STAYING OVERWEIGHT JAPAN

15 November 2020

The Bank of Japan’s regular Financial Stability Report helps Arminius update our investment view on Japan. Because the country has suffered very few coronavirus deaths, the Japanese economy will recover very quickly from the lockdowns in the first half of this year. Consensus forecasts are for GDP to fall by -5% in 2020, but to rebound with +3% growth in 2021. Most importantly, the average Japanese company carries very little debt – many have a net cash position. Corporate Japan’s leverage to the East Asian economies will cause a sharp improvement in profits. Therefore we recommend maintaining a high exposure to the Japanese share market… [read more]

AUSTRALIA’S BANKS ARE ON THE ROAD TO RECOVERY

13 November 2020
  • The ANZ, NAB and WBC results for the September half-year suggest that their bad loan problems will be smaller than expected, because loan deferrals are falling faster than feared.
  • NAB had the best underlying result.
  • Banking sector profits are likely to bottom in FY21, then recover at 10% to 15% pa for the next two years, taking dividends to about 4.5% fully franked.
  • Risks to this scenario include more outbreaks in Australia and renewed economic downturns in the US and Europe.
  • We continue to believe that, although the banks will recover over the next two years, they will underperform the market in the long term.

NAB had the best underlying earnings for the year ended 30 September 2020, in terms of a rising net interest margin and solid profits before provision charges… [read more]

THE PRESIDENTIAL VOLATILITY KINK

20 October 2020

The US share market is the biggest in the world, accounting for 60% of total market capitalization. (The Australian share market is only 2%.) Therefore, when investors in the US are getting scared, the rest of the world sits up and pays attention… [read more]

IF CHINA REBOUNDS, AUSTRALIA GETS AN ASSIST

30 September 2020

China is a major factor in Australia’s economic recovery because China buys more than a third of our exports. This is why global investors like to use the Australian dollar as a proxy for the Chinese economy – if China does well, Australia will benefit, so our dollar will rise (provided that the Australian government does not provoke any more trade retaliation)… [read more]

AUSTRALIAN MARKETS – THE AUGUST 2020 REPORTING SEASON

15 September 2020

Twice a year we summarise the half-year and full-year results of the companies in the ALCE portfolio. Although the COVID-19 pandemic has affected some of the results for the June 2020 half year, the companies in the portfolio remain strong. Several – e.g. APA, Amcor, BWP, Spark NZ, Steadfast, and Waypoint – have not been materially affected by the pandemic. Others – e.g. ASX, Coles, and Wesfarmers – have done very well in recent months… [read more]

WILL THE US DOLLAR BECOME ANOTHER CASUALTY OF COVID-19?

22 July 2020
  • The economic consequences of the COVID-19 pandemic in the US are expected to trigger a fall in the US dollar against major global currencies over the next four years. By 2024 the Australian dollar could rise as high as $0.84 (US 84 cents)
  • The fall in the US dollar (USD) will be probably be associated with rising inflation in the US, from the present level of less than 2% to as high as 5%. This does not mean there will be worldwide inflation – other countries will be able to decide how much inflation they allow in their economies.
  • We recommend that Australian investors reduce their exposure to Australian companies which derive a large part of their revenues in US dollars, such as the global healthcare groups. The rise in the Australian dollar (AUD) against the US dollar reduces the AUD value of USD profits.
  • Australian investors should also reduce their exposure to the broad US market. At its low point in March 2020, the AUD had fallen -44.7% against the USD since the highs of July 2011, boosting the AUD value of US equities. This effect is about to go into reverse… [read more]

WILL COVID-19 CRIPPLE THE 4 BANKS?

18 June 2020

Bank profits have been falling since 2015, but the latest half-year was particularly dismal. Loan growth was weak even before COVID-19 arrived on the scene, and the banks were already paying hefty remediation charges for their crimes against their clients. Are the COVID-19 loan impairment charges going to be the straw that breaks the camel’s back… [read more]

HOTWIRING THE CHINESE ECONOMY

6 June 2020

The Chinese economy has stalled. The manufacturing PMI for May was an anaemic 50.6, a touch worse than April’s 50.8. The PMI is a dispersion index, which means that figures above 50.0 indicate expansion, and figures below 50.0 indicate contraction. So manufacturing growth is only just in positive territory. Trivium’s National Business Indicator tells the same story. In the first week of June it had reached 87.8%, compared to 85.3% a month earlier. In particular, new export orders remain very weak as the rest of the world struggles with COVID-19… [read more]

WARREN BUFFETT IS NOT BUYING RIGHT NOW

5 May 2020

Warren Buffett provided a couple of surprises at Saturday’s annual meeting of Berkshire Hathaway.

First, he admitted that he had made a mistake in owning airline shares, because the industry was unlikely to bounce back quickly, so he sold out of all four big US airlines in April… [read more]

CHINA IS RECOVERING

1 May 2020

China is recovering, not only from COVID-19, but also from the GDP collapse caused by its lockdown. We know this because the central government has begun to relax several key restrictions on travel and spending.

First, China’s children are being allowed to go back to school. All provinces are phasing in the resumption of regular classes over the next six weeks. In the land of the one-child policy, the return to school is psychologically very important. Even though COVID-19 very rarely kills young people, no Chinese government wants to be responsible for any child mortality. Remember the 2008 scandal about melamine infant milk formula? Reports cite that 12 children died with 300,000 falling ill. A mayor and local party boss were sacked; China jailed 19 people and 2 men were executed. Who knows what the real totals were… [read more]

OKLAHOMA – WHERE OIL FUTURES GO TO DIE

21 April 2020

The day oil died was Monday the 20th of April 2020 – for the first time in history the price of a novated futures contract CL00 for Crude Oil WTI went negative (“CLK20” ticker on the CME for May 2020). It got buried -$37.63 below ground, final resting place Cushing, Oklahoma. Speculators holding those futures and retail investors holding the ETF “USO” will have, in market parlance, been “carted out” on the day. Whilst the next roll month is still trading in positive territory (at time of writing!) the issues that caused the May contract to hit -$37.63/bbl have not gone away. These same issues may not go away by the time the June contract expires, so future oil prices may well go negative again… [read more]

HOW BAD WILL THE COVID-19 RECESSION BE?

31 March 2020

EPIDEMICS – A NATURAL PART OF LIFE
If there were no quarantines, lockdowns, vaccines or cures, the COVID-19 epidemic would keep on spreading through the population until everyone susceptible to it had been infected. This was how almost all the epidemics in human history played out until about 1850, when scientists began to understand how diseases spread and how they could be treated… [read more]

CHINA STOPPED COVID-19 BY STOPPING ITS ECONOMY… …BUT CAN IT RESTART ITS ECONOMY WITHOUT RESTARTING COVID-19?

23 March 2020

Chinese authorities have told the world that COVID-19 has been contained inside China. Rules about isolation are being loosened – even in Wuhan – as the number of new cases diminishes. The number of cases outside the core areas around Wuhan remain small, because the policies of quarantines and draconian travel restrictions have succeeded in preventing new cases in the rest of China. Big cities like Shanghai and Hong Kong have set excellent examples of how to handle a pandemic, because their leaders were smart enough to listen to the experts and to act decisively very early on. Examples of this decisiveness is welding doors shut on apartment blocks… [read more]

BREXIT FROM A EUROPEAN VIEWPOINT

23 November 2019

In the wake of the GFC, and again after the June 2016 Brexit referendum, many fund managers left the City of London for European shores, in search of lower tax rates and less regulation, not to mention the fear that Brexit would cut them off from their clients’ money. But most of the English fund managers who flocked to Switzerland have long since departed. The fund managers were unable to adapt to Swiss cultural norms, or they deemed Switzerland too “boring”, or for many other non-substantive reasons in a long litany of typical English whinges. The “boring” moniker is one viewed with much mirth and amusement by the Swiss, given that no fewer than 5 (five) Swiss cities rank in Europe’s Top 10 cities for cocaine consumption. (In case you are curious, Barcelona tops the European league tables for consumption of “devil’s dust”… [read more]

BANKS FY2019 – THE PAIN GOES ON AND ON

22 November 2019

The banking sector has underperformed the Australian market since 2015, and the results for the year to 30 September 2019 suggests that another year or two of underperformance is still to come.

The latest results were dismal. Cash profits fell by 7.8% ($2.9bn) year-on-year. Revenue growth was minimal to negative as the big banks lost market share to their newer and more agile competitors. Banks’ cost to income ratio rose by 313 basis points on average, ranging between +200bp and +540bp. Net interest margins (the spread between banks’ lending rates and their cost of funds) narrowed for all banks, dropping as low as 1.94% for the first time. Customer remediation charges hit $4.6bn for the year, making a total of $8.0bn to date… [read more]

BANK RUNS IN CHINA

5 November 2019

In February this year, we outlined the risks of a financial crisis in China. (Published as one of our Geld Zug commentary articles: https://arminiuscapital.com.au/preparing-for-the-china-crisis/). One of the triggers for a financial crisis was a rash of problems among China’s small banks. This trigger may be taking shape right now. Another small bank suffered a run last week, making it the fourth small bank to get into trouble since May… [read more]

RECESSION O’CLOCK, AUSTRALIA?

4 October 2019

The biggest drivers of GDP growth in Australia are “houses and holes”, i.e. residential construction and resource exports. Residential construction is driven by factors internal to the Australian economy, whereas resource exports depend on the growth of the major global economies, particularly China.

House prices and housing starts have been falling since early 2018, but there are recent signs that they are bottoming out. Optimists believe that the Reserve Bank’s two interest rate cuts plus changes in the banks’ prudential requirements will stimulate demand, prompting a recovery in 2020. We are more pessimistic: although house prices are cheaper now than they were two years ago, they are not cheap compared to household incomes, especially when real wages remain flat and many households are already carrying high levels of consumer debt… [read more]

THREE SEISMIC TREMORS IN SEPTEMBER

1 October 2019

The financial world was shaken by three seismic tremors during September 2019, but most people only noticed one of them.

The First Seismic Tremor

The one that everyone noticed was the drone attack on Saudi Arabia’s oil processing plant at Abqaiq on 14 September. The Yemen-based rebels who claimed responsibility have launched more than one hundred drone attacks in the last two years, on Saudi oil facilities such as oilfields, pipelines, and pumping stations, as well as military bases, airports, and other infrastructure… [read more]

COMMONWEALTH BANK’S FY19 RESULT: TRENCH WARFARE AHEAD

12 August 2019

The Commonwealth Bank of Australia (“CBA”) is Australia’s largest bank at $140.6 billion, and the most expensive of the Big Four, in terms of P/E, dividend yield, and price to book ratio. As such, its disappointing result for the year ended 30 June 2019 does not augur well for the other three big banks (who all have September year ends)… [read more]

ANOTHER TRADE WAR – THIS TIME WITHOUT THE US

6 August 2019

With all the news about the Trump Administration’s trade disputes with China, Japan, Canada, Mexico, and the EU, the ordinary investor probably hasn’t noticed one trade war which doesn’t involve the US but could have serious consequences in East Asia. On 2 August 2019 the Japanese government removed South Korea from a “whitelist” of 27 countries which have blanket approval to buy certain sensitive Japanese exports. The whitelist exempts the specified countries from having to get individual approvals for the purchase of hundreds of commercially sensitive materials – for example, materials which have military as well as civilian uses… [read more]

BANK TO THE FUTURE II

24 July 2019

Countless tech visionaries have talked about the potential for “disrupting” the banking industry. Some have even started companies which competed with traditional banks. (Despite his words, Gates himself never did so.) To date, none of these companies has had much impact on the incumbent banks, who have done a far better job of disruption by shooting themselves in the foot. (Honourable mention to Deutsche Bank, which since the GFC has managed to lose over 95% of shareholder value.) This is not to say that banking is immune from tech-based challengers, just that – so far – none of the challengers has succeeded… [read more]

FACEBOOK FACEPLANT

22 July 2019

Last month, with a great fanfare and many pious platitudes, Facebook announced its proposed global cryptocurrency, Libra. We, along with many others, expressed doubt that Libra would meet the regulatory standards which are mandatory in developed countries, particularly the anti money laundering and “know your client” rules. (See FACEBOOK’S LIBRA: STAR SIGN OR TAMPON? 28 June 2019)… [read more]

FACEBOOK’S LIBRA: STAR SIGN OR TAMPON?

28 June 2019
  • Libra is planned to be a global cryptocurrency suitable for international transfers. Its value will be stable because it is based on a Reserve of high quality assets.
  • There are many unanswered questions about Libra’s regulatory status, particularly about its compliance with anti money laundering rules. It will not be accepted in developed countries until it satisfies each country’s regulator.
  • Libra can productively target remittances, which are an important segment of the global money transfer market. Remittances from rich countries to middle income and poor countries totalled USD $529 billion in 2018.
  • The impact on Western banks will be modest until Libra changes its business model.

…[read more]

ECONOMIC GROWTH AND EQUITY MARKETS

19 June 2019

It is natural to assume that a country’s share market performance is driven by its economic performance, and therefore that a country with high GDP growth will generate high equity returns. Unfortunately, completely the opposite is true. For most countries over most periods, equity returns are negatively correlated with economic growth. How could this happen?

We have known for four decades that share markets are much more volatile than they ought to be if their price movements were driven by changes in economic and business fundamentals alone. Robert Shiller pointed out in 1981 that, based on price and dividend data since 1871, share price volatility was more than five times the level you would expect if prices responded only to new information about future dividends or real interest rates. This conclusion suggested that more than 80% of share price movements were mere noise, unrelated to fundamental information. Or, as Paul Samuelson joked, “The share market has predicted nine of the last five recessions.”… [read more]

BIPARTISANSHIP – AN ALBATROSS FOR CONGRESS

21 May 2019

As we watch the US and China heading enthusiastically into a full-scale trade war, it is worth taking a step back from President Trump’s daily squabbles via the Twittersphere with the rest of Planet Earth, and focusing on the policy areas where the Republicans and the Democrats do already agree.

Infrastructure is one of the obvious areas. Both parties agree that the USA needs to spend more on maintaining its existing roads, bridges, canals, tunnels, pipelines, etc., as well as building new ones. The American Society of Civil Engineers produces a four-yearly report card on the nation’s infrastructure, covering roads, bridges, aviation, ports, schools, public transport, drinking water, waste water, and solid waste management. The 2017 report card graded most categories as D or D+, with an overall rating of D+, i.e. “Fail”… [read more]

WARNING SIGNS IN THE US

12 May 2019

Since the GFC, the world’s central banks have got into the habit of publishing regular Financial Stability Reports (FSR). These documents are intended to function as an early warning system, by monitoring financial markets in order to identify risks as they appear and grow, so that the regulators can take action before the crisis actually occurs – unlike in the GFC… [read more]

OPERA IN BEIJING – THE NATIONAL PEOPLE’S CONGRESS 2019

8 March 2019

China’s equivalent of Parliament meets in Beijing every year for a few days in March. This august body, officially called the National People’s Congress, always passes every item of legislation put in front of it by the Communist Party leadership… [read more]

PREPARING FOR THE CHINA CRISIS

22 February 2019

After a decade of pointing out that China was not heading for a financial crisis, we have changed our minds. Recent trends suggest that problems are building in China’s corporate bonds, small banks, and consumer loans. We think that a crisis is likely in the next two years… [read more]

YOU HAVE BEEN WARNED

21 November 2018

Here is a list of fund managers and financial regulators:

  • Ray Dalio, founder of Bridgewater Associates, which manages USD$160 billion
  • Paul Tudor Jones, successful hedge fund manager since 1980
  • The International Monetary Fund, which recently pointed out global debt has now reached 225% of GDP, beating the 2009 record of 213%
  • Jean-Claude Trichet, head of the European Central Bank from 2003 to 2011
  • The Bank of International Settlements, which did warn the US Federal Reserve about the impending GFC
  • Janet Yellen, former Chair of the US Federal Reserve.

What do they have in common? All of them have recently warned that a debt crisis will occur in the next couple of years… [read more]

FROM WEAK OWNERS TO STRONG OWNERS – ASSETS IN A BEAR MARKET

31 October 2018

Through 2018, many of our investors may well have become bored listening to our endless repetitions of the warning that a market correction was “just around the corner”. In October, the correction arrived in all major markets: the US S&P500 price index has fallen by -8.8% so far this month, the Australian S&P/ASX200 by -8.7%, the Japanese Nikkei 225 by -11.3%, and the European Stoxx 600 by -8.2%. (The Chinese Shenzhen A dropped -10.3%, but it has been falling all year and is now down by -31.9% since January.) By the third week in October, all major country indices were now definitively in the red for the year to date… [read more]

WHEN THE BEAR TRIPS, HOW HARD DOES IT FALL?

31 October 2018

Investors will remember that we have been nagging them about the coming correction. Now that it’s here, the big question is how bad will it be.
History is a good guide because, as Warren Buffett has pointed out, Mr Market keeps making the same mistakes, swinging from over-optimism to extreme pessimism and back again. The main driver of the US share market since the GFC has been the technology sector, headed by stocks such as Facebook, Apple, Amazon, Netflix, and Google (aka Alphabet)… [read more]

WELCOME TO THE YEAR OF THE PIG… AND AFRICAN PIG FEVER

25 October 2018

2019 is the Year of the Pig. In the Chinese zodiac, the pig is regarded as peaceful and generous, but the Chinese government already has a serious problem with pigs. In addition to fighting a trade war and trying to deflate a credit bubble, it now has to deal with an outbreak of African Swine Fever.

Cases of African Swine Fever (‘ASF’) were reported in China’s north-east in early August, and authorities responded by disinfecting farms, imposing quarantines, culling over 200,000 infected pigs, and restricting long-distance transport of all pigs. Their measures have been unsuccessful… [read more]

THE NEXT BEAR MARKET HAS JUST BEGUN

10 October 2018

For the last six months we have been warning our investors that the end was nigh for the US bull market which has appreciated by a colossal +423% for the S&P500 TR index from 6 March 2009 to 21 September 2018. Arminius Capital ALPS fund investors have benefitted from this since the fund’s inception in 2014, until we became very concerned at the end of the first quarter 2018 and began to materially add to (increasingly expensive) hedges. The recent rises in US 10 year bond yields and falls in global equities have signalled that the long bull market is over… [read more]

LEHMAN DAY

15 September 2018

15 September 2008 was the day that Lehman Brothers went bust. Lehman had long been one of the pillars of the US financial system, and management had been hoping for some sort of bail-out, but the US government wasn’t going to play. The Lehman insolvency sent the GFC into full panic mode.

The GFC had been gathering pace since June 2007, when the US market for residential mortgage securities began to seize up as buyers became more and more suspicious of the value of these securities at a time when US house prices were falling… [read more]

CAUGHT IN THE CROSSFIRE

27 July 2018

President Trump’s latest tweets and interviews clearly indicate that he intends to go ahead with his trade wars. This is bad news for China, and even worse news for China’s regional suppliers like Australia, Japan, Malaysia, Singapore, South Korea, Taiwan, and Vietnam. But The Donald’s trade war ambitions have also expanded to include Canada, Mexico, and most European countries… [read more]

WHEN YOU ARE IN A HOLE, THE FIRST THING TO DO IS STOP DIGGING

18 June 2018

It is difficult to begin solving a problem until you admit that the problem exists. One of the reasons that the GFC was so severe in the US was that US regulators had spent the previous decade or two ignoring the danger signs while they proclaimed the virtues of the free market and asserted that bankers’ self-interest was the best assurance that banks would not misbehave… [read more]

IT’S NOT JUST THE PROFITS YOU MAKE – IT’S ALSO THE LOSSES YOU AVOID!

08 May 2018

The first principle of the ALPS Fund’s strategy is based on the fact that staying invested in equity markets over the long term produces very good returns – an average of 8.8% pa in the US since 1871, and slightly better in Australia over a shorter period. This is why, most of the time, the Fund owns shares in the Australian, US, and European markets… [read more]

FRIENDLY FIRE CAN KILL YOU JUST AS DEAD AS HOSTILE FIRE

18 April 2018

Trade wars are not like ordinary wars. They don’t start with a formal declaration of war, or with an informal one like the bombing of Pearl Harbor. They get under way slowly, with tit-for-tat threats which escalate step by step… [read more]

SWEET HOME CHICAGO BOE

02 March 2018

There are very few stocks that most fund managers would buy and hold for 10 years – with the notable exception of everyone’s darling, Berkshire Hathaway, which famously never ever pays a dividend (with no complaints from the shareholders!)… [read more]

WILL TECH DISRUPTION DESTROY YOUR SHARE PORTFOLIO?

17 January 2018

As we investors watch famous names in retailing crumble under the relentless assault of Amazon, we start to wonder, “Which sector will be the next to be disrupted?” Then we think, “Will the companies in my share portfolio survive all these changes?”… [read more]

A GREENER CHINA IS A SLOWER CHINA

2 October 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]

CHINA CRACKS DOWN ON OVERSEAS INVESTMENTS

1 September 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]

THE CHINESE GOVERNMENT PLAYS SPOILSPORT

24 August 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]

AN INTRODUCTION TO INDICES, ETFS AND BENCHMARKS

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]

STOCK MARKETS ALWAYS LIVE IN THE PAST

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]

THE PERILS OF STOCKMARKET INDICES

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]

BUYERS BEWARE OF AUSTRALIAN AND US RETAILERS!

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]

THIS YEAR’S CHINESE TAKEAWAY

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]

IT’S THE YEAR OF THE ROOSTER – NOW DON’T COCK THIS UP, CHINA

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]

LIES, DAMNED LIES, AND CHINESE STATISTICS

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… GELD ZUG 20170123 LIES DAMNED LIES AND CHINESE STATISTICS

A PRESIDENT FOR “THE LITTLE GUY”

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]

THE BRAVE NEW WORLD OF TRUMPONOMICS

15/12/16

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]

ROLL THE DICE, MR PRESIDENT

10/11/16
  • 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]

FOUND: THE NEW GLOBAL GROWTH SECTOR – INSOLVENCIES

3/10/16

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]

HOW THE NEXT PRESIDENT’S “FISCAL SHIFT” WILL MOVE INVESTORS

22/9/16

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]

FRACK-TIONALLY LOWER OIL PRICES

15/9/16

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]

EXPENSIVE MARKETS = DANGEROUS MARKETS

31/8/16

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]

“BREXIT: THE WORLD’S MOST EXPENSIVE DIVORCE”

CAN THE EU BREAK UP?

14/7/16

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]

THE WORST IS YET TO COME FOR YOU, ENGLANDER

29/6/16

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]

ARMINIUS’ HEDGE FUND CHARTS A POSITIVE PATH THROUGH BREXIT BREAKUP

28/6/16

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]

PAYING ATTENTION TO AN AUTHORITATIVE PERSON

25/5/16

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]

LIFE IN A SUB-ZERO CLIMATE: GETTING USED TO NEGATIVE INTEREST RATES

17/5/16

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]

WHY ARE US WAGE COSTS RISING?

21/3/16

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 – FINANCIAL YEAR 2015 REVIEW

2/3/16
  • 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]

THE PROBLEMS FACING COMMODITY-EXPORTING COUNTRIES LIKE AUSTRALIA

18/12/15

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]

EMERGING PROBLEMS IN EMERGING MARKETS

05/11/15

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]

MAURICE & KING JULIEN OF MADAGASCAR’S ”EMERGING MARKETS”

09/10/15

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]

IT’S A SMALL VOLATILE WORLD AFTER ALL

31/08/15

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]

THE US NAIRU BASE IN MACRO-NESIA

31/07/15

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]

STORM WARNINGS FOR GLOBAL BOND MARKETS

02/07/15

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]

HELLENIC HADES APPROACHES

22/06/15

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]

CAPTAIN AMERICA AND THE WINTER GDP

26/05/15

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]

UNDERWEIGHTING THE POOR WHITE TRASH

02/04/15

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]

INVESTMENT ARITHMETIC FOR 2015: 2 + 2 = 4

11/02/15

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]

THE PURPOSE OF ECONOMIC FORECASTING IS TO MAKE ASTROLOGERS LOOK GOOD

12/01/15

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]

OIL GOES BACK TO THE FUTURE

14/12/14

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]

“HISTORY DOESN’T REPEAT ITSELF, BUT IT DOES RHYME.”

09/10/14

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]

WHEN CHINA SNEEZES, AUSTRALIA GETS PNEUMONIA

06/30/14

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]

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