It’s been a while since I did a Q&A, and though I have a number of things I could discuss they will wait for another day for two very important reasons.
Firstly, by doing a Q&A I can reply to questions which typically takes me a bit shorter than it does to write longer articles. This is important because it’s a Friday night and my wife is looking smoking hot…
The second point. Oh, I forget what that was.
Onto it then…
I just downloaded your US$ Bull Market Report from Dec. 2014. It seems most of your predictions did not work out and the US$ has been in broadly a sideways to slightly up market since then. The Yen is back to 100.
Your entire thesis on the US$ Bull Market appears to be based on the notion that US interest rates will rise whilst interest rates everywhere else will stay low or fall or even go negative.
Doesn’t your recent podcast on owning gold negate the US$ bull stance?
With the FED having postponed its tightening cycle several time and the market now starting to doubt the FED will ever raise interest rates, does your stance from 2014 still stand?
What is your stance on the USD/JPY? It seems the JPY is the new save haven currency which strengthens whenever there is a crisis. Do you still stand by your prediction that the JPY will weaken substantially against the USD?
Where do you buy the currency options (especially USD/JPY) you refer to in your write-up? Could you kindly let me know which exchange they are traded on? (I have market access to all major exchanges).
Let me break the questions down one by one.
Not sure what charts you’re looking at but to get on the same page here is what we said on November 13, 2014:
“A bull market in the US Dollar is underway and its magnitude and duration are likely to catch everyone by surprise. I believe it isn’t out of the question for the USD Index to advance by at least 50% within the next 5 years. If this forecast proves correct, there will be profound ramifications for the global economy and many financial markets, particularly emerging markets.”
We’ve been bumping and grinding for the last 12 months and we are forming a converging wedge which typically portends a break. I think we break higher. Maybe I’m wrong but that’s where the weight of probability lies for me right now.
Remember, the dollar spent 10 straight years doing nothing but go down. To expect it to go up in a linear fashion is foolish. It’s not going to happen. Markets don’t work like that. They are non-linear.
The dollar bull thesis is in part due to an interest rate differential – as you mention – but there is more to it than that. The USD carry trade unwinding is arguably a much bigger force behind a rising dollar than interest rate arbitrage.
Then there is the fact that on a relative basis, especially politically, the US looks a whole lot less shaky than does Europe or Japan, where Kuroda-san continues on the path to destroy the yen. This is a ridiculously sad situation given that the two podium donuts on show in the US actually look less bad than the clutch of parasites at the helm in Europe. It is what it is.
USD and Gold
With regards to being dollar bullish as well as long-term gold bullish I believe we are likely to see both rising simultaneously.
The factors driving the two asset classes are at this point in time working to strengthen both. For more on this you can listen to my discussion with Raoul Pal.
I guess this is not really fair if you’ve not been a long term reader as we put out a special Japan report in January 2012 saying we were shorting the yen. It was at 72. Twelve months later at 89, and hit a high of 125 before moving back to 100 today.
For me this is a long term trade I’m happy to have on for the next decade. I actually think it’s possible we get back down to 95 before heading much higher. I’m not prepared to buy the yen in anticipation of that but if we get there I’ll be pressing the short trade. This is quite simply something that I think you can set and forget and not be too worried about short-term noise.
Options on currencies are available via the Saxo platform. If you’re a US citizen then you’re a lepper to Saxo and they don’t want anything to do with you.
Easy enough to get around by using an offshore (non-US) company to open an account. I don’t know of any other platform that offers options on currencies. Perhaps readers can comment below if they know of any.
“Thanks for your fantastic blog – it is much appreciated.
I would be very interested in your view on two points:
- China looks like a Ponzi scheme to me too. However in the tradition of searching for non-bias-confirming views, I come accross the argument that Chinese SOE debt is not as bad as it looks because savings are very high, those savings fund corporate loans, and therefore in China debt is often used as a substitute for raising capital in the equity markets. By this reasoning, a debt for equity swap could at a stroke hugely reduce the debt load. An example of this argument is here:
- I have heard you talk about the frequency of six-sigma events in today’s markets. This may or may not be remarkable, but I think we have to exercise caution over this interpretation of a statistical measure. Standard deviations are only applicable to normally distributed events, and financial events are certainly very far from normally distributed. I think that the frequency of n-sigma events is just re-enforcing this fact, though of course their increase does point to a change in the climate. Do you agree with this?
China, a Ponzi Scheme?
This argument has been used before. It’s a variation of “we owe it to ourselves so it doesn’t matter”.
Let’s say you lent money to your cousin Joey who, instead of using using it to grow his business as promised, bought a Bentley (he clearly has terrible taste).
Since you found that, after he failed to pay you back your money on time, he’s put some mileage on it, taken out an additional loan against the car to access some more cash, and dinged it parallel parking which we can’t really blame him for since it’s such a big ugly sucker. You’re family so it doesn’t matter?
What about a debt for equity swap? You get the equity in his “ugly as sin” Bentley. But wait, it’s encumbered and when you net out the debt against the equity you realise the equity is close to worthless. Does it matter?
Here’s the issue. Economists call it pushing on string:
In 2015, total Chinese government debt increased by a CNY4.6 trillion, or about US$700 billion.
Problem is, in 2004, one yuan in new debt generated 73 cents in additional GDP. By 2009, this was down to 33 cents. Today, the ratio is less than 1 to 4. You don’t need me to explain to you that when your debt is increasing four times faster than your income you’re heading fast towards the edge of a cliff.
This is the real tragedy of central bank policy. By these bureaucrats’ warped logic, the fact that the increase in debt is no longer having the desired effect is used as evidence that in fact more debt is required. This lands up being a debt multiplier in that an ever increasing amount of debt is required to achieve the same level of growth. To the point that now we sit with central banks pushing NIRP down our collective throats.
As I mentioned earlier this week, with the help of some birds to explain the situation, we now await blowback.
Six Sigma Market Events
The increase in frequency of such events is unmistakable but not unsurprising.
It points to a period of time that is unlike the periods of time we’ve been experiencing: unchartered waters.
Imbalances have consequences and greater imbalances beget greater consequences. Ergo, more 6 sigma events on the horizon.
Onto the next one:
Thank you for continuing to post unique and insightful content on CapEx! Really invaluable insight. One topic I would like to pick your brain on, and which has been a topic of a few of your latest posts, is inflation:
Over the past 8 years we had an incredible amount of asset price inflation due to QE/NIRP etc. as liquidity remained in the financial system. How likely is, in your opinion, that eventually this will be reflected into CPI/consumer goods?
The potential scenarios I see:
On one hand (Scenario 1 – Deflationary Bust) this asset inflation boom might end a-la ’08, as FED raises rates/dollar strengthens triggering a repricing of asset prices
On the other hand (Scenario 2 – Stagflation), the FED might stay put (after a small raise of benchmark rates) and fiscal policy on a worldwide scale is more accommodating; this will unleash a wave of wage/consumer goods inflation.
I used to think that the most likely scenario was Deflationary Bust followed by even more aggressive QE/fiscal policy which in turn would lead to Stagflation. Now though I am more inclined to think that Scenario 2 is a real possibility (because of structural impossibility of raising rates significantly without triggering a crisis; additionally policy speeches seems to be shifting towards more fiscal easing as well lately).
What are your thoughts? And how should Scenario 2 be traded – short rates or short currencies? So far currencies have been the release valve, but are we going to assist to a paradigm shift whereby rates will have be forced upwards (by inflation expectations/market or as central banks catch up)?
Apologies for the long e-mail.
Firstly, thanks for the kind words.
Inflation Showing Up in CPI
To your question on inflation showing up in CPI: you’re dead right. We’ve had asset inflation largely in financial assets to an extent that is truly frightening.
Consider that 50 years ago in pretty much any developed country in the world a home was affordable with just one working parent, healthcare was affordable, college tuition could be saved and paid for by weekend and holiday jobs at the local supermarket checkout counter, and televisions and phones were luxury expensive items.
Today everyone, including kids, has a smartphone, everyone has a TV that can’t be fitted through a doorway without gymnastics. And yet home ownership, especially for millennials, is a pipe dream, college tuition can no longer be paid for by summer jobs, and healthcare insurance requires you to sell your kidney to pay for it, which of course defeats the purpose.
Many consumer goods, on the other hand, have been experiencing deflation though this is due to tech innovation and geographical labour cost arbitrage.
I don’t know when inflation shows up in consumer goods.
Obviously in a bond market rout and currency crisis then inflation typically takes hold in every asset class, including consumer goods. Given that I believe there is no more GDP to be juiced out of the global economy via credit fuelled policies (NIRP, ZIRP), I think it’s prudent to be looking at those asset classes which are in the “need to have” basket of consumer goods.
For example I’m beginning to get pretty interested in the soft commodities. If you take a look at the charts alone it’s hard not to get a little excited.
Regarding fiscal policy. As I mentioned recently when chatting with Erik Townsend, I think fiscal policy is the next big hit, certainly in the US.
Should that bring even a whiff of inflation it could spell real trouble for what is now a bond market that is more sensitive to price movement than it’s ever been!
Your question was how to trade. Rates or currencies? Both – they’re reflexively related.
I’m a retired medical doctor and consider myself well read and well versed in world affairs. The first article I read of yours roughly 2 years ago really irked me. It angered me because at the time I was convinced the dollar was going to hell. I’d been reading a lot of material published by [omitted] and it was a constantly repeated theme. I felt like it was the only thing that mattered and I automatically rejected anything that contradicted what I wanted to believe. I was invested in emerging markets and foreign currencies as a result. I honestly don’t know what made me sign up for your free content as I recall thinking you were a complete idiot. Perhaps I simply was convinced you would be wrong and wanted to see your ideas proven for the garbage I was convinced they were.
It only took a few more articles since reading that first one, and as much as I was ready to hate you and see you proven wrong I found myself nodding my head and smiling at your ability to dispassionately see and explain what are very complex financial, social and political issues. I can tell you that over the course of time, I have a newfound understanding of our world, am certainly less dogmatic than I used to be, and your work together with Realvision TV which you introduced me to has played a significant part in that.
You Sir have yourself a dedicated reader.
If you would be so kind, (and I feel bad for asking for this since you’ve given me so much and I’ve given you an email address) you mentioned in an article a while back that the HK market was worth a look. I decided for the first time to act on your thoughts and bought the iShares MSCI Hong Kong ETF. I’m up over 10% and would love to know more on why you thought HK equities were a good bet.
Wow, thanks. I’m glad you no longer hate me. That’s a decent start.
One quick comment and I know I’ve mentioned this before but it bears repeating. The market DOESN’T care what you or I think. It doesn’t care about opinions, it doesn’t care about who said what or how rich or famous they may be. Dogmatism in investing is lethal. Nobody knows all the answers. Certainly not I.
Question everything and whenever someone is yelling and screaming that XYZ is absolutely going to happen it’s probably a sign to be cautious, especially if they’re selling something. I know a lot of incredibly smart, successful investors, and not one of them thinks they absolutely know what is going to happen. It’s all just probabilities and risk management.
In any event, what you’re referring to was an issue of “World Out Of Whack” back in June:
“While the focus today is on overvalued RE markets, as an investor I can’t help myself from pointing out that with a P/E ratio of just 9x, Hong Kong’s equity markets are today the cheapest in the world, with the Hang Seng Index trading at the biggest discount to global shares in 15 years.
As a reference point consider that most major stock markets typically trade at a P/E of between 15-20x, so we’re looking at an equity market some 40-50% of its highs and an overvalued real estate market at the same time.”
Here is the ETF you bought. We’re up about 14% this quarter:
Cheaper valuations obviously, a stable currency pegged to the USD (for now at least), and the coming second exchange link with China seem to point towards more favourable setup for HK equities. Where would be the first place you’d go if you were a mainland Chinese looking to diversify out of China?
That’s all for now and my apologies to all those who email me and who’s questions go unanswered. It’s not because I don’t love you too.
Have an awesome weekend wherever you are. I’m going to go find that wife of mine…
“My most brilliant achievement was my ability to be able to persuade my wife to marry me.” — Winston Churchill