate by which companies can borrow and consumers can spend will be determined by their borrowing capacity, credit quality, state of inflation/deflation, and will not be determined by the Maestro nearly as much as the crowds like to believe. My cash is not available to be borrowed for the long term at the current market interest rate, even as I continue to buy 0% yield physical precious metal.
<<So, start sweating Jay and hope that the great financial calamity of 2001 happens in the next 6 months since it didn't happen in the first. I prefer steamed to barbecued [less carcinogenic].>>
Sweating in the sweltering heat of Hong Kong and the commotion prevalent financial market is not the description applicable to cash holders sitting on zero debt and in air-conditioned comfort, unless and until inflation is generally recognized to have taken off upward in earnest, and even then, bond yields and equity value will be or move to such levels that we can buy cheaper than in the period immediately preceding the general recognition of inflation fact. No, no need to sweat for the folks sitting on top of a geologically stable mountain top, observing the commotion below through a high quality sniper scope.
<<Also, please tell me this - why don't Japanese borrow billions of yen at about zero % interest, buy some buildings, rent them out [rents are high in Japan according to my Japanese source] and pay back the loans over the next umpteen years [or just borrow more]? 1% interest is very attractive. That's an actual serious question which puzzles me.
Since it isn't happening, there must be a good reason. Or maybe it is happening.>>
I was and am looking at the trade you speak off … because it is an obvious trade for the Japanese and the non-Japanese …
Message 16011318
Specifically, I wrote “The easiest trade now is also the most dangerous trade, which speaks volumes about the strange environment we find ourselves: we can borrow a gabillion Japanese Yen at 125 exchange rate, 1.25% interest rate, lock in a Yen Put strike 120 for 3% annually, and then invest the borrowing in a basket of so-so but safe bonds yielding say 8%, netting a 3.75% carry on a gabillion USD, and sip coconuts some where warm. So, why do we not do it? Because instinctively we feel that in our weakened global condition, an accident is waiting for the most opportune moment to happen.”
Specifically on the Japanese real estate trade you mentioned, the Goldman Sachs and Morgan Stanleys are doing so, and the Mitsubishis and Mitsuis are as well. Japanese Real Estate Investment Trusts are and will continue to come to market. I think the amounts are not of mania proportions because the absolute value-to-replacement-cost of the buildings in Japan are still high by international standards, with much ‘value’ embedded in the underlying land. Because the Japanese government is not allowing the banks to fail, and the banks are not writing off bad loans in any hurry, the value of land stays where it is, with few transactions (tax driven issue). So, the danger of buying Tokyo real estate via borrowing may be dangerous because the deflationary tendencies in the Japanese economy may pummel real estate value yet again. Deflation is bad for real estate, and in fact is bad for all assets, and for debtors. Assets go away, but the debt stays.
Now, borrowing Japanese money to buy non-Japanese real estate and bonds, as I noted in above post looks viable, but people got pummeled pretty royally the last time they piled into the Yen carry trade, only to be punished when the Kobe earthquake struck, Yen headed home, and the exchange rate flux went against the Yen carry trade crowd.
Thus my “So, why do we not do it? Because instinctively we feel that in our weakened global condition, an accident is waiting for the most opportune moment to happen”.
And more on this post …
Message 16016710
If your stress level was OK upon first read of the story, you pass the ultimate stress test for your asset allocation and trading strategy, whatever they may be.
We cannot successfully predict profit and loss, and can only less successfully predict accidents and crisis. But we know that accidents happen, regularly, and they tend to happen in volatile and confusing times.
When they happen, governments must step in fast, and governments can only do so when their hands are not tied by already low interest rates, and not weakened by the economy and private sector balance sheet over which they govern.
The Taiwan story is bogus, but the trillions of derivatives in the global economy and in JP Chase mentioned in the story are true.
The chemical fertilizer is piled high and deep, high-octane debt fuel liberally sprinkled, derivative fuse exposed to the open flame of financial volatility and confused human emotions.
The party can start with one drop of a small match anywhere along the daisy chain of parties and counter parties.
Do you really believe I am the one who ought to sweat, profusely, for the reality that you have correctly observed?
We agree on the state of reality. We differ on approach to navigate this reality.
Chugs, Jay |
