just in in-tray
Subject: I really Haven't Got a F....ing Clue: JAPAN 23ix2011
#FABER AND ROCHE:
I really haven't got a f...ing clue what's going on let alone what to do. it seems to me that fiat currency debasement is as inevitable as shuffling off this mortal coil - but it's not happening - well not at the moment -the value of all fiat currencies have risen by 20% in two months (well that's if you price them in private sector assets). And why is capital seeking sanctuary in what I thought was the very epicentre of global financial calamity ie The Spent World's sovereign debt markets? - aren't they just an accident waiting to happen?
What's mildly reassuring (or fantastically un-reassuring) is that I don't think David Roche or Marc Faber have much idea what to do either! I cannot remember less conclusive comments from either of them - below swift summaries of their instructive but less prescriptive presentations at CLSA's HK Forum.
No-one was expecting Roche to be bullish but his presentation was a wake-up call in more ways than one. Firstly, there has been no deleveraging over the last three years. In fact global debt to GDP has continued to rise and now stands at a staggering 300%. Whilst governments have been mainly responsible, corporate debt levels have not fallen either surprisingly. He observes pertinently that with government debt at 100% of GDP by itself it means that even small changes in growth can have a big impact on indebtedness.
Secondly these over indebted governments face the "Stall Speed" problem. Roche believes that if GDP growth falls below 3% the action of attempting to cut deficits has the opposite of the desired effect as it craters growth and actually increases the deficit. The only solution to this Catch 22 is to cut liabilities (Russell Napier has a few ideas as to how that might be done!) As a result of the above, by the latter part of the decade, the US looks like Greece from a gross government debt perspective. So why, you may ask, are government bond yields so low? We know the answer to that one... the prices are rigged! The net result of which is that risk aversion is getting expressed in equities instead, reminding me of how "open" hedge funds suffered disproportionately post
Lehmans Shock vs their "gated" cousins.
Amongst other things, Roche has a genius for memorable charts. The one from this year that will stick in the memory is his "Three Ifs and Fat Tails" probability curve which shows the world shifting from a normal
distribution to a flat line. It's a great way of getting the point about market volatility across. In effect the market view is oscillating between vastly different outcomes which seem to have as much chance of happening as each other.
The other big message is that Emerging Markets will not prove to be good hiding places. The export led model is breaking down, as is the high savings, low cost, capital inflow model. China is not spared in this
process and in an echo of Chris Wood's concerns Roche's work suggest that as much as 60% of new loans in China this year have been generated in the shadow banking system Needless to say Europe was not spared the whip either. The most telling observation to this voyeur concerned the German constitution which almost certainly needs to be changed before Europe can address its issues but which was designed, for obvious historical reasons, to be very difficult to alter.
So how is he positioned? The bets in his asset allocation that caught my eye were Irish debt, the NZ$ and his short view of soft commodities. As an active fund manager Roche, unlike many macro speakers, brings the discipline of putting his thoughts into daily action and whilst he is obviously talking his book, he is also very open about that and refreshingly, about his mistakes. Now for Marc Faber....
#MARC FABER:
For a man famed for his Gloom, Boom and Doom report I was pleasantly surprised to hear that apart from the rise in volatility, the potential collapse in commodity prices, the rise of geopolitical tension, the possible attack on Iran by Israel, the push for Chinese global dominance and the out of control US deficits, things are actually ok..read on.
He started by giving a history lesson showing how negative real interest rates almost always lead to increased volatility and speculation but also to a fall in social cohesion as the rich who own real assets and so get richer while the middle classes see their savings erode. The poor see their food and energy bills become a larger percentage of what little income they have. His view was that CPI was in reality over 5%.
His anecdote that only one person in any recent presentations had seen a fall in his living costs, but only because his girlfriend had left him...Marc of course pointed out his living costs would rise over the long term due to escalating replacement costs.
The ongoing printing of money by the US Fed he sees as a necessary evil since they had no other option.
He gave the example of Mexico who attacked their own problems in 1979 to 1988 by the same approach, but saw their currency fall by 98% the equity market however gave several very good buying opportunities and was basically flat in US dollar terms over the period. For the long term he suggested the following asset allocation: 25% Equities, 25% Asian Real Estate, 25% Gold and 25% US dollar cash for those who can't count that means Zero weighting in bonds.
He was long term positive on commodities but shorter term is concerned about the deceleration in growth of demand given that China had grown from 10% of global demand in many basic materials to 40% - 60% this is probably unsustainable. The Achilles heel of China is oil. They have tripled their demand in 15 years and are building military facilities as well as political relationships to defend their interests.
The Middle East is a mess as the population is unhappy. No hope, no jobs and no sex. Not a formula for stability.
He advises to selectively buy oil related assets and maintains that Gold is not in a bubble and is very underowned. IF it had moved in line with Asian Income it would be $10,000. On the current equity markets, he hopes for a rapid correction but reminds us that the US mutual fund industry saw redemptions in every single month except three during the 1970's...
#9436 OKINAWA CELLULAR:
Yesterday the Nikkei reported that KDDI is to have a bite of the Apple and will start selling the iPhone5 in Japan from November. That will make life a little harder for Softbank, which is why its share price softened rather dramatically. But if KDDI is going to sell the iPhone5 - maybe the most peaceful stock in Japan might get to sell a few of them too. Okinawa Cellular is peaceful in every sense. It inhabits a peaceful island where it has a stable 40% market share, it has one of the most peaceful share price charts I've ever seen, (have a look if you don't believe me) and it's balance sheet is so strong, its dividend payment so generous and sustainable - that it's share holders are almost guaranteed nights of peace and tranquilly.
Okinawa Cellular is 51.5% owned by KDDI, which is why it might get some iPhone's to sell, but it probably doesn't awfully matter if they don't - they've been selling smart phones to their aging islanders like hot cakes - actually "hot cakes" is a little strong, they've been selling 20 smart phones a day since April, but then there are only 1.4ml people on Okinawa. Still, small is beautiful and anyway this ratio of dialy sales to total population is the same as the rest of Japan. What's not small but is still beautiful is the $230ml of net financial value sitting on the balance sheet, equivalent 38% of market cap. And what is smaller and beautiful are the ratios on which it trades compared to its larger indebted parent.
Okinawa Cell KDDI
Price/EPS 9.19 9.49 OC 3% cheaper
Cap-NFV/EPS 5.70 11.45 OC on half the multiple
Dividend Yield 4.45 2.54 OC 78% more generous
Price/Book 0.94 1.05 OC 11% cheaper
EV/EBITDA 3.37 3.66 OC 8% cheaper
OP Mgn 18.36% 13.74% OC 33% more profitable
ROE 11.53% 12.37
If you want a peaceful life with thoroughly worthwhile yield - I'd buy it.
#JGBS:
I've always been sanguine about Japan's state indebtedness; largely because it is simply a reflection of a very low tax take together with an implicit social contract which says "if we don't tax you - you must lend it to us instead". That's why historically 94% of JGBs have been held onshore - and why the $12tn JGB market is the corollary of the $20tn stock of household savings - if the Japanese paid more tax - both would be smaller. That seems sustainable enough particularly given the $20tn of Household Financial Assets. But it could be argued that although very laudable to fund one's Government, it's been at the cost of Japanese domestic growth - ie the JGB market has soaked up too much domestic wealth and crowded out the private sector. But then what happens if foreigners start lending money to the Japanese Government too - and they have. In July gaijin suddenly pulled on their JGB buying boots adding more than $12bn to their $880bn of JGB holdings - this is a record high and gives foreigners 7.4% of the $11.9tn Japanese Government Bond Market. If Foreigners keep buying JGBs doesn't it create a "Reverse crowding out" which could be good for domestic demand? - or is this just me not having a f....ing clue again? |
