Outside the Box

The Burning Questions For 2015

December 18, 2014

Louis Gave is one of my favorite investment and economic thinkers, besides being a good friend and an all-around fun guy. When he and his father Charles and the well-known European journalist Anatole Kaletsky decided to form Gavekal some 15 years ago, Louis moved to Hong Kong, as they felt that Asia and especially China would be a part of the world they would have to understand. Since then Gavekal has expanded its research offices all over the world. The Gavekal team’s various research arms produce an astounding amount of work on an incredibly wide range of topics, but somehow Louis always seems to be on top of all of it.

Longtime readers know that I often republish a piece by someone in their firm (typically Charles or Louis). I have to be somewhat judicious, as their research is actually quite expensive, but they kindly give me permission to share it from time to time.

This week, for your Outside the Box reading, I bring you one of the more thought-provoking pieces I’ve read from Louis in some time. In Thoughts from the Frontline I have been looking at world problems we need to focus on as we enter 2015. Today, Louis also gives us a piece along these lines, called “The Burning Questions for 2015,” in which he thinks about a “Chinese Marshall Plan” (and what a stronger US dollar might do to China), Abenomics as a “sideshow,” US capital misallocation, and whether or not we should even care about Europe. I think you will find the piece well worth your time.

Think about this part of his conclusion as you read:

Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder.

Wise words indeed.

A Yellow Card from Barry

What you don’t often get to see is the lively debate that happens among my friends about my writing, even as I comment on theirs. Barry Ritholtz of The Big Picture pulled a yellow card on me over a piece of data he contended I had cherry-picked from Zero Hedge. He has a point. I should have either not copied that sentence (the rest of the quote was OK) or noted the issue date. Quoting Barry:

Did you cherry pick this a little much? 

“… because since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non-shale states have lost 424,000 jobs.”

I must point out how intellectually disingenuous this start date is, heading right into the crisis – why not use December 2010? Or 5 or 10 years? This is misleading in other ways:

It is geared to start before the crisis & recovery, so that it forces the 10 million jobs lost in the crisis to be offset by the 10 million new jobs added since the recovery began. That creates a very misleading picture of where growth comes from.

We have created 10 million new jobs since June 2009. Has Texas really created 4 million new jobs? The answer is no.

According to [the St. Louis Fed] FRED [database]:

PAYEMS – or NFP – has gone from 130,944 to 140,045, a gain of 9,101 over that period.
TXNA – Total Nonfarm in Texas – has gone from 10,284 to 11,708, for a gain of 1,424.

That gain represents 15.6% of the 9.1MM total.

Well yes, Barry, but because of oil and other things (like a business-friendly climate), Texas did not lose as many jobs in the recession as the rest of the nation did, which is where you can get skewed data, depending on when you start the count and what you are trying to illustrate.

My main point is that energy production has been a huge upside producer of jobs, and that source of new jobs is going away. And yes, Josh, the net benefit for at least the first six months until the job non-production shows up (if it does) is a positive for the economy and the consumer. But I was trying to highlight a potential problem that could hurt US growth. Oil is likely to go to $40 before settling in the $50 range for a while. Will it eventually go back up? Yes. But it’s anybody’s guess as to when.

By the way, a former major hedge fund manager who closed his fund a number of years ago casually mentioned at a party the other night that he hopes oil goes to $35 and that we see a true shakeout in the oil patch. He grew up in a West Texas oil family and truly understands the cycles in the industry, especially for the smaller producers. From his point of view, a substantial shakeout creates massive upside opportunities in lots of places. “Almost enough,” he said, “to tempt me to open a new fund.”

On a different note, everyone is Christmas shopping and trying to find the right gift. Two recommendations. First, the Panasonic wet/dry electric razor (with five blades). I just bought a new set of blades and covers for mine after two years (you do have to replace them every now and then); and the new, improved shave reminded me how much I was in love with it when I bought it. Best shaver ever.

Second, and I know this is a little odd, but for a number of years I’ve been recommending a face cream that contains skin stem cells, which I and quite a number of my readers have noticed really helps rejuvenate our older skin. (I came across the product while researching stem-cell companies with Patrick Cox.) It clearly makes a difference for some people. I get ladies coming up all the time and thanking me for the recommendation, and guys too sometimes shyly admit they use it regularly. (It turns out that just as many men buy the product as women.) The company is Lifeline Skin Care, and they have discounted the product for my readers. If you can get past the fact that this is a financial analyst recommending a skin cream for a Christmas gift, then click on this link.

It is time to hit the send button. I trust you are having a good week. Now settle in and grab a cup of coffee or some wine (depending on the time of day and your mood), and let’s see what Louis has to say.

Your trying to catch up analyst,

John Mauldin, Editor
Outside the Box

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The Burning Questions For 2015

By Louis-Vincent Gave, GavekalDragonomics

With two reports a day, and often more, readers sometimes complain that keeping tabs on the thoughts of the various Gavekal analysts can be a challenge. So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.

1. A Chinese Marshall Plan?

Discuss This

3 comments

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Comments

Andrew Fately 49963

Yesterday, 4:54 a.m.

It strikes me that the idea that peer-to-peer lending will ever be able to flourish, or at least any time in the next 20 years, is misguided.  What banks do at their core is make credit decisions.  Who should be able to borrow money, what is the probability of default and what is the appropriate price accordingly.  While the market as a whole may be able to absorb that risk, no individual is going to be happy about taking the losses.  Essentially, a bank serves the function of being the market as a whole, collecting an array of risks and running the probabilities to determine the appropriate pricing.
Face it, most ‘investors’ today are unwilling to read the first paragraph of a prospectus, let alone do the financial analysis necessary to be informed.  There is virtually no possibility that these peer lenders are going to be willing to do the work necessary to make good decisions.  After all, we know how hard it is for banks, and they have people being paid to do nothing else.  The first time there is a big default on one of these P2P networks, there will be lawsuits galore and calls for regulation.  And then you are just back to where we are now, except without actual bankers trained in the art (science) of making loans.
While banks may look different in the future, and an effective Glass-Steagle act may be reinstated, the business of making loans and earning a risk adjusted returns benefits from economies of scale like so many businesses.  I don’t care what Apple-pay is trying to do, they are still not going to be making loans, certainly not on a commercial basis.

jack goldman

Dec. 18, 4:06 p.m.

John, I think you are missing the whole point. We are in a counterfeit currency subsidy system. Wall Street prints $100 bills for five cents. Main Street works all day for five cents, a one hundred dollar debt note. This ends badly. The exchange rate on real silver money is 13:1. The Dow was $995 in 1966. At 13x that means just break even is $13,000 on the Dow. Dow is up 1% a year. It’s not profit, it’s currency debasement, counterfeiting, where a communist politburo central bank picks winners and losers. Wall Street, bankers, brokers, asset owners, and government employees, picks Wall Street to win. Main Street loses. The children, families, renters, employees are used as collateral for loans. Food prices are not up. The buying power of the counterfeit currency is down. It’s all a fake misallocated economy where Wall Street is guaranteed to win and Main Street is guaranteed to lose. We no longer have an economy where free markets pick asset allocation. We have a centrally planned Communist 2.0 Politburo where the private, secret, foreign owned Central bank picks politically correct, censored, winners and losers.

The problem is counterfeit currency, which is misallocated. Silver money, real money, is not misallocated. I think the system has to break, like getting a divorce, before the wife abuse stops and a new way is created. Using debt notes as money is a fools game, misallocating resources by the Fed, the counterfeiter. Get out of debt. Stop using debt as money. Stop letting banks and government pick winners and losers. Prepare for a collapse in the loss of buying power when the dollar is repudiated. We just don’t know when. Good luck to us all. Good luck.

DAVID WEBB 35412

Dec. 18, 2:56 p.m.

“Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder.

Wise words indeed.”

That last statement is where I see a fatal flaw in investing wisdom.

A few big winners make up for a whole host of losers. 

How many losers would someone have to sell at the right time to make up for not holding on to great investments like Priceline, Apple, Amazon and Google?

Calculate what your net worth would be if you had invested just $10000 in each of these companies in the past 10 or 20 years. Your investment would be several million today.  All the rest of your investments could have gone to zero and you would be just fine.

Trying to pick out losers is not a good strategy, too many winners are sold in the process.