Hi Ron, happy upcoming holiday season.
I figured I could be right when posting a few short weeks ago, but not this right. The NAZ has now yielded more or less 15% per annum since 1989 (starting at index 500). Should things over correct, and they mostly do, regardless of Greenspan has to say about not over reacting, we should be heading to the next stop of 10% per annum yield, 1426, another 39% drop (not so much, in the scheme of things). At current velocity, in time for “January Effect” trade.
A comment on why inflation will not help the debtors in aggregate. For a retiree wannabe, the ability to pay off a fixed rate mortgage on the newly inflated home (one can not seriously treat ones own home as savings unless one intends to move to Ecuador eventually) with inflated dollars does not offset the continuing need to buy newly inflated cars, health care, food, and travels. This is especially true when such a debtor needs to earn his retirement kitty by working in a corporation that must remain globally competitive, paying an income constrained by an age where most goods and many, and increasing, services can be imported. There is never a free lunch and perpetual motion is not.
Many comments on one offshore investor’s view of the trade a/c deficit and capital a/c surplus:
The HK folks have an odd view of trade a/c surplus and capital a/c deficit (the reverse of the US situation) and this view guide our personal/corporate investing activities. We are not different from the rest of the offshore investors, only possibly faster on the trigger.
HK is not an exporter but a re-exporter. We (I use the first person, as “HK person” is definitely not a nationality or even ethnicity label) buy US and Japanese goodies and sell in the neighborhood, and we buy Chinese and Thai goods and sell far away. Whether we are re-exporting products or providing services to the re-exporters, we are all selling to folks outside of HK, generating a mostly tax free trade surplus and always looking to invest or spend that surplus under tax free conditions. We are possibly the busiest of all economies (on per capita/GDP basis) that invest offshore.
As a typical generator of trade surpluses, we have our bubbles to contend with and thus are familiar with various survival strategies based on sharpened instincts. We deal with bubbles about once every 2 to 3 years, and get suspicious when we do not see a bubble.
We spend the surplus without creativity. Our fancy cars clock only 8,000 kilometers per year, our apartments costs US$ 900 per square feet, rents at 5% yield, and we tend to have more watches than coins in wallet.
We are also gamblers by nature, and if we are not worried, we have not bet enough. A godly % (over 10%) of our GDP moves over to Australia during the Melbourne Cup horse race period.
The money built up through trading has few outlets on our barren rock island, and lack of tax on off-shore sourced active income and on all passive investment income has made us the ultimate friction-free trader of goods, assets, monies, people and promises.
The most common of us can have access to financial channels and news from around the world for a low monthly fee, have access to buy securities from around the world in the form of direct purchase or unit trusts (mutual funds) 18 hours per day, six days per week, the more sophisticated can call upon advisors supplied by the best securities houses, and the most barbaric have access to platinum, gold and silver bullion coins from seven territories (Isle of Man is the seventh) at banks located on all major street corners.
So, how do we invest that trade surplus?
We use the trade surplus to buy offshore operating companies and manufacturing/operating assets (factories in China, hotels in US, forests in New Zealand, oil fields in Canada), in shares of operating companies (Vodafone in Europe, VoiceStream in US), real estate (Canada, Australia, US, Britain, Thailand, etc), and in national and corporate bonds. We tend to be careful in investing in illiquid assets such as factories (keeping equity low, design flexible, marketing ready, strategic partners handy) and we tend to be speculative with liquid assets (hot money). US treasury bills is nothing more than a parking space between destinations. For the liquid assets, we tend not to discriminate between the different national pedigrees, but buying those shares and bonds and metals we believe will go up and selling those believed to be heading down. Collectively we have been pretty good at this game, as we have simply gotten richer year after filthy year, good and bad.
We feel relatively safe in the bets made in the emerging markets. We generate a trade a/c surplus using these countries resources and use the resulting surplus to buy assets of various sorts or to loan to various emerging nations and folks. Over time, the non-US debtors and owned employees (China, Thailand, Sri Lanka, etc) finds themselves working for shark fin soup slurping capitalists far away and some try to cheat us by fiddling with the local laws, regulations and such. Then these countries figure out that for all that offshore investments in country’s plants, the equity base is quite small, supported by large dollops of locally sourced loans. Oops, cannot cheat those HK (and other offshore) folks that way, as it would pull down the banking system and pulverize the employment base (to wit Thailand, Indonesia, Philippines, Malaysia, Korea, Mexico, etc). By this time the hot money will have long left the scene already.
Thankfully these non-US countries cannot simply print money and devalue the currency to get us out of their system, as a cheapened currency only makes us filthier still, using cheaper local labour and raw material to sell to a ready world market.
Failing in cheating us via fiddling with the laws, now try debt for equity conversions. Typically the HK investors are nowhere to be seen during debt for equity conversion phase of the game as we had long left the scene, leaving the mess for the more ponderous German and American investors, other strategic partners, and the totally unaware Japanese.
Survival strategy #1: run faster than the next guy, away from danger; and if you must panic, panic first. Kiss goodbye to the first 50% drop, as there is always another 50% to go yet.
In the smaller countries, the offshore investors, with mobility, firepower and daring, is very much like the combatant in Unreal Deathmatch, equipped with Redeemer (nuclear tipped, wire guided gizmo) and tanked to the gills on “Quad Damage” and “Invisibility” pills. Banking, currency and debt crisis are the calling cards.
We also feel pretty safe in the bets we make in the US. The assets in the US are (so far) safe from confiscation and theft (forget Philip Morris and Dow Corning for a moment), with only the value fluctuating.
The loans made to the US are relatively safe as we can not be quickly inflated out of our US based riches without the local pension funds and insurance companies suffering much bigger losses, and local residents screaming as their income buys that much less Toyotas. Any slow and steady systemic inflation will hurt the locals far more than the offshore folks as it is the locals that have the most money in the local economy, and mostly unable to run for cover, where as we are willing to leave the scene of agony.
When the assets values did collapse in the US, we end up buying US assets with quite a bit of gusto, only to see eventual recovery and then sell out to the unaware Japanese as they are nationally inclined (almost destined) to always be the guys providing the exit at the peak.
US assets, like any other assets, is just another trade, and as such, tradable, to be bought as well as sold.
The US trade deficit and capital surplus is OK up to a point (much like the first three drinks at Le Femme Nu), and then there is hell to pay for, by everybody in and outside of the country, except those that loaded up on contra-cycle assets.
I am looking for that contra-cycle trade and having a hard time, really wanting to know what the great Soros is doing with his stash. Even as I am aware of the enormous overhang of Central Bank and private hoard of gold that is out there, I gravitate towards it, adding ever so little with each passing month. One thing can be said of gold – there is always liquidity for it. In the meantime am sinking under the weight of heavily appreciated platinum and are concerned about the declining auto sales and the increased mining output. Not a lot of places to run to when the entire arena becomes a frenzied killing place. |
