just in in-tray,
CLSA BULLET POINTS
Martin Wolfe – Financial Times:
- Government foreign reserves have exploded from $1.5 Trillion in 2000 to $8.5 Billion today. Add in $3.5 Trillion from Sovereign Wealth Funds, and that is $12 Trillion in total. This is neither helpful nor desirable.
- Investors have been piling into developing markets. Governments then recycle this money to prevent currency appreciation and re-invest back into developed markets – i.e. US Treasuries!
Risks going forward
1 – Protectionism, a real and viable threat. US Fiscal contraction means likely protectionism.
2 – Inflation or Deflation? “Overwhelmingly a Deflationary Threat.”
3 – Sovereign Debt Crisis
- Europe, real and important and imminent
- US, will not be able to close the deficit, but will be easily funded in the near term.
4 – Huge flows continue into emerging economies, which then is recycled back into the developed markets.
- Developed Country Debt is not worth the paper it is printed on.
- China is a quasi currency manipulator. They didn’t plan to be one, but ended up one, boxing themselves in.
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All of this implies that things will not end well.
Marc Faber – Gloom, Boom, Doom:
- The same thinking that created problems won’t solve them.
- Tight monetary policy going forward is impossible. Interest rates to remain at zero or if higher, still negative (rates lower than inflation rate).
- Bernanke and all other Central Bankers will print, and print, and print, and print.
- 78% of US Government Expenditures are mandated and unable to cut. 27% of US Government Expenditures in 10 years will be interest payments. Impossible to ever cut the deficit.
- The Federal Reserve wants inflation. Worst place to hide are cash and bonds. Precious metals, collectibles, city real estate in Hong Kong, Singapore & Switzerland and farmland elsewhere are wise places to invest. Equities will be extremely volatile, but will retain value whereas bonds and cash eventually become worthless via explicit default or implicit one via inflation. Art, stamps, etc. have never been expropriated unlike land and gold. Gold should be held in Hong Kong, not Switzerland as US can bully Switzerland but not China.
- 50% of Assets should be in Emerging Markets at a minimum.
- Whereas Martin Wolfe thinks there will be deflation, Marc points to the massive increase in Government reserves and asks what that is if not monetary printing and inflation?
- China is in a property bubble, but if it falls 30+% in the next few years, it will be absorbed as there is a long term structural demand for much more housing, unlike the Western World (Ireland, Spain, US).
- Long term growth of China and India provides long term structural support for commodity prices.
(as an aside, I note that gold was at $1,276 immediately before Marc’s talk and was trading at $1,282, up $6 one hour after his talk ended. Perhaps someone in the audience was convinced!)
Chris Wood – CLSA Equity Strategist:
- US deleveraging by the US has to and will continue.
- Bernanke wants more deleveraging, but needs an excuse. (negative GDP or weak stock market)
- He thinks that the US stock market could trade in line with nominal GDP growth, which is what the Japanese market has done for the past 20 years.
- Further US and Central Bank Quantitative Easing is very bullish for Asian Assets. Money is printed, but investors want to put it to work in Asia. More upward pressure on real estate.
- European bank problems have been delayed, but nowhere near solved. It will return.
- The next European crisis will result in the expulsion of Greece from the EC.
- He would be short European financials.
- Dislikes Australia as the consumer is more overleveraged than the US consumer.
- Be long India, Indonesia (well run large caps, no direct investment) and China
- India is his favorite long term equity story.
- He is bullish on Mongolia and its currency. Short term deposit rates are 10% and would park some money there.
- Target price for gold is US$3,500 (he is 40% weighted in gold and gold mining stocks).
David Roche – Independent Strategy:
- Sovereign Debt – most overvalued asset class in the world.
- This is the first crisis where the debt in the system has increased rather than decreased (due to massive government spending and stimulus).
- Money is being printed, but it is not being productively invested, rather it is being recycled into bonds, creating excessive overvaluation.
- Excessive Sovereign Debt creates GDP stagnation - >60% in emerging markets and >90% in developed markets. We are already there in most major developed markets. They will thus grow much slower than otherwise if they grow at all.
- Structural fiscal deficits are now at the point where they are practically impossible to close.
- Inflation is a problem for most countries (UK excepted) as they have an average duration of 4 years, meaning they have to re-price 25% of their debt each year.
- Japan’s deficit is no longer funded by their citizens (3% savings rate), pension funds are now experiencing net withdrawals and foreigners are not buying. Only investor at the end of the day is the Bank of Japan (via banks). This condition is temporary and we will see a collapse within 3 years.
- 80% of China lending in 2009 was lent to local governments, much of it misallocated and will end up as dud loans. Impossible to have such a large lending stimulus again. Thinks China grows 6% in 2011.
- China’s long term (10+ years) secular story is still good, as the middle class grows. How does China’s political system deal with a middle class that demands protection of rights? Land rights, housing rights, non-corrupt judges, etc. – not necessarily “democracy.”
- We will see increased macro volatility with wide ranging outcomes possible.
o 30% chance of collapse
o 40% chance of dead duck muddle through with stagflation
o 30% chance of boomlet as money printing pushes markets higher, then collapses as inflation then forces higher interest rates which results in a collapse of sorts.
Russell Napier - CLSA:
- He expects a 30% rally in the next 18 months.
- Sell equities when either US inflation > 4%, US bond yields >5.5%, Asian inflation nears 10%
- He thinks that the US is re-leveraging, with money supply growing.
- Currently 38 of 78 nations have inflation >3%, 58 of 78 have higher inflation today than 1 year ago.
- Equity Cash Flow yields relative to Bond Yields at the largest spread in 60 years.
- Earnings will not drop much, and PE ratios will expand when investors become confident that corporate earnings have stabilized.
- Companies have not been hurt by this recession, but people have been hurt by this recession.
- “I’m the biggest bear in the world on US Treasuries.” – but yields will rise slowly.
- US Treasury market run by Central Bank bureaucrats. Low yields not predicting a recession but are merely distortions created by the bankers themselves.
- Even with 10% unemployment, people will spend when inflation exceeds deposit rates by a substantial margin.
- All Central Banks are printing, including the Swiss and now the Japanese. No Central Bank is willing to accept a strong currency. A race to the bottom.
- Recommended Kimberly Clark: “you can either buy a company that prints toilet paper and yields 4% or you can buy Federal Reserve toilet paper that yields you nothing.”
- Russell is basically in David Roche’s “boomlet box” scenario. |
