Debtor countries that can´t print money will restructure their debt
Debtor countries that can print money will devalue their currency
Countries running a surplus with a linked exchange rate will break the linkage because growth too strong and inflation becoming too high, so can have an independent monetory policy
See surplus countries buy the physical assets of countries whose ccy and paper is worth less will want less of their bonds. Hence why buying commodities and commodity companies.
When China tightens see a drop in commodities.
Mean reversal doesnt work for commodities?
2012 an election year in China and the US
Rising interest rates are good for a ccy but not for bonds
At a time when losing a ccy regime gold is an underowned asset by central banks, sovereign wealth funds. Safe used to mean USD, EUR and JPY. All have problems at the moment, gold will be taking more of that place! If devalue their ccy to reduce the debt burden better to hold gold reserves.
Money printing is good for stocks, good for gold, good for commodities.
Thursday, 28 April 2011
Sunday, 24 April 2011
Currently in a delicate two phase maneuver
First was flush the world with cheap money.
Second increase the cost of that money to reduce its velocity.
However, how successful stage 1 is will depend how productivily that capital will be used. Read annual reports and see what companies are doing.
Flush the world with cheap money because money was not moving. Counterparties did not accept the credit risk of financial institutions, only sovereign. So sovereigns had to come in and provide the credit and guarantees to get the financial system moving again.
Second level of problems started in Europe when investors started questioning sovereign risk, as they may also do in the US in the future.
Now in Europe as realise there should be an interest rate differential. However, at the moment some countries cant get financing, let alone borrow at a higher rate! They must go to the ECB.
Question if there is a single unified Europe supporting each other fiscally, or will credit risk for each country be separated. Yet the EURO rises. The market believes this project will not end. But writedowns for each individual country is possible, so each country is responsible for there own fiscal position.
However doubt in soveriegn credit are generating a policy of budget deficit reduction to regain crediability. However, cutting costs from the only body that was previously spending will reduce GDP growth, which will increase the weight of the debt. Since the currency cannot adjust to make regions more competitive, this forces price and wage reductions: deflation. Countries experiencing deflation in europe, hence relative hardship is what is required to make Europe competitive? Did lived to well and now need to suffer to equilibriate their progress! Is this what German minds are thinking. The longer we wait, the more deflation they will suffer and it will help Europe grow later.
However, weakening governments and potential write downs will affetc teh European banking system. Hence should be encouraged to raise equity now! Writedowns, or their fears, will reduce lending, which will not support economic growth.
Company funding can only come from the capital markets, and if poor clarity in how Europe will evolve will affect their cost of borrowing, the Europeans are not using capital efficiently, paying too much for it by not committing to a plan now.
This lack of clarity was noticed when the weaker European countries needed to be bailed out by the IMF, i.e. Hungary
Different European countries have different economies and suffer different inflation, have different structured economies and need different interest rates. When Spain could borrow at 4%, it encouraged the country to borrow to fund its lifestyle whihc was being de graded by a lack of wage increases relative to the cost of living. Will fiscal union help solve this problem? Different countries should borrow at different rates hence affect the cost of borrowing in a different country. Part of a countries GDP should contribute to the EC, which can help in other services, ie funds to help develop Europe. The EC will help to oversea countries to ensure European funds are to help the country to become more productive, not to help speculation.
Each countries fiscal position should be transparent so each country has its own cost to borrowing.
Should let Portugal write off its debt and then help re build a new European structure. There must be punishment, destruction, to help build the new.
If want a unified Europe, need a unified regulator that each country contributes relative to their GDP in an amount agreed by everyone.
European funding should not be provided if company does not have a competitive advantage, ie better than money goes elsewhere in Europe? Or to start a new facility and then judge if they are good or not. It is to start an opportunity, not to leave countries as they are today in the future. Need to give them an opportunity. If they dont take it, they dont get further funding in that area. Let Europe compete against each other under a common curerncy!
Development of the EU was a piece by piece process of social engineering. This must continue if europe will improve. But not based on automatic feedback mechanism, but based on generating a small solution to a big problem continuously. The European way.
Maastrict treatty suggested no more budget deficit then 3%, and gobt debt not more than 60% of GDP. But no adequate enforcement mechanism. Ie no punishment by receiving fewer European funds, or funds from the ECB more expensive, or market rates more expensive because no explicit bailout. The EU should simply be a structure that allows more efficient movement around Europe, not telling a country how to be ruled or bail it out if it does something wrong. It is a framework that should allow countries to interact more easily should they want to be a common law and rules and a common currency. That is it. That is all it can afford to be at the moment.
Really it is a banking crisis rather than a fiscal crisis? Banks hold the below par bonds and they have not been marked to market. So European banks need to be recapitalised. Banks cannot access short term financing? Need to go to ECB?
Stress tests out in July.
If create fiscal discipline but have loose monetary policy (ie ECB buys Spanish debt) there may be no Spanish fiscal crisis? Especially if Spain eliminates the huge burden of unncessary admin.
Europe needs to grow itself out of problems. First solve the banking problem. This can be the first positive sign. If tighten fiscal policy, loosen monetary (they increased rates). Invest in education and infrastructure to increase innovation and the connection between Europe.
G20 endorsed a budget deficit reduction by half for 2013. A deflation risk.
The worlds leaders have to lead markets, not follow them. Need to forge a consensus under a common agreement, but enough flexibility that each country can do their own.
Second increase the cost of that money to reduce its velocity.
However, how successful stage 1 is will depend how productivily that capital will be used. Read annual reports and see what companies are doing.
Flush the world with cheap money because money was not moving. Counterparties did not accept the credit risk of financial institutions, only sovereign. So sovereigns had to come in and provide the credit and guarantees to get the financial system moving again.
Second level of problems started in Europe when investors started questioning sovereign risk, as they may also do in the US in the future.
Now in Europe as realise there should be an interest rate differential. However, at the moment some countries cant get financing, let alone borrow at a higher rate! They must go to the ECB.
Question if there is a single unified Europe supporting each other fiscally, or will credit risk for each country be separated. Yet the EURO rises. The market believes this project will not end. But writedowns for each individual country is possible, so each country is responsible for there own fiscal position.
However doubt in soveriegn credit are generating a policy of budget deficit reduction to regain crediability. However, cutting costs from the only body that was previously spending will reduce GDP growth, which will increase the weight of the debt. Since the currency cannot adjust to make regions more competitive, this forces price and wage reductions: deflation. Countries experiencing deflation in europe, hence relative hardship is what is required to make Europe competitive? Did lived to well and now need to suffer to equilibriate their progress! Is this what German minds are thinking. The longer we wait, the more deflation they will suffer and it will help Europe grow later.
However, weakening governments and potential write downs will affetc teh European banking system. Hence should be encouraged to raise equity now! Writedowns, or their fears, will reduce lending, which will not support economic growth.
Company funding can only come from the capital markets, and if poor clarity in how Europe will evolve will affect their cost of borrowing, the Europeans are not using capital efficiently, paying too much for it by not committing to a plan now.
This lack of clarity was noticed when the weaker European countries needed to be bailed out by the IMF, i.e. Hungary
Different European countries have different economies and suffer different inflation, have different structured economies and need different interest rates. When Spain could borrow at 4%, it encouraged the country to borrow to fund its lifestyle whihc was being de graded by a lack of wage increases relative to the cost of living. Will fiscal union help solve this problem? Different countries should borrow at different rates hence affect the cost of borrowing in a different country. Part of a countries GDP should contribute to the EC, which can help in other services, ie funds to help develop Europe. The EC will help to oversea countries to ensure European funds are to help the country to become more productive, not to help speculation.
Each countries fiscal position should be transparent so each country has its own cost to borrowing.
Should let Portugal write off its debt and then help re build a new European structure. There must be punishment, destruction, to help build the new.
If want a unified Europe, need a unified regulator that each country contributes relative to their GDP in an amount agreed by everyone.
European funding should not be provided if company does not have a competitive advantage, ie better than money goes elsewhere in Europe? Or to start a new facility and then judge if they are good or not. It is to start an opportunity, not to leave countries as they are today in the future. Need to give them an opportunity. If they dont take it, they dont get further funding in that area. Let Europe compete against each other under a common curerncy!
Development of the EU was a piece by piece process of social engineering. This must continue if europe will improve. But not based on automatic feedback mechanism, but based on generating a small solution to a big problem continuously. The European way.
Maastrict treatty suggested no more budget deficit then 3%, and gobt debt not more than 60% of GDP. But no adequate enforcement mechanism. Ie no punishment by receiving fewer European funds, or funds from the ECB more expensive, or market rates more expensive because no explicit bailout. The EU should simply be a structure that allows more efficient movement around Europe, not telling a country how to be ruled or bail it out if it does something wrong. It is a framework that should allow countries to interact more easily should they want to be a common law and rules and a common currency. That is it. That is all it can afford to be at the moment.
Really it is a banking crisis rather than a fiscal crisis? Banks hold the below par bonds and they have not been marked to market. So European banks need to be recapitalised. Banks cannot access short term financing? Need to go to ECB?
Stress tests out in July.
If create fiscal discipline but have loose monetary policy (ie ECB buys Spanish debt) there may be no Spanish fiscal crisis? Especially if Spain eliminates the huge burden of unncessary admin.
Europe needs to grow itself out of problems. First solve the banking problem. This can be the first positive sign. If tighten fiscal policy, loosen monetary (they increased rates). Invest in education and infrastructure to increase innovation and the connection between Europe.
G20 endorsed a budget deficit reduction by half for 2013. A deflation risk.
The worlds leaders have to lead markets, not follow them. Need to forge a consensus under a common agreement, but enough flexibility that each country can do their own.
Saturday, 23 April 2011
Cycles are not perpetually fueled...understand the drivers
Certain economies at the moment are viewed positively because they generally have a positive trade balance or control of their budget. The question is how have the managed to do this?
Norway, for example, has the advantage of finite oil assets which it is using well and re investing into its economy to have a life after oil (good management and luck it has such valuable resources).
China has abundant cheap labour (a large country with a large population) and an economy which as each day passes is more integrated into the global economy. As they get wealthier using this resource the labour will not be as cheap so the business plan for the country has to change. I.e. more focused on education and innovation. This transition must be followed closely. In any period of good growth, dont assume it is perpetual. Understand why it is occuring and hence be able to foresee when it will end. If the managers of that economy are doing the same they are capable people and they are likely to find new sources of wealth. However, history tells us over time othr countries for luck or otherwise will become more competitive (for they fact they were not getting as rich as the country of interest!).
Norway, for example, has the advantage of finite oil assets which it is using well and re investing into its economy to have a life after oil (good management and luck it has such valuable resources).
China has abundant cheap labour (a large country with a large population) and an economy which as each day passes is more integrated into the global economy. As they get wealthier using this resource the labour will not be as cheap so the business plan for the country has to change. I.e. more focused on education and innovation. This transition must be followed closely. In any period of good growth, dont assume it is perpetual. Understand why it is occuring and hence be able to foresee when it will end. If the managers of that economy are doing the same they are capable people and they are likely to find new sources of wealth. However, history tells us over time othr countries for luck or otherwise will become more competitive (for they fact they were not getting as rich as the country of interest!).
Pensions
Here is a factor that is a consequence of a number of macro variables:-
1. Demographics, i.e. Japan need more immigrants
2. Economic management (i.e. what liabilitis a government commits to and how they react to the facts, i.e. borrow more or reduce the liabilities by indexing benefits to life expectancy or developing new solutions, i.e. SIPPS where pension costs are incentivised to be done by the individual via tax breaks)
Funded or unfunded pensions
Funded UK, USA, Netherlands (pension assets as % of GDP is Japan 64%, Britain 101%, Australia 103%, Netherlands 134%)
Unfunded most of Europe (pension assets as % of GDP is Germany 14%, France 5%)
If unfunded, means money comes from workers taxes. If funded, they come from investment income
Many states in the US have a balanced budget mandate. If there are pension shortfalls, cuts have to be made elsewhere to keep the commitment
Tax burden set to rise or quality of retirement package will fall.
Unions are strongest in the public sector. The elder population have a large voting block
Fund management companies benefit from more self invested personal pensions
Older population implies more healthcare services
Targets: FUND MANAGEMENT, HEALTHCARE, ELDERLY SERVICE COMPANIES?
Likely a new institution has to be created to police this issue. Many pension providers are running away from the problem leaving it for future generations to solve by increased tax and contributions. We need pensions to be reviewed annually if if contributions or taxes have to be increased now, they should be increased now!
Should consider pension liabilities as high level senior debt. Hence should be discounted at this rate. Often use AA corporate bond rate. Lower discount rate will make the liability look bigger.
Conclusion
INCREASING SAVING RATE to fund the personal pension
HIGHER TAXES to meet past agreed liabilities
LESS CONSUMER SPENDING
Potential slower ECONOMIC GROWTH as shake off the pension burden (as well as the debt burden from over consuming)
Requirement for increased immigration to change the support ratio!
Older people working! Increase productivity as more people at one moment in time working! This can be beneficial for ECONOMIC GROWTH (GDP)!
Less government money in public pensions! More capital to more productive activities! (this requires pension reform and can be positive for freeing up govt spending, but reduces consumer spending. Who is the most efficient?)
More money in risk assets to generate a return. Can reduce dependence on bank financing and more liquidity in capital markets
1. Demographics, i.e. Japan need more immigrants
2. Economic management (i.e. what liabilitis a government commits to and how they react to the facts, i.e. borrow more or reduce the liabilities by indexing benefits to life expectancy or developing new solutions, i.e. SIPPS where pension costs are incentivised to be done by the individual via tax breaks)
Funded or unfunded pensions
Funded UK, USA, Netherlands (pension assets as % of GDP is Japan 64%, Britain 101%, Australia 103%, Netherlands 134%)
Unfunded most of Europe (pension assets as % of GDP is Germany 14%, France 5%)
If unfunded, means money comes from workers taxes. If funded, they come from investment income
Many states in the US have a balanced budget mandate. If there are pension shortfalls, cuts have to be made elsewhere to keep the commitment
Tax burden set to rise or quality of retirement package will fall.
Unions are strongest in the public sector. The elder population have a large voting block
Fund management companies benefit from more self invested personal pensions
Older population implies more healthcare services
Targets: FUND MANAGEMENT, HEALTHCARE, ELDERLY SERVICE COMPANIES?
Likely a new institution has to be created to police this issue. Many pension providers are running away from the problem leaving it for future generations to solve by increased tax and contributions. We need pensions to be reviewed annually if if contributions or taxes have to be increased now, they should be increased now!
Should consider pension liabilities as high level senior debt. Hence should be discounted at this rate. Often use AA corporate bond rate. Lower discount rate will make the liability look bigger.
Conclusion
INCREASING SAVING RATE to fund the personal pension
HIGHER TAXES to meet past agreed liabilities
LESS CONSUMER SPENDING
Potential slower ECONOMIC GROWTH as shake off the pension burden (as well as the debt burden from over consuming)
Requirement for increased immigration to change the support ratio!
Older people working! Increase productivity as more people at one moment in time working! This can be beneficial for ECONOMIC GROWTH (GDP)!
Less government money in public pensions! More capital to more productive activities! (this requires pension reform and can be positive for freeing up govt spending, but reduces consumer spending. Who is the most efficient?)
More money in risk assets to generate a return. Can reduce dependence on bank financing and more liquidity in capital markets
Friday, 22 April 2011
Value investing may be less efficient if have macro instability?
In EM one may see that value investing has to be approached differently...one may want to sell sooner as the macro environment cannot be explicitly assumed to be stable...the margin of safety may be larger...
Choose countries where macro stability is as close as in many DM...this is where value investing has worked best because in the long term the macro environment has not been a big problem...
Choose countries where macro stability is as close as in many DM...this is where value investing has worked best because in the long term the macro environment has not been a big problem...
Macro variables
Though we practice the idea of purchasing "good companies at good prices", we cannot ignore how the macro environment can affect the valaution of financial securities. We do this because:-
1. We are buying a minority interest in a company hence have little say in how the company should react in a difficult environment
2. We cannot expect clients are as patient as us in receiving results. Hence, we must be aware how the macro environment can affect portfolio performance in the medium term (next three years)
3. We are buying participation in companies via an auction based system that will react emotionally to changes in the macro environment. Opportunities to buy and sell should be expected to be created by rash decisions from investors who do not apply a long term time horizon
We focus on a few variables and compare them in different economies to get a general picture. We also add a TIME factor to appreciate how quickly they can change (1 weeks, 2 months, 3 years 4 decades) and whether the market or authorities most dominate their outcome:-
COST OF MONEY
Base interest rate TIME 2, AUTHORITIES
Libor rate TIME 1, MARKET
Government bonds (yield curve), TIME 1 MARKET
VALUE OF MONEY
Inflation TIME 2
Currency TIME 1
M1, M2, M3 supply, TIME 2, AUTHORITIES
ECONOMIC GROWTH & STRUCTURE (how money is used)
GDP breakdown (income and expenditure)
Profit/GDP
Wages/GDP
Savings/GDP
Consumer spending/GDP
Equity markets/GDP
TRADE & MANAGEMENT
Trade balance
Budget balance
Government and consumer debt
DEMOGRAPHICS & EDUCATION
Old/young
Pension liabilities
Do young people move abroad to get educated or get a good job and then come back?
How many graduates/Universities? % of population
POLITICAL FREEDOM
1. We are buying a minority interest in a company hence have little say in how the company should react in a difficult environment
2. We cannot expect clients are as patient as us in receiving results. Hence, we must be aware how the macro environment can affect portfolio performance in the medium term (next three years)
3. We are buying participation in companies via an auction based system that will react emotionally to changes in the macro environment. Opportunities to buy and sell should be expected to be created by rash decisions from investors who do not apply a long term time horizon
We focus on a few variables and compare them in different economies to get a general picture. We also add a TIME factor to appreciate how quickly they can change (1 weeks, 2 months, 3 years 4 decades) and whether the market or authorities most dominate their outcome:-
COST OF MONEY
Base interest rate TIME 2, AUTHORITIES
Libor rate TIME 1, MARKET
Government bonds (yield curve), TIME 1 MARKET
VALUE OF MONEY
Inflation TIME 2
Currency TIME 1
M1, M2, M3 supply, TIME 2, AUTHORITIES
ECONOMIC GROWTH & STRUCTURE (how money is used)
GDP breakdown (income and expenditure)
Profit/GDP
Wages/GDP
Savings/GDP
Consumer spending/GDP
Equity markets/GDP
TRADE & MANAGEMENT
Trade balance
Budget balance
Government and consumer debt
DEMOGRAPHICS & EDUCATION
Old/young
Pension liabilities
Do young people move abroad to get educated or get a good job and then come back?
How many graduates/Universities? % of population
POLITICAL FREEDOM
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