We woke up this weekend to a €100 billion "rescue" of Spanish banks, and the initial reaction of the market was relief. But did we not just see this movie, but with Greek subtitles rather than Spanish? Was this another of those "necessary but not sufficient" plot lines that Europe is so good at? Kick the can down the road and hope for a happy ending?
Pardon my skepticism, but I see numerous problems. In the first place, €100 billion will not be enough. While the current estimates are closer to €40 billion (if you ask the Spaniards), JP Morgan estimates it will be more like €350 billion. Others estimate more or less, but €100 billion is decidedly optimistic. Even the Spanish authorities are acknowledging that there is another 35% downside for the housing market, which is the main source of the losses. It appears that has NOT been included in the guesstimates.
Secondly, this saddles Spain with yet more debt, which will force the rest of already-sold Spanish debt into a subordinated position (more on that from Louis Gave, below). It does not address the problem that Spain is running an almost 10% of GDP deficit and will need to access the markets for very large sums in the near future. For all intents and purposes, they have been shut out of the bond market, which is why they needed a "rescue."
Third, it does not address one of the fundamental problems, which is the subject of this week's Outside the Box from Charles Gave: it does not help solve the trade imbalance between Germany and the periphery nations.
Germany has two very bad choices. It can finance the multiple trillions of euros of debt of Spain and Italy (and France), converting it into eurozone debt, while giving up its own fiscal sovereignty and allowing a eurozone-wide fiscal union and taxing authority; or the Germans can spend trillions of euros allowing the eurozone to break up, either by exiting themselves or allowing the southern countries to exit.
The market is not going to finance Spain, Italy, et al. in the short term (i.e., this year). That means the ECB will have to print money or some European entity will need to have a basically unlimited blank check at the ECB, if those countries are not allowed to default on their debt. Someone, or some group of someones, is going to have to write a rather large check. The question is whether it costs more to stay or to go. Germany leaving the euro would not be good for German exports, which are 40% of their economy.
Finally, it is not clear exactly how this bailout (let's call a spade a spade) is going to come about. There will have to be, I assume, agreement from the eurozone countries if the EFSF or ESM funds are to be used. Further, if you make this deal for Spain, then Greece, Portugal, and ESPECIALLY Ireland are going to demand a reset. I am sure there is a coherent plan here somewhere, but I can't find it as of Monday night. What I did find is this quote in the Financial Times (jumping to the end of the story):
" 'Many Irish people looking at the deal this morning will be asking themselves why is there one set of conditions for us and another for Spain,' said Mr Doherty. Ireland's economic crisis closely resembles the situation in Spain, where a property crash has morphed into a banking crisis, leading to calls that Dublin should renegotiate its existing EU-IMF bail out deal. Aware that it is unlikely to persuade the troika to reopen its own bailout program, however, Dublin moved quickly on Sunday to deny that Spain's program would be less onerous than its own.
"The Spanish program could also produce political problems outside current bailout countries, particularly over the issue of which of the eurozone's two bailout funds is used for the rescue.
"Dutch and Finnish officials have warned they do not want the new bailout funded through the existing rescue system, the €440bn European Financial Stability Facility, because its lending is treated like any other private lender, meaning it has no seniority in the repayment queue." (emphasis mine)
The Spanish prime minister played the Germans very well. He got what appears to be a much better deal than the Irish. But then, he was playing hardball. This note from Joe Weisenthal at Business Insider:
"According to El Mundo, Spanish PM Mariano Rajoy sent a stunning text message to FinMin Guindos prior to the bailout negotiations. He said, according to El Muno editor Pablo Rodriguez: "Resist, we are the 4th power of the EZ. Spain is not Uganda." Translation: We're a major power, not some random IMF-case banana Republic.
"The followup message (according to Google translate) "If you want to force the redemption of Spain will prepare 500,000 billion euros and another 700,000 for Italy, which will have to be rescued after us."
"Bottom line: hold out for something good. We are powerful, and if they don't give in, the whole thing will go down. It will cost Europe 500 billion if Spain goes bust, and then another 700 billion if Italy goes bust. No wonder Der Spiegel, which represents the German point of view, has an article blasting Spanish blackmail."
And before we get to Charles's piece, let's look at this quick analysis by his son Louis Gave, the CEO of GaveKal, writing from Hong Kong (www.gavekal.com):
"As we go through the few scant details of the bank bailout offered to Spain, we cannot help but shake an uneasy feeling of deja-vu all over again:
- Banks confronting a deposit flight – check.
- Sovereign shut out from debt market – check.
- Loans provided to help sovereign deal with the situation – check.
- Potentially pushing current sovereign debt investors into a subordinated position – check.
"It is on this last point that the Spanish 'bailout' could prove to do more harm than good. Indeed, as we highlighted with Greece, when policymakers transform government debt into subordinated debt, they may as well shut down that market for good. This for a very simple reason: most investors who buy government debt do so on the premise that the paper is the most 'risk-free'. These are not equity investors, carefully weighing the risk-reward of a current asset.
"Investors into sovereign debt are all about minimizing risk. The reason one buys government bonds is first and foremost for capital preservation and portfolio diversification. Subordinated debt does not meet those requirements. Thus, Europe's policymakers, from one day to the next, could potentially not only increase the Spanish debt load by 9% of GPD but simultaneously make Spanish debt considerably more risky, and thus more unattractive. Beyond an immediate knee-jerk reaction, it seems unlikely that the Spanish contraction in spreads will be meaningful or lasting."
What Europe did over the weekend was put a band-aid on a very deep gash. To actually fix the problem, Europe must remove bank liability from the various nations and make them joint and several. But that is going to be something that Germany and other nations will fiercely resist. When the dust settles, the markets will realize, I think, that this latest move did not solve the real problems. It was just a way to stop the immediate pain. There is more to come, and it will require a lot more money and the loss of a great deal of national sovereignty if the eurozone is to hold together. It took the US decades, if not a century, to get to that place. Europe has a few years under its belt at most, and the crisis is right on top of them.
I am in New York tonight, just back from dinner with some of "the guys." (Jonathan Carmel of his eponymous hedge fund, Dan Greenhaus of BTIG, Barry Ritholtz of the Big Picture, and Rich Yamarone of Bloomberg). The topics were all over the board. I am not certain we solved any big problems ourselves; but the Chinese food at Shun Lee was sure good, and the conversation was sparkling.
It is time to hit the send button. Note: There will be no new postings on the Over My Shoulder website for the next 24 hours, as we do a major web-hosting switchover.
And now, let's turn it over to the always-incisive Charles Gave.
Your sorry to rain on Spain analyst,
My friends at GaveKal are uniquely positioned to help us think about where we have been in the past decade and where we are going in the next one. Their perch in Hong Kong lets them keep their fingers on China's pulse, but they also have profound roots in Europe – the Gave family is French – as well as a thorough grasp of the US economy and culture. (Louis Gave, the author of today's Outside the Box, is a Duke grad.)
We can all second Louis when he notes "the discomfort and uncertainty we find in most meetings with clients" – we're treading on uncertain turf here and moving into unexplored territory. We sense that the potential, in the next few years, for both creation and destruction (so yes, creative destruction) is greater than at any time in our lives – and greater perhaps than at any time in the history of the human race.
How do we get our heads around something that big and dynamic? Where do we find the confidence that our next steps will take us forward rather than back? How do we allocate and husband our resources, wisely and profitably? In the following piece, Louis Gave takes an approach that is genuinely helpful: he looks back to the crucial year of 2001 and identifies three big events that largely determined global economic and investment trends in the '00s.
And then he does something that is rather scary but very necessary. He says, don't look now, gang, but those trends have stalled; and so we had better come to grips with the great trends that are now forming (lest we be like the British guns of Singapore at the outbreak of WWII: facing the wrong way).
And then – GaveKal to the rescue! – he tells us what those trends are. So, without stealing any of Louis's thunder, I will deliver you into his capable hands. But first, this note –
I did get my iPad 3 on time. No line, in stock at the local Apple store. I decided to try when I got a few emails from analyst types who actually go to stores to check on lines and inventory instead of just looking at numbers. Lines were down, for whatever reason. And inexplicably to me, there is absolutely no visual difference between the iPad 3 and the 2. None. And there is nothing on the box to reassure you that you actually got the 3, if you don't get the 4G. Now, the 4G speed is cool, and I can see the increased processor speed, and the display is in fact nicer. Not sure, unless you are an early adopter or hooked on speed (as I am) that the need will be there to buy up. And if you don't get the 4G? There is no difference in connection speed. And Apple stock is priced for perfection. Just saying…
Finally, I rarely ever provide a link that is simply for fun, but my friend Cliff Draughn of Excelsia sent me the funniest 5-minute clip I have seen in years. I laughed out loud for some time. Do not listen unless you are where you can laugh. This may be something of an inside investment-world joke, but I think most people will appreciate it. http://www.xtranormal.com/watch/12032078/a-day-in-the-life-of-a-financial-advisor. I think even Suze will get a kick out of this!
Have a great week. I am finishing this up in the airport, and am off in a few minutes to Stockholm and Paris. I intend to take some time and see the Vasa, a 68-gun warship built in 1628 and pulled up from the bay in 1987, where it had been perfectly preserved. Stunning history and something I have long wanted to see. (en.wikipedia.org/wiki/Vasa_(ship)) Plus a lot more of Stockholm and a few spots in Paris before the GIC conference. And I am also going to spend some time with people who went through the banking/sovereign crisis in Sweden in the '90s and see what I can learn. And now let's turn you over to Louis.
Your up on my board, surfing the inevitable analyst,
I had the pleasure of spending the morning and part of the afternoon today with Louis Gave and Anatole Kaletsky at a seminar here in Dallas; and we shared a long lunch, where Europe and China were the topics of conversation. So, with their permission, here is their latest "Five Corners," in which Charles Gave and Anatole Kaletsky discuss last week's summit, and then engage in an internal debate about whether Italy really has a significant trade deficit with Germany. As I expect from GaveKal, it's not your typical analysis. And since I have to run to dinner – and glean more insights from their team (there will be homework when I get back!), this introduction to Outside the Box is short, and we can jump right into today's piece. Have a great week.
Your feasting on information analyst,
Europe is rapidly approaching the denouement, the Endgame, of its currency experiment. The outcome is not clear, at least to your humble analyst, as the debates rage and there are huge pluses and minuses the 17 nations must decide upon. But the proverbial road down which the can is tumbling and clattering, kicked along haphazardly, is coming to its end, and soon a rather sharp turn, either to the left or to the right, will be required. Let us hope they choose wisely.
Today's Outside the Box is a rather philosophical debate between my friends at GaveKal, which they have graciously shared with us. It is important to note that Charles Gave, Louis-Vincent Gave and Francois-Xavier Chauchat are French. Louis served in the French army, studied at Duke, and has lived in Hong Kong for over a decade. Charles (his father) is the quintessential French patriot and patrician right from central casting, whose voice has the authority of God. Anatole Kaletsky is supremely British and one of the most influential economic thinkers in Europe. He is Editor-at-Large and Principal Economic Commentator of The Times, for which he writes a thrice-fortnightly column on economics, politics, and financial markets. These are Europeans vigorously debating the European future as only good friends can.
What we have is an email exchange among them on the future of the euro and the inherent philosophical tensions that are faced by European leaders. I have read it three times and will read it several times more. (Do not feel bad if you need Google to keep up with some of the references. When Anatole refers to Sedan, for instance, he is not talking about cars but a major battle the French lost to the Germans in 1870. Interesting Wikipedia page for you history buffs.)
Let me give you a taste, from so many great lines. Here's Louis (who I will see Monday in Dallas – more below):
"Above, Charles focuses on the philosophical hurdles to any mass intervention. And while I subscribe to Charles' reading of the German institutional framework, my concerns are far less intellectual and far more practical. Basically, we have to remember that the average sovereign debt buyer is not a hazardous investor. The guy who buys a government bond is looking for a very specific outcome: he gives the government 100 only so he can get back 102.5 a year later. That's all the typical sovereign debt investor is looking for. Nothing more, nothing less.
"But now, the problem for all EMU debt is that the range of possible outcomes is growing daily: possible restructurings, possible changes in currencies, possible assumption of other people's debt, possible mass monetization by the central bank etc. Given this wider range of possible outcomes, and the consequent surge of uncertainty, the natural buyer of EMU debt disappears. Again, the typical sovereign investor is not in the game of handicapping possible outcomes; he is in the game of getting capital back!
"... Even if the Bundesbank did agree to monetization (which is hardly a foregone conclusion), the window for this to work may now have closed."
I will be with Louis and Anatole this coming Monday morning in Dallas at a seminar for money managers and accredited investors. If you would like to attend, drop me a note and I will get you an invitation.
And you can find out more about GaveKal consulting services and funds at www.gavekal.com.
What fascinating times. What an interesting period in which to live. And don't we all want to get through this and have more certainty, in place of the roller-coaster ride we are now on? I will be glad to get back to long-term investing, but in the meantime we should appreciate the fascinating spectacles. It will make for interesting stories to tell our grandkids. Have a great week, and in the midst of spectacle enjoy the holiday season.
Your amazed to finally see it all happening analyst,
The developed world seems to be focused on Europe, and while the next crisis in indeed brewing there, we must not forget that Asia is a large part of the future and major contributor to world GDP. My friends at GaveKal are based in Hong Kong and have staff in most Asian countries or are in them on a regular basis, so I read their Asian views with interest. Today's Outside the Box is their latest Five Corners – Asia edition, where they look at China, Thailand, and Vietnam, as well as Asian growth, contrasting it to that of the "developed world."
It is good for us to remember that not everything rotates around US politics or European sovereign debt. Our crises shall pass, and Asia will still be there and growing. And for what it's worth, my personal plan is to start visiting Asia a lot more in the future. It looks like I may be in Hong Kong in January, but more on that at some later point.
Your feeling like some Chinese takeout analyst,
This week we turn our eyes to Asia as my friend Louis Gave of GaveKal gives us a very thought-provoking piece on the problems of investing in Asia, with a focus on China. While there are real opportunities, Louis also sees some speed bumps. Those Asian ETFs may not be the winners a lot of people think for structural reasons.
I was to thank the team at GaveKal for letting me reproduce their research as typically it is only available to their clients who pay a rather hefty sum.
This has been a productive weekend book writing wise. I am down to finishing 2 chapters which are mostly written and two long flights to Vancouver in front of me. Then the hard part of re-writes but I can see the end of the race. Have a great week, and if you are in Vancouver be sure to say hello.
Your writing machine analyst,
Let's have a thought game. What if the Eurozone breaks up? My friend and very serious philosophical thinker Charles Gave (of GaveKal) thinks that would be a positive event. To quote his conclusion:
"But we return to the most simple of questions, namely: Was the end of the USSR a negative event? When Americans stopped wasting capital building empty condos in Florida or Arizona, was that bad news? If, like us, our reader answers "no" to the above questions, then the Greek crisis should be seen as a reason for hope, rather than despair."
Now, that is a truly Outside the Box proposition and one which I found very compelling. His partner, Anatole Kaletsky, elsewhere argues that the ECB will enlarge their mandate to try and save the day by printing enormous sums of money, ultimately making things worse.
The team at GaveKal gave me permission to share this with you, as I think it deserves a wide audience. Warning: the first part is philosophical in nature. You will need to think through it. This is not one for speed reading. But if you grasp what he is saying, I think it will give you a major insight into the plight that is now engulfing Europe. Note. Even though Marc Faber calls the GaveKal team "euro perma-bears" GaveKal is mostly quite bullish on everything else. They always seem to find the bright side of the street to walk on, or at least a few spots in the sun in which to sit.
Read this and learn why the break-up of Europe might be a bullish event. As I said, Outside the Box is for ideas that challenge the status quo, and this, if anything, does just that.
Today I am sitting listening to Ralph Merkle lecture on nanotechnology, part of a 9-day-long series of lectures on how accelerating change in technologies of all types will affect our world. 15-hour days and intense discussions are stretching my brain, but I still have to make sure you get your Outside the Box. Fortunately, I came across today's OTB last week from my friends at GaveKal, who offer a way to think about the Greek crisis and what it means for all European bonds.
There are a lot of allegations about manipulation of European bonds. It's those nasty traders. GaveKal shows us data that bond yields are actually quite logical, given the debt of various countries. But they also warn us, as part of their conclusions:
"As of today, there seems to be no additional risk premium related to the possible dislocation of the Eurozone. Clearly, this possibility would have such devastating effect on world financial markets that investors cannot even think of it (even if many talk about it)."
I suggest you read at least the beginning and then the end of this piece, even if the data makes your eyes glaze over. (I must admit the data made me feel all warm and fuzzy, but then I am somewhat of a wonk.)
Have a great week. I am getting overwhelmed here in California, learning about the future. It is going to be amazing, even if our bonds drop in price. We will live in what may be the most interesting and exciting period of human history. What a contrast between the financial markets and what the scientists continue to amaze us with. It is one of the reasons I think we Muddle Through, in spite of our rather negative economic environment.
Today I am speaking at a local conference here in Dallas for my friends Charles and Louis Gave of GaveKal along with George Friedman of Stratfor, and get to finally meet Anatole Kaletsky. They graciously allowed me to send their latest Five Corners report as this week's Outside the Box. I find their research to be very thought-provoking as they are one of the main sources of optimism in my ususal readings (except for their very correct and profitable views on the European debt of the PIGS (Portugal, Italy, [Ireland?], Greece and Spain).
The GaveKal team is scattered all over the globe (and based in Hong Kong), and make my paripatetic travel schedule seem small change, not only being in scores of countries but talking to the movers and shakers in both finance and politics. This is an amazing advantage in information gathering. Thus they have a very global view of the world and tend to spot trends before most analysts have picked up on them.
Have a great week as we go into the Holiday season (and can you believe the prices on electronic stuff this year?).
This week I offer you two short pieces for your Outside the Box Reading Pleasure. The first is from my friends at GaveKal and is part of their daily letter. They address the real difference between those who think we will have a consumer led recovery (Keynesian) and those who think we will have a corporate profit led recovery (classical economics or Schumpeterian). This is actually a very important debate and distinction. I find that GaveKal pushes me to think almost more than any other group, as they constantly challenge my assumptions. (www.gavekal.com)
The second piece comes from Dr. John Hussman of Hussman Funds (www.hussmanfunds.com). He offers us some very insightful analysis on the potential for growth going forward, which goes along with what I have been writing: We are in for a longer period of below trend growth, which does not bode well for corporate profits in the long run. I think you will get a lot out of these two items.
One of my most significant learning experiences came from a basic forecasting mistake. Back in 1998, I looked at 40 years of documented evidence that 50% of all large programming projects ended up coming in late. That set of data was consistent over all industries and over decades. I checked it out with industry experts. I really did my homework. And thus I said that the Y2K bug would be a problem, as a sufficient number of corporations around the world would have bugs that would create supply and management problems, which would slow the economy down. I did not suggest that we would see blackouts or major problems, just enough to slow things down and, when coupled with other macro issues (like the tech bubble), could trigger a recession. We had the recession, so my investment advice actually turned out to be right (lucky?), but it was not caused by Y2K.
Almost 100% of the Y2K fixes came in on time. From a metric that said 50% was the norm, we went straight to 100%. What caused the change? I had a debate with (my good friend) the late Harry Browne, who many of you will remember as a very wise investment counselor, multi-book best-selling author, two-time presidential nominee of the Libertarian Party, gold bug, and from the school of Austrian economics. He said that Y2K would be a non-event. When presented with my marshaled facts, he said, "John, each company will figure out what it has to do to survive. That is the way markets work." And sure enough, faced with extinction if they failed, it seems that CEOs found ways to get the programmers to meet a very clear deadline. Besides knowing they fudged deadlines in the past, we now know if you hold a gun to their heads and give them resources, they can in fact perform.
Why this comment to open today's Outside the Box? Today we read a piece sent to me by my friend Louis Gave of GaveKal (and who will be at my conference in April). It is entitled "Where Will the Growth Come From?" It reminds us of the lessons that Harry gave me. Each person and company is responsible for their own part of the recovery. You can't rely on mass statistics, or you miss the important lesson in individual responsibility.
I don't think anyone can accuse me of being bullish the past few years. Interestingly, I get a lot of emails from people telling me the end of the world is coming, and deriding my longer-term optimism. They are convinced we are going into some deep national morass worse than the Great Depression (and such deflationary times will somehow make their gold go to $3,000!?!?). Yet they are working to make sure their own personal worlds are covered. I get no letters from people who are simply giving up. What company will keep a CEO who does not work hard to figure out how to keep the company alive? If you lose your job, do you not try and get another one or figure out how to make ends meet? Do you not put in extra hours to try and make your personal life or business or job better? Even if it is terribly difficult, the very large majority of people don't throw in the towel. Each of us, in our own way, gets up every morning to fight the good fight, even when the swamp is full of more alligators than we ever counted on. We just pick up a baseball bat, wade into the swamp, kill as many alligators as we can in one day, and then go home to get ready to fight the next day.
The lesson from Harry is the same as it was in 1998: It is the individual working to get his or her own house in order that will help us all collectively get our national house in order. This is not to diminish the Herculean tasks we have in front of us, collectively. We have dug ourselves into a very deep hole of credit and leverage. It is going to take lots of time. The way back is not entirely clear at this point. This is not an ordinary business-cycle recession. But each of us will do what we can to make our small corner of the world better. And in the fullness of time, we will collectively get back to trend growth and a rational market.
Of course, we will then find we have other problems to face. There is no nirvana. There will always be more problems. But that's what a free-market collection of motivated individuals does: We face problems and solve them to the best of our ability. And as a group, the clear path for centuries is one of growth and progress. Cautious optimism is the proper long-term stance.
So, today Louis speculates about what sectors might come back first, and offers a good lesson in economics along the way. I think you will enjoy this Outside the Box, unless you just want to believe in the end of the world.
Many of us in the US are focused on our own woes. But this is a global credit crisis. In today's Outside the Box, we take a look at the currency markets, which are in an historic upheaval and also look at what is going on in Europe. I suspect that Europe is in for a period of much distress, as the world begins to deleverage That is why one government after another will back the deposits of banks within their countries, for otherwise capital will flee to countries like Ireland and Germany which ARE guaranteeing the deposits for all banks in their borders. Many European banks are leveraged 50 to 1 (not a misprint). I suspect that more government will do like Belgium and the Netherlands and inject capital directly into their local banks deemed too big to fail.
I am going to give you three brief pieces which all look at a different part of the crisis, but looking at the crisis from a more international perspective. The first is from Dennis Gartman's letter (www.thegartmanletter.com) with his views on the overnight currency markets. (Note: the yen has risen even more since he wrote!)
The second piece is a short note from my friends at GaveKal (www.gavekal.com) in which they ask can the euro survive and if so, what will it look like? Very provocative, but in line with my thoughts that the euro will one day be once again at par against the dollar.
The last piece is a column by Wolfgang Munchau writing in today's Financial Times. Munchau argues that the fact that EU member nations managed to survive their first series of bank failures does not mean it can afford to take the risk of defaulting to continued improvisation. Munchau comes out squarely in favor of a coordinated, funded rescue program. Again, thought provoking, and as I noted in this week's letter, something that the US could face within a few weeks as well.
Fascinating markets and times we live in. Let's hope for a rally tomorrow.
Today's "Outside the Box" will be one of the more controversial pieces that I have sent out over the past year. My long-term readers are well aware of my views on oil and energy, yet despite my beliefs, I find it valuable to read thoughts from those who have different views. These challenging view points come from my good friend, the very intelligent and always thought-provoking Charles Gave.
Charles is one of the co-founders of GaveKal, 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 his article, "Oil: Will the Malthusian View Carry the Day?" Charles postulates that the price of oil could fall over the next several years. He defends his position with some teaching on the dynamics of energy, a review of historical cycles, and some thoughts on alternatives. I agree that there will be large energy substations, for which he makes a solid case, but I disagree with his conclusion that the price of oil will permanently drop. I think that the growth of the world GDP and thus the need for energy and oil will offset the energy substitution he outlines.
Charles goes on further to describe a commodity of which has been far less volatile than oil and has never had a down month since 2001 and one in which he thinks has great potential in the future. (I won't spill the beans on what it is just yet.)
My aim is that you will broaden your understanding and gain insight as a result of reading a contrarian's perspective. Enjoy this week's Outside the Box.
Tomorrow the Fed will be announcing whether they will continue to raise rates or not and many investors seem to think that a pause is a highly probably outcome. Controlling inflation has been the reason for prior rate hikes and I believe it to remain the key variable. With this in mind, I thought that it would be a good idea to share with you the new GaveKal piece by Louis-Vincent Gave.
As my long term readers know, GaveKal produces some thought-provoking and highly intelligent research on the markets from a global perspective. Louis writes about how profit margins, income disparity and global economics are shaping the current inflationary environment. But he does not stop there, Louis further describes how these market forces are all affected by none other than Adam Smith's old "Invisible Hand."
I found this article to be exceptionally interesting, and, given the fact that the Fed is meeting tomorrow, a timely read as well. I think you will find it to be an "Outside of the Box" point of view.
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.
Two weeks ago in my "Thoughts from the Frontline" E-letter I wrote about trade imbalances. I quoted a significant portion of a speech by Anatole Kaletsky from GaveKal. It was part of a debate he had with Stephen Roach. Last week's "Outside of the Box" contained some very insightful and timely remarks on the current market conditions by the well known economist Stephen Roach.
The team at GaveKal sent me Roach's side of the debate which addresses Anatole's point of view on the subject of trade imbalances. While I do not want to look like an "All Stephen Roach, All the Time" letter the speech was so good I felt that we should use it this week. I trust that you will find this week's Outside the Box to be a "grand finale" on some of our most recent topics.
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.
Investment managers around the world have become closet indexers, suggest my friends at GaveKal, which is messing around with the normal forces of the capitalistic marketplace. Today's Outside the Box is a Chapter from GaveKal's important new book, Our Brave New World. You can get a copy at www.gavekal.com or now from Amazon at www.amazon.com. It is a definite must read for any serious investor. (The book is the work of Charles and Louis-Vincent Gave and Anatole Kaletsky.)
At the end of this article, I am going to make a few comments. So put on your thinking caps and enjoy this essay, which is truly an example of outside the box thinking.
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.