Today's Outside the Box comes to us from England. My European partner Niels Jensen from time to time sends me some of the best letters he reads from the hedge fund world. He is an excellent filter for me, and this week's Outside the Box offering is no exception. Below is the November commentary from Eclectica fund manager Hugh Hendry. He challenges the current preoccupation with the falling dollar and China, and posits what would happen if that thinking is wrong? It offers some very thought-provoking ideas. You can contact them for more information at firstname.lastname@example.org or visit their website: http://www.eclectica-am.com
Your wondering if we are all turning Japanese analyst,
I get more questions about gold than other single topic. The fascination for the "barbarous relic" among my readers is clear. This week in Outside the Box we take a look at the gold market, its growth-to-date, and potential future investment opportunity. Doug Casey and David Galland of Casey Research provide an intriguing analysis of the gold market today.
I have known Doug and David a very long time. They take their research on gold stocks very seriously, and have been quite successful over the past years. While they are more bearish on the economy than I am, their analysis of the natural resource markets and gold stocks in particular has been spot on. In the mid-80's I wrote my first newsletter which focused on gold stocks. I sold it after about a few years as I became bearish on gold, but kept up the interest in the stocks.
But one thing I learned. If you are not on the ground talking to the men who are doing the work, getting into the behind the scenes facts, you are going to have a hard time making money even in a gold bull market. Doug is one of the few guys that truly knows what is going on in the market. He knows the difference between those who are serious about mining and those who are simply promoters.
If you are interested in specific gold stocks and gold stock investing, I really suggest you subscribe to Doug Casey's letter The International Speculator. They will send you his recent update which covers in-depth all the stocks he likes and a few he says to avoid. For more information on how to subscribe, please click here.
In my Friday letter, "Thoughts from the Frontline," I touched briefly on the Yen Carry Trade and its effects on asset prices. Just what should investors be concerned with and profit from in a market bent on volatility and anchored by a new seat at the Fed? My good friends at GaveKal have written an excellent and timely article on global liquidity and its implications for the markets.
Charles and Louis-Vincent Gave, along with Anatole Kaletsky, are each co-founders of GaveKal, a global investment research and management firm. Their expertise on monetary policy and global trends is often very insightful and highly sought after. In one of their more recent commentaries, The Leverage in the System and the Weak U.S. $$, they take an in-depth look at the Bank of Japan, Oil, the U.S. Dollar and the Euro. This is a very interesting take on the strength of the dollar and very much Outside the Box.
I trust that you will pay less attention to the manic noise of the markets and find this piece to be an enlightening perspective on the global economy.
We are almost half way through the year and the markets are providing us with plenty of trends and issues which we must take into account. From 6 year market highs to the cooling of the housing market, from the energy bonanza to China's effects upon globalization, there is no shortage of topics of interest in the financial press. But as of late, I have been receiving several questions from my subscribers focusing special attention towards the recent commodity boom and the dollar with respect to the future of both.
Morgan Stanley's Chief Economist, Stephen Roach, provides us with some valuable insights on both of our subjects at hand. My long-term readers are familiar with Mr. Roach and the independent perspective that he provides on noteworthy economic conditions. This week's Outside the Box encompasses not one but two of his articles, a global outlook on the "Commodity Bubble" and "Dollar Spin." I entrust that you will enjoy Mr. Roach's commentary and seek to glean some wisdom from this wealth of information.
About a month or so back I wrote about some of my thoughts regarding interest rates and monetary policy being affected by both velocity and the money supply (see When Will the Fed Stop?). In my letter, I highlighted some exceptional research performed by my good friends at GaveKal. Well they have done it again, this time turning their attention towards Japan and the global economy.
Founded in 1999 by Charles and Louis-Vincent Gave and Anatole Kaletsky, GaveKal is a global investment research and management firm that provides an array of financial services worldwide. They are best known for their study of monetary policy, fiscal policies, secular trends, technical analysis and asset class valuations which they use to form a unique perspective on the relationship between the financial markets and the global economy.
In "What We Missed: Japanese Liquidity Flows," we are presented with an in-depth analysis of the role of Japan amongst the growing interconnectedness of today's financial markets. Both the past and current decisions of Japan's policy makers have had a profound effect on the global economies that has produced a new metric which they call the "international yield curve." I think that you will find this study to be as equally intriguing as I have. It is, indeed, outside of the box thinking.
Every month I read the outstanding commentary by Bill Gross, Paul McCulley and others at PIMCO. This month they have comments by Chris P. Dialynas, Managing Director, Portfolio Manager and Senior Member of PIMCO's Investment Strategy Group.
Dialynas offers his views on the flat yield curve, the new Bernanke era and the theory of a global glut of savings. He sees a global economy awash in liquidity due to the increased risk of investment and the Chinese currency being pegged to the US Dollar. This has caused inflation to show up in some places and the imbalances in the world give Bernanke an extraordinary challenge and that is why it was picked for this week's Outside the Box.
In November a paper was published at the Kennedy School of Government and Center for International Development at Harvard University by Riccardo Hausmann of Harvard and Federico Sturzenegger of Universidad Torcuato Di Tella. The title was "U.S. and Global Imbalances: Can Dark Matter Prevent a Big Bang?" They claim the current US account deficit is not a problem because "dark matter" does not show up in government statistics. They propose that this dark matter explains away the deficit and no real imbalance exists. You can read the original paper at http://www.cid.harvard.edu/cidpublications/darkmatter_051130.pdf
This week we will take a look at what two different economists have to say about their theory. The first comments come from Tim Drayson of ABN AMRO in the UK and the second comments are from Martin Barnes of Bank Credit Analyst in Canada. It is always exciting to watch some of the brightest economic minds debate a subject and that is why it was picked for this week's Outside the Box.
Regular readers will know that I have mentioned my London partners, Absolute Return Partners, in the past. They have a monthly letter called The Absolute Return Letter. This week we will look at some recent comments by my very good friend Niels Jensen, the president of ARP. I was just in London last week for a few days, and the topic of this week's OTB was discussed at length over dinner. Niels seems to have a gift for great restaurants and even better wines, as well as strong and thought-provoking opinions.
Niels comments on global liquidity, the dollar and liquidity. Niels sees the U.S. current account deficit as a good thing because it has helped add liquidity and stimulus to the global economy. Past downturns in global liquidity have been accompanied by a financial crisis somewhere in the world and strength in the Dollar. I strongly suggest you look at the charts included in this letter. They are quite instructive.
This is clearly a contrarian call. As you know, most observers predict that the dollar will weaken due to the large current account deficit. Thus, it is perfect for this week's Outside the Box.
A reader forwarded the following article to me last week and suggested it might make a good Outside the Box. This week's article comes from Rodney Dickens, Head of Research for ASB Bank, New Zealand and I thank him for letting me share his thoughts with my readers. Rodney has been analyzing the fixed income markets for two decades and has some insights into the current trends in global interest rates.
Rodney refers to the US Fed as the "global custodian of inflation" and finds an interesting relationship between the Fed Funds Rate and G7 capacity utilization. He then goes on to look at China's role in inflation and the current trend in commodity prices. These factors all lead to the conclusion that interest rates will continue to go up globally and that is why it was picked for this week's Outside the Box.
This week we will turn once again to a group headquartered in Hong Kong with offices in Stockholm and New York called GaveKal Research Limited. They did a long piece on What We See And What We Don't See and we have edited it down to the What We Don't See portion of the research. I really enjoy reading the guys from GaveKal, as they challenge my thinking.
(Incidentally, Louis Gave was in my office last week, coming down to watch a game [Those Yankees beat us again]. He is married to a delightful young lady from Oklahoma so comes to the area from time to time. I look forward to spending more time with him.)
They admit that it is not the obvious market observations that clients pay them to deliver, but the unobvious or what we don't see that really matters. They bring up some interesting and non mainstream views of the Euro, China and the US Dollar, which is why this was picked for Outside the Box.
This week we will turn once again to a group headquartered in Hong Kong with offices in Stockholm and New York called GaveKal Research Limited. We pull together three one page commentaries from last week that focused on the carry trade.
They make the point is that over the last ten years the carry trade has moved from the Yen to the US Dollar and is now moving to the Euro. This is a short concise piece that gets right to the point and brings a lot of ideas. Most economists are still forecasting a weak dollar, but GaveKal presents a scenario that could lead short-term to a strong dollar and even weaker Euro. This is an outside of consensus view, which is why this was picked for Outside the Box.
This week's letter is by Richard Duncan who is based in Hong Kong and is one of the brightest financial analysts I know. Richard is the author of one of my favorite books called The Dollar Crisis: Causes, Consequences, Cures. A new paperback edition that is revised and updated is now available at Amazon for under $14.
Richard said this piece is really an updated version of one of the new chapters in The Dollar Crisis. It looks at the federal deficit, the dollar, Greenspan and offers another explanation for why the longer end of the yield curve has stayed low while the Fed is raising rates on the short end.
Can the current account deficit undermine the Fed's ability to control US interest rates? Let's find out in this week's Outside the Box.
This week's letter is again by one of my favorites, Stephen Roach of Morgan Stanley. We will look at two pieces, one from May 31st and another from June 3rd. The first article lays out why Roach is moving from a bond bear to a bull or at least neutral stance. Low inflation, slowing china, and low relative rates in other parts of the world will help keep our long end rates down.
The second article examines the movement of the dollar. If the current account deficit is to narrow, the dollar must fall and interest rates must rise. The first part looked at why Roach does not expect rates to rise on the long end of the curve, which means the dollar rally must end and Asian currencies should rise. This type of insight is why Roach is one of the smartest economists around and picked for this week's Outside the Box.
This week's letter is by Richard Duncan who is the author of one of my favorite books called The Dollar Crisis: Causes, Consequences, Cures. Richard is based in Hong Kong and is one of the more thoughtful financial analysts I know.
Many people have talked about Federal Reserve Governor Ben Bernanke's printing press speech in 2002, which created quite a storm with the media and financial writers. Richard notes that he repeated the theme of that speech while in Japan in 2003, but unlike us the Japanese ran with the idea. In this piece he looks at how Japan printing ¥35 trillion may have been the cause for world reflation in 2002-03.
Richard lays out the facts, the evidence, and the results of turning on the printing presses and that is why it was picked for this week's Outside the Box.
This week we will turn once again to a group headquartered in Hong Kong called GaveKal Research Limited. Louis Vincent Gave's GaveKal Ad Hoc Comments for Wednesday, February 23, 2005 looks at the possible implications of the recent announcement by the Bank of Korea to diversify their holding away from the US dollar.
He uses the term "sterilize" a lot, and it is important to understand this process. Countries sterilize their currency to maintain fixed exchange rates and Investopedia.com defines "sterilize" as "using offsetting open market operations to prevent an act of exchange market intervention from changing the monetary base." If the country does not sterilize the incoming currency, it will "infect" the money supply and could cause inflation. Basically it does this by buying or selling bonds in the local currency.
Gave goes on to discuss the explosion in foreign central banks US dollar reserves and suggests that the dollar will strengthen in the future rather than fall. This idea is at odds with my longer term forecast of a weaker dollar and that is why it made this week's Outside the Box. (Of course, I did note in my annual forecast that I thought the dollar could strengthen in the short term.)
In a past Thoughts From the Frontline letter, I quoted some economic forecasts from a group in The Netherlands called ECR Research. ECR is an independent financial research group with a team of analysts and economists specializing in medium-term developments in interest rate and currency markets. ECR supplies their research to some of the top financial financial insitutions in the world.
ECR's Global Fiancial Markets report from February 3rd takes a look at the current situation in the U.S. They see short term rates going up more than the market currently predicts and at the same time the dollar will get stronger, then in 2006 the tides will turn and we could see deflation and a weakening dollar. This letter is a little longer than most, but well worth the time because ECR has a few other Outside the Box predictions for the coming year, so let's take a look at what they see in the future.
This week we look at the comments of one of my favorite analyst groups, the Morgan Stanley Global Economics Team, who's most recognizable member is Stephen Roach. I have been a big fan of Roach over the years and part of last week's commentary was a roundtable discussion by the group between Roach, Stephen Li Jen, Richard Berner, Joachim Fels, Andy Xie, Eric Chaney, David Miles, Riccardo Barbieri, Ted Weiseman and Gray Newman.
This distinguished group debates the dollar, deficit and other global imbalances between the US, Europe and Asia. I found it an interesting and highly insightful look at where the world economies stand today. A group as talented as this one is always able to help you think "Outside the Box."
As long time readers know, I get a lot of newsletters sent to me from around the world. Many are from private sources. Among the best is the HCM Market Letter written by Michael Lewitt of Harch Capital in Florida. Michael is one smart guy with a deep understanding of the markets, especially the credit markets, and how they work. The firm manages domestic and offshore debt and equity hedge funds and separate accounts. I really look forward each month to getting Michael's insights. For this week's Outside the Box we will look at his letter from late last week which, given the continued drop in the dollar, is more pertinent than ever. He also touches on interest rates, the problems with Credit Default Swaps and oil. It is a wide-ranging essay and one that I think you will enjoy pondering.
This week we have a special double treat for Outside the Box. Peter Bernstein, the venerable editor of Economics and Portfolio Strategy, has sent two pieces our way. The first is a brief treatise on the dollar which appeared in the Financial Times the day before Greenspan's speech last Friday. It clearly points out the issues facing the dollar and the world if there is a lack of cooperation among nations. In fact, even with full cooperation, there could be quite stormy periods.
The second piece comprises research on the quality of earnings. Bluntly, you can't trust them, and the current system is working against shareholders. I know that is hardly a surprise, but the evidence of how the books get cooked is important.
Peter is the dean of economic writers. The first and long time editor (now serving as a consulting editor) of the prestigious Journal of Portfolio Management, Peter has been observing the investment world for almost 60 years, after serving as a captain in the Air Force in WW2. During his career, he has rubbed shoulders and influenced the movers and shakers in our world. He is the author of nine books on economics and finance plus countless articles in professional journals such as The Harvard Business Review and the Financial Analysts Journal, and in the popular press, including The New York Times, The Wall Street Journal, Worth Magazine, and Bloomberg publications.
His book, Against the Gods - the Remarkable Story of Risk is one of my top five, you gotta read it books. (www.amazon.com) His next book, Wedding of the Waters, due out in late January and which I am reading now, is a powerhouse of historical economic story-telling. (OK, it is nice to be able to get early review copies.)
You can find out more about my friend Peter by going to http://www.peterlbernsteininc.com/. His newsletter is a must read for serious investors and institutions. I would say he has forgotten more than most of us know, except at 80 plus years, he has not forgotten anything. I am proud to offer you his work today in Outside the Box.
This week's letter is from Financial News Online. Located in London, they are one of the leading sources of information about Europe's investment banking, fund management and securities industries. Financial News ran a piece last week that was a series of letters over the summer between two of my all time favourite analysts, Bill Gross of Pimco and Stephen Roach of Morgan Stanley.
Gross and Roach exchanged letters over the summer expressing their outlook on many current economic issues and allow us a glimpse into how they perceive the world today. One of the main concerns in their discussion was the U.S. dollar and they wonder if the "Buck is going to Duck?" I hope you enjoy their bantering as much as I did and it helps you think "Outside the Box."