The latest commentaries from the Directors of Arminius Capital Advisory
2 Oct 17
Anyone who has been to Beijing in winter knows how bad the air pollution is there. The same is true of many Chinese cities because, from the 1980s on, governments at all levels were focused on maximizing economic growth and job creation. The future careers of local officials were heavily determined by the GDP growth rates which they managed to achieve in the areas under their supervision... [read more]
1 Sep 17
Since 2008 the Chinese government has had an official policy called chuqu, or “going out”, which encourages Chinese companies to expand overseas by means of building new assets and acquiring existing assets. The strategy of building new assets has been mostly successful, with some exceptions: CITIC’s Sino Iron project at Cape Preston, Western Australia, for example, opened... [read more]
24 Aug, 17
Chinese banks and other lenders have enjoyed years of double-digit credit growth, but in March 2017 the authorities stopped the party, turned the lights on, and took away the alcohol. Abrupt changes in the leadership of the three main regulators (of banks, brokers and insurers) were followed by equally abrupt changes in regulatory style. Draconian new rules were ...[read more]
3 July 2017
The Dow Jones is one of the oldest share market indices and probably the best known. The Dow Jones Industrial Average (to give it its full name) was created in 1896 by Charles Dow and Edward Jones in order to give an aggregate picture of trading on the New York Stock Exchange. The Dow is currently owned and managed by a subsidiary of S&P Global, which also owns and manages the Standard & Poor’s indices. It is based on the share prices of its thirty constituent companies, which are selected by an arcane process.
The Dow started out in 1896 at a value of 40 and has now passed 21,000. This growth tends to show how much the value of the US share market has increased in the last century... [read more]
15th June 2017
Way back in 1981, the writer William Gibson remarked “The future is already here – it’s just not very evenly distributed.” Investors tend to think of stock markets as predictive, but they are mostly the result of economic activity in the past.
The largest sectors of a stock market are those which have done well in the past. They are made up of companies which have consistently made large profits and raised large amounts of capital. Investors have come to expect that these companies will keep making profits and paying dividends. But most companies don’t survive for long... [read more]
23rd May 2017
Many people choose the passive approach to investing – they put their long-term money into index ETFs or index funds which mirror the standard share market indices, such as the S&P500 in the USA or the S&P/ASX200 in Australia. This is perfectly reasonable. After all, one of the greatest active investors of all time has recommended the passive approach. In 2014 Warren Buffett told his wife that, after he died, she should put 90% of her money into an index ETF which tracked the S&P500, and the other 10% into a high-quality US government bond ETF... [read more]
16th May 2017
The imminent arrival of Amazon in Australia has frightened many investors away from Australian retailers. We think that shareholders in traditional retailers should be very nervous indeed – much like the Australian media sector, the transformation of Australian retailing has barely begun.
The US retailing sector is much further down the painful path to re-invention, simply because the US is where most of the successful online retailers originated. US e-commerce sales rose from 10.5% of all sales in 2012 to 15.5% in 2016. As the chart below shows, more stores have closed in the first four months of this year than in the whole of 2016. Retail companies are going bankrupt at unprecedented rates: the ratings agency Fitch estimated in April of this year that the bond default rate by retailers would leap from 1% in the last twelve months to 9% by the end of 2017... [read more]
24th March 2017
In 2016 Australian coal and iron ore miners enjoyed a jump in commodity prices thanks to capacity closures mandated by the Chinese government. Prices have since pulled back from their peaks, and companies such as BHP and Fortescue have warned that the current level of prices cannot be sustained. We provide an overview of why the Chinese government has been shutting down coal-fired power stations, and explain why commodity prices will fall back again... [read more]
31st January 2017
According to the traditional Chinese calendar, on Saturday 28 January the Year of the Monkey gave way to the Year of the Rooster. Last year started badly and ended well. We think that this year will do the opposite.
A slowdown in the Chinese economy remains, as ever, the single biggest risk for the Australian economy. We have often stated that Chinese GDP growth is slowing over the long term because the structure of the Chinese economy is changing – services now outweigh manufacturing industry as a percentage of GDP, state sponsored capex is declining, and labour supply is moving from surplus to shortage... [read more]
23rd January 2017
After achieving GDP growth of a scientifically-precise 6.7% in each the first three quarters of 2016, China recorded 6.8% in the December quarter, making 6.7% for the calendar year. This outcome was squarely in the middle of the official target range of 6.5% to 7.0% for GDP growth under the Thirteenth Five Year Plan (covering 2016 to 2020).
There is a widely held opinion that Chinese statisticians work more magic than Harry Potter. Back in 2007, the current Premier Li Keqiang remarked that he avoided official statistics and preferred to look at underlying data such as electricity consumption and bank lending. Many researchers have also developed their own measures of the Chinese economy... [read more]
9th January 2017
One of the many paradoxes of the Trump presidency is that, although he is one of the richest men ever to be elected president, he was elected by “the little guy”. The opposite of being rich is being poor. Trump was not elected by poor people on average, but by poor areas of the USA. What do we mean by saying this? ...[read more]
Arminius has made money for our investors in November and December by being long assets which have benefitted from the Trump rally, but we bought these assets because we expected them to rise in value regardless of Trump’s policies. Arminius makes investment decisions on the basis of long term data, not by betting on political events... [read more]
- Investors have decided that the Trump presidency will be good for US equities and bad for US government bonds. These trends support our view that bonds yields will keep rising as the developed world enters a reflationary phase.
- We expect a flurry of activity in the first hundred days after Trump’s inauguration on 20 January, because Presidential powers can be used to limit immigration, raise tariffs, cancel environmental regulations, etc.
- After that, the President will need to get the agreement of Congress to pass legislation on complex issues such as personal tax cuts, infrastructure spending, and higher budget deficits. Delays and disappointment will set in.
- Australia is not particularly affected by Trump’s policies. A trade war between the US and China, for example, will not impact our exports of coal and iron ore, despite what alarmists and journalists will tell you.
- The Arminius hedge fund does not make political bets, but our fundamentally based positions have performed well in November so far... [see more]
Arminius monitors bond defaults on a global basis, not only because of the disruption which they cause to financial markets and the banking sector, but also because of the lasting damage which they inflict on the real economy. Chart 1 below shows how bond defaults have risen sharply in the last eighteen months.
Most of the increase in defaults so far is a direct consequence of the halving of oil prices in 2014. Many US shale oil producers had funded their development expenditures by issuing junk bonds when oil was over USD$100 per barrel and with oil at USD$50 they no longer had sufficient cash flow to meet their obligations. The red dots in the chart below represent US shale oil producers and they account for a majority of the defaults in 2015 and 2016 – but not all of them... [see more]
On 21 September the US Federal Reserve decided not to raise interest rates, but fourteen of the seventeen board members indicated that they expected one more rate rise in 2016. This has pretty much telegraphed to financial markets that, so long as economic statistics remain reasonable, the Fed will go for a rate rise at its December meeting.
This December is an excellent time for a rate rise, regardless of the state of the US economy, because it is a period of low public scrutiny. It has the advantage of being after November’s Presidential election but before the inauguration of the new President on 20 January 2017. Hence a rate rise at this time is much less controversial: the Fed is unlikely to attract criticism from either the lame-duck incumbent or his not-yet-installed replacement... [see more]
It is now two years since oil prices halved in the second half of 2014. The chart below reminds us that this fall was far less severe than the oil price collapse during the GFC, when prices recovered very quickly. Why aren’t prices beginning to recover now?
The causes of the two price falls were very different. The 2008 collapse was triggered by factors outside the oil market – specifically, the GFC’s liquidity crisis which shut down bank lending and trade finance, followed by lower demand as a result of the recession in developed countries. But when central banks pumped up liquidity, global oil demand recovered... [see more]
Our proprietary metrics indicate that the US and Australian share markets are very expensive at present. Although we are confident of the sound statistical basis of our metrics, it is reassuring to know that we are in good company: in recent months several very successful global investors have warned that US equities are over-priced, or have stated very clearly that they have taken out portfolio protection. For example:
- Legendary hedge fund managers George Soros and Paul Tudor Jones have both increased their short positions on the S&P500.
- Carl Icahn said in June, “I don’t think you can have zero interest rates for much longer without having these bubbles explode on you.”
- In late July Jeff Gundlach, founder of DoubleLine, said, “Sell everything. Nothing here looks good.”
- Only this month Paul Singer, who manages USD$28 billion, warned that “the ultimate breakdown (or series of breakdowns) from this environment is likely to be surprising, sudden, intense, and large.”... [see more]
CAN THE EU BREAK UP?
It is legally possible for the EU to split up into its constituent countries, but – as Britain is finding out – the process is laborious and complex, needing several years. More to the point, for almost all EU members there are major economic advantages to staying inside.
These advantages are obvious to all the smaller members, such as Greece, Cyprus, Latvia, Romania and Portugal. They are net winners in the EU’s subsidy games... [see more]
Arminius’ global macro hedge fund recorded a modest positive return on the Brexit vote, even though we do not make bets on political events. We invest our clients’ money on the basis of quantitative statistics about the market, and our quantitative models told us in mid-May that risk in global markets was too high. Therefore we shifted 95% of our fund to the safe haven of cash, which is where it will remain until at least 01 July. As a result, we have avoided the market falls which followed the Brexit vote, and the Fund made profits on some market neutral short positions in the US equities market.
The Brexit vote has triggered a regional crisis, not a global crisis... [see more]
To be clear, not everyone had an uncomfortable Brexit. What is being referred to now (and no doubt in case studies at Harvard in years to come) as “Black Friday”, was in fact quite a Good Friday for investors in Arminius’ global macro hedge fund.
So how did we manage to not lose money through Brexit? By obeying our models... [see more]
Two weeks ago, on 9 May, the People’s Daily devoted much of its front page and all of its second page to a 10,000-character interview with someone described only as an “authoritative person”. This interview included some strong statements which differed sharply from current policy:
- Debt is the “original sin” from which all others emanate, and excessive debt will lead to systemic financial crisis and negative growth
- Using loose monetary policy to stimulate the economy is a “fantasy” which should be abandoned
- China needs to de-leverage steadily
- Structural reform is necessary, especially of state owned enterprises (soes)
- Zombie companies must be allowed to fail
- The path of future gdp growth will not be v-shaped or u-shaped, but l-shaped, i.e. It will not rebound to past heights.
Why are we bothering to write about an anonymous interview? Although the People’s... [see more]
Why would any investor agree to pay negative interest rates? Surely the whole reason for investing is to maximize your returns. Despite this, as at the end of April 2016 there were USD$9.9 Trillion of bonds and bills on issue which carry negative interest rates. This figure amounts to 16% of all global government bond indices. The average interest rate of (minus) -0.24% means that investors are paying a total of USD$24 billion per year for the privilege of owning these bonds.
Since the European Central Bank introduced negative interest rates in June 2014, the phenomenon has spread to Denmark (September 2014), Switzerland (December 2014), Sweden (February 2015) and Japan (January 2016). In each case... [see more]
Every diligent student in Economics 101 learns how to use supply and demand curves to show that legislating for minimum wage rates tends to reduce total employment... ...what these diligent students don't know yet is that the real world is often reluctant to behave the way that economic theory says it should. Supply and demand curves are theoretical abstractions, and the straightforward conclusions of economic theory depend on several simplifying assumptions which usually aren’t true in the real world... ...in recent earnings guidance from US retailers and restaurant chains, management has suggested that rises in the minimum wage will cut CY2016 profits by 2% to 3% and CY2017 profits by 3% to 4%... [see more]
- China’s GDP growth met its CY15 target, but it keeps on slowing down. It would be a lot lower if the authorities weren’t pumping up the money supply, applying fiscal stimulus to key sectors, and fudging some of the statistics.
- China’s wealthiest citizens are continuing to ship their money off to safer jurisdictions. This is one of the main reasons why the China’s currency is weak even though its trade surplus and its incoming direct investment are both rising.
- We don't see any likelihood of a hard landing in China this year, but the downward drift of the Chinese economy is negative for resources exporters in general and for Australian resource stocks in particular... [see more]
A common question from Australian investors in recent years is “Why hasn’t the Australian stock market done as well as the US stock market?” Since the GFC bottomed out in March 2009, the S&P500 Index (excluding dividends) has tripled from 676 then to 2043 now, setting new records, whereas the S&P/ASX200 is only up 50% in that time, and is still a long way short of its pre-GFC peak of 6828 in November 2007... [see more]
Last month we addressed investor concerns about slowing growth in China. This month we look at how trends in other emerging markets might affect Australian investors.
The core of the problem is that growth in emerging markets, which has been strong for a decade, is now slowing down, mostly because of the way that the China slowdown and falling commodity prices depress the value of commodity exports from low income countries. Although GDP growth in the developed economies remains stable... [see more]
In the Dreamworks movie “Madagascar 2”, there are many parent-intended lines uttered by the Lemur King Julien. One of his best is when they are leaving the African island of Madagascar on a plane, flown by the Penguins, bound for New York City. King Julien of Madagascar (self proclaimed) wants to know why people from the other end of the plane keep coming into the first class section; “Maurice, whatever happened to the separation of the classes?”. The new Chief Economist of the IMF, Maurice Obsfeltd, answers this question in a recent report and the findings all lead back to New York City indeed; the Federal Reserve. A pending US interest rate rise is going to separate the developed and emerging economies in a way that may lead to unforeseen circumstances... [see more]
Flash crashes, ETFs gapping, VIX spiking. Volatility is so du jour for 2015. Back in 1962, the world was reacting to the volatile global environment created by the Cuban Missile Crisis. At that time, Walt Disney commissioned the Sherman Brothers to compose a song that could be translated into multiple languages and be featured as the song played at one of his attractions. It was said to represent “a message of peace and brotherhood”, however when Walt heard it, he said that it wasn’t lively enough, so he ordered the tempo be increased, the mood heightened and to introduce multiple harmonies. “More volatility!” is what Walt might well have said... [see more]
Don’t economists just love acronyms? The usual suspects incorporate GDP and CPI, which everybody recognises – or should – instantly. Moving up the economists’ food chain, we can find other delectables such as PCE, RFR & ERP. Once you enter the realm of the macro economists, the populist pinnacle (because what this class of economists talk about actually sometimes is of relevance to the man on the street), we are blessed with exposure to a whole new universe. The one that currently appears in the media with increasing frequency, for very good reason so the Fed tells us, is one of my personal favourites, "NAIRU"... [see more]
Most Australian investors have watched the recent gyrations in US and European bond markets with a feeling of relief that all this excitement doesn’t affect them, because they don’t own any US or European bonds. They have been watching the Grexit turmoil with similar emotions, because they don’t own any Greek bonds or shares. It is true that the immediate effects on Australian investors are modest, but we believe that these types of wild market moves are symptomatic of major underlying problems which will lead to further trouble in future... [see more]
As we approach the June Solstice in the northern hemisphere, we would do well to remember that in Greece and North America at this time of year it is known as the longest day of the year. The Latin from which the name is derived is “Solstitium” which means nothing less than “sun-stopping”. So, as we approach the final chapter in a farcical end game between Greece and the IMF/EU/ECB/EFSM/EC/European-taxpayers/(insert acronym beginning with “E”), we truly are about to finally watch the sun stop shining on Greece’s financial credibility. Again... [see more]
Winter has come. A bitter winter can bring with it devastating effects and not just for Al Gore. Winter will kill crops, defeat armies and in some countries where snow falls, it will hide the green grass under a blanket of white for an entire season. Only when the season changes and the snow melts away will the grass appear greener than ever to those who look upon it.... [see more]
The death of Lee Kuan Yew brought to mind his warning in 1980 that Australians were in danger of becoming the “poor white trash of Asia”. As things turned out, we didn’t: in terms of the World Bank’s inflation adjusted data, Australia’s GDP per head rose from USD 10,187 in 1980 to USD 67,458 in 2013, a six-fold increase... [see more]
In 2014 my Australian Equities mandate returned 15.1%, but the S&P/ASX200 Index managed only 5.6%. Share prices in the mining sector dropped as iron ore and coal prices fell to levels not seen since 2009... [see more]
2014 was a year that confounded forecasters. We admit our own mistakes first: we were worried about a market correction of 10%-plus, and it just didn’t happen. As a result our modest investment in derivative protection turned out to be unnecessary, but my equity fund has nonetheless recorded a return of more than 14% for CY2014, significantly above the S&P/ASX200 accumulation return of 5.68%... [see more]
The collapse in oil prices is positive for most of the world, but will cause recessions in several oil producing countries and defaults in many US oil company bonds... [see more]
We were reminded of Mark Twain’s assertion when we read that the Chinese insurance group Anbang (安邦) had bought the Waldorf-Astoria hotel in New York city (Financial Times 06 Oct 2014), making it the most expensive single hotel transaction ever. Anbang has paid USD 1.95 billion to buy the historic 1,413-room hotel, which was built in 1931 and covers an entire city block. The sale price is equivalent to USD 1.4 million per room or 33x the hotel’s historic EBITDA. The seller was the Hilton hotel group (HLT:NYQ), which will retain management rights for the next hundred years... [see more]
Recent official statements indicate China’s GDP growth rate in CY14 will be about 7.5%. This figure is way above growth rates in the rest of the world, but nonetheless it marks another step down from China’s peak rate of 14.2% in 2007. The long term factors behind slower growth include:
- Ageing population: more retirees, less workers.
- Rising real wages, as regional and sectoral labour shortages enhance employees’ bargaining power... [see more]