Hello DJ, During the past few days two friends and I goofed off together, and held discussions on what's-up and where's-down of politics, economics and finance. We settled on a general scheme regarding the way forward in our economic/financial lives; we must continue to (a) increase wealth by first exploring then exploiting opportunities, and (b) be careful.
We defined 'careful' as:
(a) self-liquidating (pays for itself),
(b) with no recourse by creditors, and
(c) if events go terribly wrong, we are still in a better position than having to start from zero/negative Net Asset Value ("NAV").
On the big macro picture, the three of us are not in disagreement on the possibilities, but only in the probabilities of the possibilities.
Peter, a bond arbitrage expert, believes that we live in an age when central bankers are coordinated in their collaboration to keep the global financial system in working order and are unified in their goal to make the planet's economy run smoothly. Peter believes interest rates will remain low or go lower. Besides the normal treasury bonds, Peter hold some exotic and high yielding paper from the likes of IMF (South African Rand denominated debt yielding 12% to maturity by 202x). He is advocating we look at some operating businesses where the underlying assets may now or soon be mis-priced. Peter wants to partially exchange his mostly financial assets for some well-chosen operating business.
Adam, an entrepreneur, believes as I do, that we are in uncharted geopolitical, economic and financial territory. He is diversifying his primary business (agriculture/aqua-culture/pearl farming) by about 50% of his assets (land equity/ocean leases) so that a few unfortunate hits will not prove fatal. He needs to decide on disposition of cash proceeds from asset sales as they occur. He comments, "An all cash position is not comfortable".
I, a perpetual refugee in a game called Survival - Last Man Standing, agree with my friends that:
(a) Global officialdom are colluding and trying to coordinate their actions;
(b) The CBs will try to keep interest rates low so that the economies and financial systems can recuperate;
(c) Various assets will get progressively more mis-priced on the high and low sides;
(d) The probability of total breakdown is no longer zero; and
(e) The best way to protect existing NAV is to grow it.
The individual environmental and valuation risks are substantial to all, and the potential interaction between the risk factors is frightening to me.
I believe there are some significant dangers associated with:
(a) Growing debt level yielding zero % are hurting savers, not saving debtors, and causing more mal-investment, poisoning the funding pool, hurting capital aggregation and new investments;
(b) Global free trade and regional protectionism can both poison the world and/or our little chunk of the world. Free trade is driven by need to grow the pie and sharing it, growing or not, satisfying the international electorates. Protectionism is driven by push from terrified and hurting local electorates;
(c) Many local/regional conflicts may converge into one global perpetual war, with many possible effects I do not care to bet on with any conviction;
(d) The cleansing of the residual stock equity and soon-to-burst housing bubble is destroying the foundation of the existing debt, even as the bond market is setting up for an implosion of its own;
(e) Chronic low profitability and pervasively growing unemployment will not justify new debt, hurt new investments, and deny opportunities to many, even as they traverse through their prime earning years; and
(f) Manufacturing deflation, in combination with service stagflation, and commodities inflation, will require a New Way of coping, even as most had not managed the Old Way with much success.
What fun;0/
We will check out East Timor, Argentina, a windmill farm, and land suitable for a hay-growing plantation.
Our spouses think we have completely lost our collective minds, because they 'know' the world will muddle through.
In the mean time, Peter will add some gold shares, and Adam will raise cash through land sales.
Both may buy a bit of physical gold as a 'Big Financial Reset Button', and I will continue to cower in the crawl space, waiting for mis-pricing of one thing or another.
Stocks ideas? We collectively thought Hub Power of Pakistan, Harmony and Gold Fields of South Africa, AOL and CD of USA, and IRS and CRESY of Argentina and some Indonesian shares were worth a nibble. Everyone also liked DAK's blind squirrel biotech portfolio because we did not understand they constituent parts, but appreciated the methodology.
Currency thoughts? We rounded up the usual suspects: long AUD, CAD, CHF, gold, and an outlying play, the South African Rand, and short the Yen where 105 is the downside and 200 is the upside.
In other words, we haven't a clue.
Chugs, Jay |
