On G-20 and GM: Economics, Politics and Social Stability
November 20, 2008
The Big Three have a new customer, and it isn't you. As Detroit's former heavyweights fight for a slice of a $25 billion bailout package, more than humble pie is being eaten. If the automakers fail and take their companies into bankruptcy, Michigan as we know it ceases to exist economically. The trickle-down impact could rapidly become a waterfall: the seat supplier in Georgia loses three major customers. The factory worker who makes seats is out of a job. The bank who holds his mortgage takes another hickey. Commercial lending at that bank dries up. Ad nauseum. In the best of economic times, this would be a troublesome scenario. In today's economy, it's easy to see how policymakers are as worried about social stability as they are economics.
No astute person thinks that the Big Three will be able to return to the business practices of last year. And no intelligent investor should be trying to evaluate portfolio decisions the same way this year either. We have moved from the realm of finance to political economy, and for that you need a different set of tools and a different mindset.
I've enclosed an article by my friend George Friedman, the founder of global intelligence firm Stratfor. This is a fascinating, must-read piece that examines US policy options by looking at the Chinese as an example. The parallels are illuminating. I've stressed before the importance of reading Stratfor's intelligence in order to gain a clear understanding of the political and economic landscape you're investing in, but you need it now more than ever.
George has arranged a special offer just for my readers. And I'm excited to tell you that in addition to a Stratfor Membership, you'll also get a copy of his new book, The Next 100 Years.
Click here to take advantage of this special offer. You'll find George's new book as fascinating and insightful as Stratfor's daily work.
Yours,
Obama’s Challenge
November 13, 2008
With the election of a new US President, everyone is focused on the "First 100 Days." How Obama transitions into the presidency impacts not just the U.S. but the entire global system. What happens to U.S. relations with Iraq, Iran, and Afghanistan? What's going to happen at Treasury and to all the programs addressing the financial crisis? What's going to emerge from the next G20 summit?
You need to read the analysis below, written by my good friend George Friedman at Stratfor. He details the immediate issues facing the president-elect, including one of the stickiest: Europe's desire for a global banking regulatory regimen. How will Obama respond to European pressure? George has built his company Stratfor and its reputation on forecasting the future, and I'm amazed at how often he's right -- on broad themes and specific events.
As we move into the next 100 days, George is way ahead of us with a book called The Next 100 Years: A Forecast for the 21st Century. I've read an advance copy, and it's absolutely fascinating. In it, he maps out what geopolitical changes the world will see in the next hundred years: the rise of Mexico (and war with the U.S.!), Poland and Turkey returning to great-power status, and a second Cold War, among others. I can tell you, his arguments are as absolutely compelling as the conclusions are provocative.
George has arranged a special pre-publication offer for my readers. Click here to take advantage of a Stratfor Membership that also includes a free copy of George's new book. For insight into the next 100 days and the next 100 years, I'm relying on George Friedman and his team at Stratfor. I know you'll find as much value in George's forecasts as I do.
Fourth Quarter Forecast 2008
October 30, 2008
Really hear what I'm about to tell you. The center of gravity of the world economic system has moved from New York to Washington. Let me illustrate what I mean so you understand just how profound this is. Banks used to compete against banks. US carmakers competed against each other and the Japanese. And the New York financial markets told you how they're doing against each other.
Understand what's happening now. The US Treasury has become the only "customer" that matters. The Treasury is now the customer—and investor -- with the $750+ billion checkbook. The Treasury is now the "investment banker" of last resort, arranging and financing mergers. Banks are competing against insurance companies for their slice of the bailout pie. Chrysler and GM (and the Michigan Congressional delegation) are looking to Washington, not Goldman or Merrill, to facilitate a merger. This is a seismic shift.
As investors, we have to start looking at the world in a completely different way, and getting our information from different sources. A company's 10-K is almost irrelevant if all it includes is financial statements and market outlooks. What matters now are the "exogenous" factors: government guarantees of the commercial paper market, currency interventions, direct capital infusions, etc. And how does a company describe in its Management Outlook that "Yes, our company is too big to fail."
In this environment, it's more important than ever to read unbiased geopolitical intelligence and analysis of government moves, and that's what my friend George Friedman at Stratfor offers. I'm enclosing below his team's Fourth Quarter Forecast. George's team analyzes US government policy as well as the moves that are being taken by central banks and governments around the world as the private sector gets taken public all across the globe. You will not be able to understand market moves if you don't understand who the real movers are now.
I'm sending you Stratfor's Fourth Quarter Forecast, and I strongly encourage you to join Stratfor and get access to all their daily intelligence. George has arranged a special offer on a Stratfor Membership for my readers: click here to take advantage of this opportunity. In this new era, I use Stratfor daily to give me a wide-lens, global view of politics and economics. I know you'll gain as much from reading Stratfor as I do.
The International Economic Crisis and Stratfor’s Methodology
October 16, 2008
Dear Friends:
Exhale for a moment, forget your losses for the time being, and try to appreciate the fact that you're living through the single most important development in global finance since Bretton Woods. This is a "tell the grandkids about it" moment, when governments all around the world have essentially decided in unison that it's time to rewrite the rules, the very framework, in which financial transactions take place. Stock trading, interbank lending, commercial paper, the very concept of private sector ownership are all up in the air right now.
The only thing I can tell you with certainty is that if you try to evaluate your investments using the same metrics you've always relied on - P/E ratios, market share, interest rates, etc. - you're going to be as successful as a football-turned-baseball coach evaluating a pitcher by the number of touchdowns he throws. The rules are changing, gentle reader, changing at least for awhile from market-driven inputs to government-driven inputs. If you try to apply what you know from the "old game" without understanding that you're playing a "new game," the rules might not make sense.
I'm sending you today a piece from my friend George Friedman on how his company Stratfor looks at economics. More precisely, this piece explains how they look at Political Economy. And from here on out, it's political economy that's going to be driving markets. If the old rule was "Never fight the Fed." It's now, "Never fight the Fed. And the Treasury. And the ECB. And the Bank of England. And the Bank of Japan...." You get my point.
George has very kindly arranged for a special offer on a Stratfor Membership for my readers. I strongly encourage you to click here to take advantage of this offer. Now more than ever, you need the kinds of insights that you can't get from traditional finance sources. You need a wider lens, and there's no one better than George and his team at Stratfor at this kind of analysis. I know you'll find them as valuable as I do.
Your Taking-It-All-In Analyst,
Why The Worst Will Soon Be Over
October 13, 2008
The credit crisis is global. Interestingly, some of the more creative and straight forward solutions are coming from England. This week in Outside the Box I am presenting you with a very well written (even entertaining) letter from Bedlam Asset Management from London www.bedlamplc.com on their view of the crisis. It is always instructive to look at your problems from the point of view of another party, and even more some when they give you some thoughtful and cogent analysis.
I have to admit, seeing green on my screen feels good, but we are in a recession that is global and is likely to get worse. What we need to do now is assess what our response will be. First, we need to avoid the pitfalls and then look around for the opportunities which will be presented us. I think this week's Outside the Box will help you think through your personal situation.
Haste Makes Waste
September 29, 2008
The purpose of Outside the Box is to present views which cause us to think through our basic assumptions. This week our old friend Michael Lewitt of Hegemony Capital Management gives us a view as to why the bailout bill going down may not be as bad as I think it might. There is much we agree on, however. And part of our agreement is that a deeper recession is in our future. Let me be clear. Muddle Through is now at risk.
I have talked with my publisher, and for the next few weeks of The continuing Crisis, we are going to send more than one OTB per week, and I may also add some short commentary. These are extraordinary times, and I know a lot of you (as I can tell from phone and emails) are worried and are interested in analysis that is not biased with either a perma-bull or perma-bear stance. I will call it as I see it, as always, and forward you material from my best sources.
That being said, we will get through this, one way or another. Sanity and clarity will return, as it always does after times of crisis. I wish you the best in your situation.
The Russian Resurgence and the New-Old Front
September 18, 2008
It's been a hell of a few weeks, so let's start with a little much-needed levity. Two friends, a Trader and an Investor, walk up to the roulette wheel in a casino. They watch a guy hogging the table hit on his first spin. Then his second. Third, boom. Four in a row! The guy has an enormous stack of chips which he lets ride again on a fifth spin. 00. He's wiped out and skulks off to the bar.
The two friends are excited because now it's their turn. The Trader says he's going to follow exactly the same pattern as the guy they just watched, BUT he's going to pocket his money after four spins. The Investor tells him to hold off for a minute. He wants to first buy stock in the casino....
Like most good jokes, there's a kernel of truth. When everything is in turmoil, you can't focus on the instances; you have to focus on the underlying foundations. Roulette isn't about guessing red or black; it's about understanding statistics. Today in a Special Outside the Box, we look at some potential problems from Russia that could impact the US and Latin America. It comes from George Friedman's company, Stratfor, the source I rely on for my geopolitical analysis. Peter Zeihan is one of the very sharpest thinkers in George's shop, as you'll see. The basic definition of public capital markets in the US and Europe is fundamentally different than in a country like Russia. If you don't understand the geopolitical lens through which a state views its capital markets, then you're making roulette bets instead of investments.
George is kind enough to have a special offer on a Stratfor Membership for my readers. I encourage you to click here to take advantage of this opportunity. Whether it's energy, public equities, or debt, the world's markets are inextricably intertwined. And that means you've got to understand the lay of the land. No one does a better job of providing the geopolitical drivers behind "the statistics" than Stratfor.
Mediterranean Flyover: Telegraphing an Israeli Punch?
August 7, 2008
Kudos to my friend George Friedman and his crew at Stratfor. If you didn't see the article in this week's Barron's about Stratfor's analysis of the geopolitical risk premium built into oil prices, you missed a really good piece of work. You've probably heard Napoleon's quote that "Amateurs discuss strategy, and professionals discuss logistics." If you want a perfect example of how that quote plays out for the markets, take a look at Stratfor's article below. It's precisely the kind of sober, fundamental research that makes Stratfor my invaluable source for geopolitical intelligence.
No matter where you're looking at putting your money today, the impact of energy prices simply can't be overstated. The commodities trade, US and foreign equities, debt and interest rates, everything is being driven by energy prices right now. Whether you're trying to factor energy as a direct input into the price and consumption of manufactured goods or dealing with monetary policy's impact on the dollar and debt markets, you're implicitly making an energy trade.
I've said it before and I'll say it again, if you're trying to trade today's markets without geopolitical intelligence, it's like trying to trade the juice futures market without a weather forecast. You can do it, but good luck to you.
George has kindly passed me the article that was the basis of the Barron's story. You'll notice right away that unlike many of the so-called experts out there, Stratfor doesn't airily dismiss underlying logistics in favor of handwaving. But better than taking my word for it, click here to get your own Stratfor Membership at the discounted rate for my readers. Every day you'll receive the same forecasts and intelligence guidance that I use to shape my thinking on where the world is going - and especially on energy prices.
The Geopolitics of Iran
July 24, 2008
For nearly 30 years, long before it was a charter member of the "Axis of Evil," Iran and the US have been locked in a hate-hate relationship. Walk down the street any Friday afternoon, and you're as likely to hear "Death to America!" as "Hi Ali, how are you?" Three decades of animosity, an externally opaque society, and no trade relations between the two countries mean that many of us have just the barest understanding of what's really going on over there. But whether it's a negotiated settlement with the US over Iraq, or a war-risk premium for crude oil, to threats and counterthreats with Israel and the US, Iran's decisions have enormous impact on the global economic system. All of the sudden, the picture of the "mad mullahs" you get from the papers seems expensively inadequate.
To understand Iran's impact on the world you need someone that wades through the complexities and distills out the salient facts. My friend George Friedman and his intelligence team at Stratfor are my go-to source for this kind of insight and understanding. For your financial analyses (I certainly hope!) you don't rely just on your daily newspaper's business section; if that's where you're getting your news on global events, well, hmmm....
Take a look at George's latest Geopolitical Monograph on Iran in the Special Edition of Outside the Box. This is part of a special series for Stratfor Members only - that George was kind enough to share this week. It's just stunning to me how the battles between Persia and Babylon are playing out yet again with Iranian involvement in Iraq. If you've ever wondered why the Iranians seem to have a bunker mentality, read this Monograph, and you'll see why. Want to understand why Iran works through proxies like Hezbollah? Here's your answer. Spend a few minutes on an invaluable investment in understanding Iran's global role.
The Geopolitical Monograph series is just one of the features of my Stratfor Membership that makes it so valuable to me. George's team also puts out daily analyses and a weekly Intelligence Guidance that highlight the critical geopolitical events that can move markets. You can get the same geopolitical intelligence I use via this special offer available to my readers. Click here for the full details, and start adding an intelligence perspective to your investing.
The Geopolitics Of China
June 12, 2008
No matter where in the world I am, in South Africa, in Europe, in La Jolla, there's one question I get asked over and over, "What about China?" And small wonder. The increasing impact of China in the last generation is just staggering and seemingly accelerating every day. If you're in the market for oil, minerals, arable land, equities or debt, you're bidding against Chinese government-sponsored entities with a $1 trillion warchest. And the list of markets where China is a key player grows every day. Bottom line: whether you're filling up your gas tank or trading credit default swaps, China's decisions impact your pocket book.
The only thing that's crystal clear about China is the need to look long term, at the underlying forces that don't change day by day. Nobody does this better than my friend George Friedman and his team at Stratfor. Their geopolitical focus filters out the noise in the popular press and concentrates on the real drivers behind national policy. This is especially critical for a market like China, where traditional financial statement analysis is impossible and profit motives just don't apply.
On Monday, George and his team are releasing the second in their series of Geopolitical Monographs, called The Geopolitics of China. I've received an advance copy of the report below, and it is today's Special Edition of Outside the Box. Click this link to take advantage of a special pre-release offer on a Stratfor Membership that George is offering just to my readers. Did you know that China is functionally an island? Want to understand China's strategy behind their sovereign wealth funds? Policy in Tibet and Darfur? Join Stratfor now. You'll get a whole year of Stratfor's insights, plus you'll get The Geopolitics of China and their other Geopolitical Monographs included free. You really don't want to miss out on this opportunity.
Look at the map below that shows how China is functionally an island. Fascinating. It's just one of the maps George uses to illustrate what makes China, China. I hope you find this report intriguing, and do take George up on his offer for a free copy of the entire series included with your Stratfor Membership.
Two Essays on the Continuing Financial Crisis
April 28, 2008
This week in Outside the Box we look at two brief essays which give us different perspective on the Continuing Crisis. The first is by Mohamed El-Erian, the co-chief executive and co-chief investment officer of Pimco. His book, 'When Markets Collide: Investment Strategies for the Age of Global Economic Change', will be published by McGraw Hill in June, and it will be on my summer reading list. El-Erian argues in the thought-provoking piece from the Financial Times that the crisis is still far from finished, and that those who think we are returning to more placid times may be surprised when volatility suddenly becomes even more pervasive.
The second is by good friend and Maine fishing buddy David Kotok, the chief investment officer of Cumberland Asset Managers (www.cumber.com). He was recently in Africa where he met with the head of the central bank of a small country with headline inflation of 10%. The problem is that "core inflation" is 5% and food inflation is 15%, yet accounts for 50% of the GDP. He asked a group of financial thinkers (including your humble analyst) to ponder what that central banker should do. Do you set high rates and target overall inflation or set lower rates and not worry about food inflation.
Why should we worry about inflation in a small African country? Because the principles are the same, and it makes a real difference where the Fed comes down at the end of the day on this very question.
This week's reading should be very helpful and thought-provoking. I hope you enjoy this read as much as I did.
The Shape Of The Future
March 24, 2008
This week I take great pride and pleasure in being able to bring you a recent letter from my very good friend Peter Bernstein. I asked him to let me publish this, as I think this is one of the more important, thought-provoking pieces I have read in a very long time. I am grateful for that permission, as you will be when you read this. I would take the time to read it through several times. Read this paragraph from the beginning of the letter to get an idea of the thought path down which Peter is going to take us:
"As Goldilocks shreds, we have to start thinking about what kind of long-term environment is going to replace it. Shifts to new environments are always attenuated. They are also rare across time, which means most of us have limited experience with this phenomenon. New environments often tend to sneak up on us and do not announce themselves with a fanfare. Most of us are unaware of what has happened until enough time passes to provide good perspective."
Peter argues persuasively that we are getting ready to enter a new economic and investing environment as profoundly different as the 80s were to the 70s. As I said earlier, take your time and think through the implications of his thoughts.
Peter writes Economic and Portfolio Strategy and has done so for decades. He has won numerous honors, edited some of the most prestigious financial journals and has been at the center of economic thought for six decades. At 87, he is still writing material that makes those of us who are his junior simply stand in amazement and applaud. His book, "Against the Gods - The Amazing Story of Risk" - is on my list as one of the five most important books on economics and finance. You can get it a Amazon.com. And while you are there, get his latest book, "Capital Ideas Evolving" or the important "Power of Gold."
For those interested in his letter or more information about Peter, you can go to www.peterlbernsteininc.com.
A Subprime Outlook for the Global Economy
October 22, 2007
Stephen Roach is one of my favorite analysts. However, since he moved to Asia to take up new responsibilities, he has not written as much. Thus I was delighted to receive what will be today's Outside the Box last week. Roach argues that the US is getting ready for a subprime economy and the world, and in particular Asia, will also slow as a result. This is a particularly sobering essay, but one that should be read.
Stephen S. Roach is Chairman of Morgan Stanley Asia, serving as the Firm's senior representative to clients, governments, and regulators across the region. Prior to his appointment as Asia Chairman, Mr. Roach was Morgan Stanley's Chief Economist.
I trust you will fine this Outside the Box stimulating.
MACRO-MARKETS: Gold Trading Boot Camp
March 26, 2007
I probably get as many questions about gold as I do any subject. The fascination with the yellow metal permeates all levels of investors, and opinions can be quite strong. But few are more informed than those of good friend and trader extraordinaire, Greg Weldon.
Greg has written a new book called "Gold Trading Boot Camp, how to Master the Basics and Become a Successful Commodities Investor." I highly recommend it for those wanting to get a grasp of how a successful trader's mind works. Greg is one of the best and maybe the most prolific commentators on market trends. Up well before dawn each day, he is a machine. Each day he produces 15-20 pages of in-depth commentary on a huge variety of topics, both fundamental and technical, that informs some of the top trading desks in the world.
I asked him to give us some idea of what his book is about and then give us a top down view of the market for gold as it stands today. For those of you who follow gold, or are merely curious, I think you will find this fascinating.
You can get the book at Amazon.com. It is very readable. Greg has an effortless, unique style that is fun, fast-paced and easy to comprehend with not a lot of technical jargon to make it hard for the beginner yet enough insights that the professionals will be taking lots of notes.
Get the book and enjoy this week's Outside the Box.
Deconstructing Today’s Ongoing Revolution In Finance
March 19, 2007
General reader, today's Outside the Box is one that you are going to want to put your thinking caps on for. My good friend Woody Brock has kindly allowed me to present you with one of the sections from his quarterly comments. In his chapter "Deconstructing Today's Ongoing Revolution in Finance," Woody has written a particularly interesting and somewhat controversial section titled "Why the Economy Needs Vastly More Derivates, Not Less."
An all too common myth is that the total value of derivates is in and of itself dangerous because they are a form of leverage...but that is not the case. Derivatives, per se, are not a form of leverage; rather they afford the opportunity and make it easier and less risky for others to use leverage across many different assets and instruments (i.e. - mortgages, insurance, etc...). It is the leverage which is then the issue, as paradoxically, the decreased risk (hedging) aspects of derivatives allows investors to feel more comfortable with increased leverage, which sends a variety of signals to market participants.
The problem lies not in the instruments but in how the risk is distributed. While many of the larger, institutional players have used the offshoots of derivates to better hedge themselves, much of the smaller investor community has unwisely used the medium in a speculative manner. If a small homeowner is in trouble because of leverage on their mortgage, there just isn't anyone left to bail them out. Just as in the greater fool theory, the party only continues while someone is more foolish and irrational than the last fool.
Again, this is one of the more insightful articles featured in an Outside the Box. I believe it to be very important as its implications tie into what we are now seeing in the subprime mortgage market. May you enjoy Woody's insights and analysis.
China’s Engineered Drop
March 1, 2007
With Tuesday's market correction being the single biggest decline in the U.S. markets since 9/11, all eyes are focused on figuring out what exactly happened as well as what is going to happen next. This week's Special Edition of Outside the Box will feature a unique perspective on the recent events as Stratfor President George Friedman explains what took place in China and how this was an "engineered drop."
Stratfor is an intelligence company that provides in-depth research and analysis on global affairs and geopolitical events. George has been kind enough to present my readers with a couple of free articles each month in addition to a 50% discount to his service, which you can get by clicking the following link:
https://www.stratfor.com/offers/061130-50OFFa/?ref=061130-50OFFa
I trust that you will find George's insights on the market correction to be an "outside of the box" explanation.
‘Capital Ideas’ Or ‘CRAP’?
February 19, 2007
Introduction Today I am pleased to present to you an exceptionally interesting article for this week's Outside the Box. But before I do, let me say that it is roughly double in length as normal, so please read it at your leisure. Before I give my 2 cents on it, I would like to both acknowledge and thank Kathryn Welling for her permission to provide you with this. Kathryn is a partner of Welling@Weeden, a service provider of independent, timely and incisive news, research and analysis, to institutional investors. More info can be found on their site: http://welling.weedenco.com.
Her article "Capital Ideas or CRAP?" is an interview between her, Peter Bernstein and James Montier where they discuss an earlier piece written by Montier, which was featured as an Outside the Box. (You can view Montier's original article here.) In the interview, Bernstein takes on the criticism of the CAPM and, in the process, provides a wealth of insights and information. Montier also contributes to the dialogue by expounding upon his previous paper, in addition to sharing some intelligent remarks in reference to Bernstein's comments.
Again, despite the length, I urge you to take the time to read this conversation as the ideas discussed are paramount to gaining a more thorough understanding of the problems we face when making investment decisions. How do you invest in a world with so much competition for capital and ideas? This is one of those extremely insightful pieces you will want to read again and again.
I trust that you will find today's Outside the Box to be a superbly insightful teaching from some great investment thinkers.
Russia’s Great-Power Strategy
February 15, 2007
Today's special edition Outside the Box discusses the long-term strategy that Russian President Vladimir Putin is setting in place. Stratfor President George Friedman has written an intriguing article on what he sees as some motives, opportunities and scenarios that the Russian leadership faces in a complex set of maneuvers involving the United States and the Middle East.
For those of you unfamiliar with Stratfor, it is the closest thing to a "private CIA" as the organization provides in-depth analysis on geopolitical events spanning the globe. George has continued to offer my readers a special 50% discount off his normal subscription rate. You can receive the offer by clicking here. I have used his service for my views on emerging markets as well as my personal curiosity of global affairs.
I hope you continue to find Stratfor's analysis to be both thought provoking and "outside the box."
CAPM is CRAP, or, The Dead Parrot lives!
January 29, 2007
Within human nature there is a tendency to search for reasoning or logic to validate our own actions. This holds true in the academic sector as models are derived to provide an answer to a scenario, but sometimes such models do not translate well from the world of academia into that of the real world. This week's Outside the Box is presented by James Montier as he discusses his opinion on how the capital asset pricing model (CAPM) has affected the ways in which investors view and measure performance.
James is a good friend and the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book "Behavioral Finance - Insights into Irrational Minds and Markets."
In his article "CAPM is CRAP, or, The Dead Parrot lives!" Montier explains why he thinks the model is empirically bogus and how it has laid the groundwork for the modern day obsession with alpha and beta performance. He goes on to talk about how illogical it is to use relative performance as a metric when compared to measuring returns on an absolute basis.
This is an overall deep piece on the scale of thought but I trust that you will find it valuable in making investment related decisions.
It’s The Real Interest Rate That Counts
January 22, 2007
Today's "Outside the Box" will feature an essay by good friend David Kotok of Cumberland Advisors. In his article, David discusses what the development of a global economy means for currencies and the financial markets. He distills the foreign exchange markets into 4 major countries and explains both the policies and risks faced by the central banks of these nations, and how they affect you.
David R. Kotok co-founded Cumberland Advisors (www.cumber.com) in 1973 and has been its Chief Investment Officer since inception. David's articles and financial market comments have appeared in The New York Times, The Wall Street Journal, Barron's, and other publications. He has also appeared on CNN, CNBC, and Bloomberg TV. David is also one of the organizer's of the annual Shadow Fed fishing weekend each summer which I am privileged to get to attend.
I hope that you find this article to be both educational and thought provoking.