Outside the Box

If Only We Could Blame China

March 4, 2016

I regularly read Niels Jensen’s monthly letter, and this month’s edition is exceptional. Longtime readers will know that he has been featured in Outside the Box several times over the years. Today, Niels challenges the widespread belief that the steep drop in commodity prices is all about the economic slowdown in China. He also questions whether China is in fact more a victim than a villain of the recent plunge in global equity markets. He arrives at the conclusion that high and rising debt levels amongst corporates in emerging markets, in combination with a strong US dollar – particularly when measured on a trade-weighted basis – is a more likely cause of the fall-off. This is a very nonconsensus view, but it’s one that I found fascinating to seriously think about. And you probably should, too.

Will the current turbulence in global markets lead to a repeat of 2008, as many have suggested? Niels’ take on that question is interesting and convincing; but rather than spill his beans, I’ll turn you over to him.

I finish this quick introduction in a very cold and snowy Chicago – quite the contrast from the weather we’ve been enjoying in Texas. For the past two days I have been speaking about and in meetings discussing portfolio design, which is a topic I don’t often write about but do get a lot of questions about.

I’ve thought hard the last few years about how we should structure portfolios, especially our core positions, given my view of how the world is going to transform over the next 10 years. How can we make certain we’re in the markets at the right times and not in there when we don’t want to be? Or at least be reasonably sure? I’ve begun sharing my ideas with senior investment professionals around the country, and they and I think I may really be on to something special. I will be sharing these ideas in private and then making them publicly available within the next few months.

Working on the new book, it’s a challenge to try to describe not only how the world will change in 20 to 25 different areas but also how we should invest in the meantime. This process of thinking more long-term but accepting that we live and invest in a short-term world has gotten me to reconsider what to many of us has been a basic assumption. Is it possible that we are diversifying the wrong parts of our portfolios? Maybe… Coming soon.

It’s time to put on the jackets and scarves and gloves and brave the rush-hour traffic from Wheaton into downtown. In snow and ice. I can’t tell you how much I’m looking forward to it. At least I’m not the one driving. And yes, I will be very buckled up and padded…

Your getting more excited about the future analyst,

John Mauldin, Editor
Outside the Box

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If Only We Could Blame China

Niels C. Jensen, Absolute Return Partners
March 1, 2016

“When you combine ignorance and leverage, you get some pretty interesting results.”

– Warren Buffett

One thing we are exceptionally good at in the West is to blame China for pretty much anything that goes haywire. If you believe various commentators, it is all China’s fault that global equity markets have caught a serious cold…

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Comments

Rolf H Parta

March 11, 7:43 p.m.

Another comment:  As it was taught to me, the traditional Chinese allocation of funds was one third to live on, one third into gold or gold jewelry [as hedge against government money becoming useless once again], and one third in liquid assets ready to take advantage of an opportunity that turns up.  Seems to me that China is pushing consumption up to that third already and it may not go any higher in the short run.

Rolf H Parta

March 11, 7:24 p.m.

I seem to recall that Reinhart and Rogoff [writing in “this Time is Different:  Eight Hundred Years of Financial Folly”] pointed out that the ‘usual’ course of relief after a debt bubble in the private economy is for government to take on the debt.  Certainly, this is exactly what has happened in the DM economies—continual [and, in the case of America, rising] deficits have ballooned the debt.

Elsewhere, we observe that increases in government deficits are usually coupled with increases in business profits [which business then uses to pay down their debts, freeing up the funds so that government can borrow them to fund the deficits].

Of course, Reinhart and Rogoff also pointed out that there are exactly ZERO recorded instances of this government debt bubble being solved without serious economic pain.

When that economic pain occurs [and I do not have a functional crystal ball, so your guess is as good as mine], we can expect demand for commodities to fall off the table ... and these already overindebted EM firms to go bankrupt—along with half or more the US shale oil industry and [once again] housing prices [as foreclosures rocket up again with the loss of jobs].

Batten down the hatches, boys!  There’s going to be quite a storm.

abbjrmd@gmail.com

March 8, 1:09 a.m.

As government debt mounts it sucks the blood of the private sector. Hence slowing growth worldwide including the US. The establishment politicians obviously have no incentive to control the controllable and so my view is that we are headed into recession worse than before after experiencing an incomplete economic recovery after the last one—-for the first time ever according to ECRI. The Fed is on track to raise shortterm rates again sometime this year for the first time ever during contraction—-only for the purpose of having an arrow in their quiver for the next recession. Negative interest rates will hasten our economic demise and so given their lack of significant effects in other nations, I believe it is unlikely the Fed would adopt NIRP.

Curt Sanders

March 6, 12:44 p.m.

Fascinating analysis, thank you. To me it is still about fundamentals and globally they are weak everywhere especially in the EM countries. I agree with Soros China is coming down hard. Their highly unorthodox development system is coming back to haunt them now. Growth for the Middle Kingdom in 16’ at best 3%( low probability), quite possibly 1.5 to 2. Chinese banking Debt is a major drag on growth now. Still CBs and Shadow Banking completely out of control… Somehow the Politburo has got to get a handle…Regarding oils valuation, it will probably be most impacted by Irans production numbers. Barring a geopolitical event. No confirmed bottom till maybe 2nd 3 rd qtr. $20 a barrel is till a possibility…to many starving producers…

jack goldman

March 4, 3:23 p.m.

I’m a simple man with a simple idea. Dow was 1,000 silver dollars and 1,000 paper dollars in 1966. Dow is 1,000 silver dollars and 17,000 paper dollars in 2016. There is no increase in prices in real constitutional US money, the silver coins. It’s a counterfeiting currency bubble that will be studied for centuries the way we study Germany’s hyper inflation. What were the elites thinking? How will the debt be discharged? 

Real household median income is DOWN 36% in real silver coins from 1966 to 2016. The middle class has been wiped out by counterfeiters. I have to protect myself from Wall Street bankers, brokers, owners and over paid, over retired, over health cared spoiled government employees, all part of the same blood sucking vampire squid known as Wall Street counterfeiting currency to benefit the elite 1%. Good luck to us all.