Seth Klarman wondered when the meteoric rise in stock markets will rise. Howard Marks wondered that too. In Marks' latest memo, he answered by saying the markets will fall when it will. He does not know when, but knows that eventually, it will.
Marks' Oaktree Capitall recently issued shares for its stock (OAK). Insiders are cashing out.
Klarman wrote: Someday...
Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy – maybe not today or tomorrow, but someday. Someday, QE will end and money won’t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.
Someday, professional investors will come to work and fear will have come to the markets and that fear will spread like wildfire. The news flow will be bad, and the markets will be tumbling.
My Guess
The markets played euphoria before. Well before 2008. Back in 1999-2001, batteries were all the rage. Batteries are once again in vogue. See PLUG. In the electric car market, look at Tesla.
Image source: Yahoo Finance
In social media, Facebook and Twitter get all the headlines, but Amazon and Yelp are the ones to watch.
In the end, all roads could lead from China. Demand for iron ore and energy dropped. Exports dropped 18% last month. China allowed its first debt default. This is unprecedented.
George Soros spoke at HK University, and fielded a number of questions from students and professionals. Soros was last covered on this blog last October.
If you want to spend even a moment this year on finance and economics, this is the one video (89 minutes) to watch. Soros provide his opinion on the current financial crisis, regulatory reform, the economy in developed countries versus developing countries, and on China.
Here are the summary notes:
About the Proposed Solutions to Current Crisis:
Will result in protection of system plus extra protection with Regulators part of that solution
Regulators are imperfect because bureaucratic and worse, they are subject to political influence
Imposing capital requirement justified (Volker proposal is valid)
At 49 minutes in the video, a young student told the audience and Soros he did not understand Soros' writings at age 13, at college, and now, at age 30, he still cannot understand it.
He asks Soros: "If you cannot influence the market, how do you spot turning points?"
Soros replies:
Markets move far away from equilibrium as well as towards equilibrium. When a positive feedback occurs, it is a bubble. When a negative feedback occurs, it is moving towards equilibrium.
Will market move as a bubble or to equilibrium? Greenspan saw bubble in 1996, but Soros said you cannot predict how far the bubble will go. Further, bubbles are not irrational. It is rational to participate in bubble. When bubble is mature, he sells or goes short.
Other important points:
An investor could have been short in 1996 but not alive (insolvent) in 2000. This follows the old adage that markets can remain irrational longer than an investor can stay solvent
Soros shorted internet stocks after they fell, but had to cover because the stocks rose again
Conclusion: there is no recipe for getting the market right!
On China:
The China / Taiwan relationship is a negative sum gain right now
For world to be prosperous, a positive sum gain is required
Soros not a favorite for China. When he is asked his opinion on China opening up of society (culturally) to the world, his response is the following:
Open society through a critical process would raise prosperity
China developed an efficient critical process, but it is confined to the leadership
This leadership requires constant consultation to see what is being done wrong
One of the strengths of China today is leadership
China's leadership is self-critical and is anxious about doing the right thing
China needs to allow outside criticism as well
On the plus side, its internal critical process is efficient
Soros notes that China has emerged as a leading power in the world: it is rising while the U.S. is sinking; rest of the world turns towards positive influences.
China is the motor.
Finally,
the American consumer was the motor before financial crisis
Rest of world turning towards China
China must pay attention to how the world views it: it can only rise in a way where it is accepted by the world
In response to a question on Soros causing the color revolution, his response is that it is easy to blame someone else than to look at one’s own shortcomings.
Soros is not in favor at all of revolutions, as revolutions destroy without creating a world order. He believes in critical thinking and gradually improving the order rather than revolutions.
His viewpoint on the current crises is that:
the Greek crisis will pass and (EU) solvency requirements will be met
China/India/Brazil will grow faster than the developed world
Michael Pettis is a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets, and a Senior Associate at the Carnegie Endowment for International Peace.
So, what business does this blog or any individual have, in taking advice or developing/validating a theme for an investment portfolio?
China is a driving force in influencing currency levels and commodity prices. The important point made by Pettis is marked with a bold font.
I spend a lot of time talking to large hedge funds and institutional investors – with at least three or four one-on-one meetings a week – on China and market conditions. It worries me that recently I have heard investors say many times, generally very sophisticated investors, that we are clearly in a bubble and the best strategy is to ride it out as long as we can. This has almost become one of the mantras of sophisticated investors – the less sophisticated, I guess, assuming that the crisis is safely behind us.
It worries me because of course we can’t all collectively ride the bubble and bail out before everyone else does. I wonder if this means that an awful lot of the big funds can be expected to rush to the doors at the same time when things turn bleak. If so, of course, that means we are likely to see both the upside and the downside market risks increase. Several of my fund management friends have insisted the problem has to do with the nature of hedge fund compensation. Most of the hedge funds were hurt pretty badly in the financial crisis, but a very large number of them were very pleasantly surprised by how quickly they’ve been able to make back a substantial share of their losses.
This means that recovering the high-water mark, which many thought would take years, has suddenly become a lot easier, and many expect that if the markets go on as they have been doing for another year or so they’ll be back in business (that is, able to charge performance fees once again). This may create a natural, albeit dangerous, incentive to take big risks on the likelihood of a rapid recovery.
The words "Green Shooting" have popped up in media in recent weeks. This catch phrase is used to describe the idea that there are signs the economy is reviving. Does hope spring eternal?
The rally is two solid months old, but as I wrote numerous times, it is based on less bad news (for jobs and housing), on companies beating already lowered expectations, and on enthusiasm for a brighter future. Yesterday, consumer spending figures were released. In April, sales declined 0.4%. March sales declined by a revised 1.3%. Foreclosure notices increased 32%.
It would appear that there is a greater likelihood that the stock market will at least begin a steady decline, because the rally was based on hope and emotion instead of unchanging economic and social behavioural facts:
The average svings rate in the U.S. will continue to rise
Unemployment will remain steady or rise
Foreclosures will likely increase (there are stories that foreclosures were stalled due to government policy, not due to economics)
Commercial real estate remains a significant concern
Bank-held mortgages will remain a concern (ARM's, etc.)
Capacity is still in excess and will need to shrink.
Another thing to watch carefully is the price of commodity prices, especially and copper and oil. The word "de-coupling" is reaching the headlines quite often. The premise of de-coupling is that China's economy is separate from world economies, and therefore China will grow/expand/consume whilst the world does not.
I believe that this is a silly idea.
China's production of goods that consume raw materials depends on other countries making those orders. What is true, however, is that China is one of the largest savers in the world. The country has a lot of money. Its government is spending right now. This will raise the price of raw materials (this is happening now, although much of the gains is due to market enthusiasm for a global recovery as early as Q4/09).
The bigger question is not China's spending. It is what China intends to do with its holdings in US debt. Investors will need to monitor the relative currency strength of China against the US dollar. This will be an indicator for whether China is spending to reduce its position in the US, or if indeed its economy is strengthening, independent of all other countries.
Investor Summary Notes from John Mauldin's Front Line Thoughts Newsletter
Article Title: Time for a Reality Check
China has seen its year-over-year exports drop by 17.5% and imports by 43%. These are not signs of a healthy economy. That being said, China is massively increasing bank loans and other stimulus-type spending to try and offset the effects of the global downturn. But putting 20 million people back to work in a short time is a daunting task
Japanese GDP was down by 9% (!) last quarter. Many of the largest corporations are seeing exports drop by 20-30% and are engaged in massive layoffs, larger proportionally than in the US.
Write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars!
The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.
Mauldin Concludes that:
..."I don’t think we know the real extent of what it is going to cost to shore up the banking system. But the consensus among the financial leadership is that we have to fix the credit system no matter what the costs, or risk a repeat of the Great Depression. That is the essence of what Irving Fisher taught us some 75 years ago, when faced with a deflationary debt crisis."
...But the heavy lifting is going to be done by the Fed. Watch their balance sheet expand. And watch Treasury and the FDIC come back and ask for massive amounts of money to take over very large insolvent banks.
For S&P 500 Targets:
David Rosenberg of Merrill Lynch forecasts a 20% drop from today’s close of 829
40% of the earnings for the S&P 500 are from outside the US. It is hard to see how those earnings are not going to be deeply affected. Let me reiterate my continued warning: this is not a market you want to buy and hold from today’s level. This is just far too precarious an economic and earnings environment
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore To subscribe to John Mauldin's E-Letter please click here: http://www.frontlinethoughts.com/subscribe.asp
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