I did an interview on CNBC Asia with the Hong Kong anchors last night to discuss global markets, oil prices, and the implications of Pres. Obama’s magical mystery tour in Asia this week. (When asked what he planned to do after the trip he said “I’m going to Disneyland!”) The link and talking points I sent to brief the anchors before the show are below FYI. Their questions–my answers are in BOLD. Interesting week.
JR
http://video.cnbc.com/gallery/?video=3000329816
1. Goldilocks economy right now?
IT WOULD BE A MISTAKE TO INTERPRET U.S. MODEST, POSITIVE GROWTH AND MODEST INFLATION AS SIGNS OF HEALTH.
INTEREST RATES–THE ONES THAT REALLY MATTER FOR CONSUMERS AND EMPLOYERS–ARE HIGH, NOT LOW. U.S. CREDIT MARKETS ARE STILL MIRED IN NON-PRICE RATIONING. THAT MEANS POTENTIAL BORROWERS WHO ARE SHUT OUT OF LOANS HAVE HIGH OPPORTUNITY COSTS OF CREDIT, WHICH HAS CREATED BOOMING MARKETS FOR PAY DAY LOANS AND MEZZANINE LENDING AT 15-20% RATES.
YES, T-BILL AND FED FUNDS RATES ARE LOW BUT ONLY PUBLIC COMPANIES AND LARGE FINANCIAL CUSTOMERS OF BIG MONEY-CENTER BANKS (PRIVATE EQUITY SPONSORS, HEDGE FUNDS, BUSINESS DEVELOPMENT COMPANIES, M&A DEALS, IPO’S) HAVE ACCESS TO CREDIT AT LOW PUBLISHED RATES.
TRADITIONAL SMALL BANK CUSTOMERS (SMALL AND MEDIUM SIZE BUSINESSES (SME’S), LOCAL CONSUMER LOANS, LOCAL RESIDENTIAL MORTGAGES, LOCAL COMMERCIAL PROPERTY LOANS) HAVE BEEN ORPHANED BY THE DEMISE OF SMALL BANKS UNDER THE WEIGHT OF DODD-FRANK COMPLIANCE COSTS. FOR THEM THE COST OF CREDIT IS VERY HIGH. THERE IS NOTHING ON THE HORIZON TO CHANGE THIS SITUATION.
IN THIS TWO-SPEED ECONOMY, WE HAVE A BOOMING WALL STREET ECONOMY WITH STRONG ASSET MARKETS FOR PUBLIC COMPANIES BUT A SLOW MAIN STREET ECONOMY WITH SLOW JOB CREATION, POSITIVE BUT WEAK GDP AND INCOME GROWTH, LITTLE PRICING POWER FOR COMPANIES, WEAK REVENUE AND EARNINGS GROWTH, AND STOCK PRICES THAT CONTINUE TO RISE FASTER THAN EARNINGS. THIS CREATES AN ENVIRONMENT WHERE NERVOUS INVESTORS WORRY ABOUT VALUATIONS, A RECIPE FOR VOLATILE STOCK PRICES.
2. Near-zero U.S. interest rates are too low and should make the Federal
Reserve nervous, according to Charles Plosser… Your thoughts?
SO WHAT IS THE FED TO DO? THE BEST COURSE (0% PROBABILITY) WOULD BE FOR THE FED TO SHIFT THEIR DIALOGUE FROM THEIR IMAGINARY GOALS OF SETTING INTEREST RATES OR UNEMPLOYMENT RATES, NEITHER OF WHICH THEY CAN SUCCESSFULLY DO. ECONOMISTS (PLOSSER INCLUDED) ARE STUCK IN A MENTAL MODEL IN WHICH MARKETS ARE IN EQUILIBRIUM AT ALL TIMES. IF THAT WERE TRUE, IT WOULD BE APPROPRIATE TO VIEW INTEREST RATES AS THE COST OF CREDIT. BUT IF THAT WERE TRUE THERE WOULD ALSO HAVE BEEN NO GLOBAL FINANCIAL CRISIS.
THE FED SHOULD GIVE US CLARITY OF THE COURSE OF FUTURE LEVELS OF BANK RESERVES, I.E., THE SIZE OF THEIR BALANCE SHEET.
SO FAR, THEY HAVE TOLD US THAT QE IS OVER, I.E., THAT THEY WILL NOT FURTHER INCREASE THE MASSIVE $3 TRILLION STOCK OF BANK RESERVES IN PLACE TODAY–THE LEGACY OF THE QE’S. THAT LEAVES 2 FURTHER QUESTIONS TO ADDRESS.
A. WILL CURRENT RESERVES REMAIN IN PLACE FOR AN EXTENDED PERIOD? IF SO, WE HAVE A SERIOUS INFLATION ISSUE AHEAD OF US ONCE BANKS HAVE CONVERTED RESERVES TO LOANS AND DEPOSITS.
B. WHAT WILL THEY DO TO GET SMALL BANKS (AND THEIR SME CUSTOMERS) BACK IN BUSINESS? EXEMPTING SMALL BANKS FROM DODD-FRANK WOULD HELP. IT IS NOT GOING TO HAPPEN.
3. investment themes & strategies for the last 7 weeks of 2014
ON NET, GROWTH IS THE US AND CHINA WILL CONTINUE AT CURRENT LEVELS WITH MODEST BUT POSITIVE INFLATION. EARNINGS WILL RISE FASTER THAN GDP. STOCK PRICES WILL CONTINUE TO RISE.
I AM NOW 100% INVESTED AGAIN, AFTER A DEFENSIVE PERIOD OVER THE PAST WEEKS.
OVERWEIGHT US EQUITIES; UNDERWEIGHT EUROPE AND JAPAN. DOLLAR WILL REMAIN STONG AGAINST BOTH THE EURO AND THE YEN. ANY MOVE BY THE ECB TOWARDS MEANINGFUL QE WILL TRASH THE EURO.
WITH CREDIT RATIONING STILL IN PLACE, THE MOST INTERESTING U.S. INVESTMENTS ARE IN SECTORS/COMPANIES THAT GET THEIR CAPITAL FROM CHEAP PUBLIC MARKETS AND DEPLOY IT IN THE HIGH-RETURN MIDDLE AND LOWER MARKETS. THAT MEANS PRIVATE EQUITY FIRMS, MEZZANINE LENDERS, BUSINESS DEVELOPMENT LENDERS, AND OTHER ‘GREY MARKET’ LENDERS.
I ALSO LIKE HEALTH CARE AND EDUCATION INVESTMENTS, 2 SECTORS THAT HAVE HAD NO MEANINGFUL INCREASE IN PRODUCTIVITY WHERE REGULATIONS AND TECHNOLOGY ARE CHANGING THE WAY SERVICES ARE DELIVERED.
THE OPENING OF THE HONG-KONG-SHANGHAI MARKET LINK NEXT WEEK IS A VERY POSITIVE EVENT FOR INVESTORS EVERYWHERE. IT IS JUST THE BEGINNING OF MORE OPEN CAPITAL MARKETS. I WANT EXPOSURE TO LARGE CAP NAMES IN BOTH HONG KONG AND CHINA MARKETS FOR THE REMAINDER OF THE YEAR.
THE OPENING OF THE SAUDI ARABIAN MARKET TO FOREIGN INSTITUTIONAL INVESTORS EARLY NEXT YEAR IS A BIG DEAL TOO. THE GULF REGION IS A MISSING LINK FOR PENSION FUNDS AND OTHER INSTITUTIONAL INVESTORS. THIS WILL BE VERY POSITIVE FOR THE SAUDI MARKET.
I DON’T LIKE THE RISK OF OWNING LONG-TERM BONDS ANYWHERE TODAY.
4. Any thoughts off the back of Obama’s longest trip abroad (APEC/ASEAN)
LAST WEEK’S ELECTION RESULTS SHOW THAT FOR MANY AMERICANS PRES. OBAMA’S TRIP ABROAD SHOULD BE EVEN LONGER, PERHAPS EVEN 2 YEARS LONG.
IT IS A VERY POSITIVE THING FOR THE U.S. PRESIDENT TO ENGAGE PERSONALLY WITH ASIAN LEADERS, ESPECIALLY WITH THE CHINESE LEADERS.
5. Anything else you’d like to discuss?
I HAVE BEEN BUYING OIL SHARES. OIL PRICE DECLINES HAVE BEEN OVERDONE. DEMAND WILL NOT BE AS WEAK AS SOME FEAR–THE US AND ASIA ARE GROWING. SOME DAY, MAYBE EUROPE AND JAPAN WILL GROW TOO. (MAYBE)
FRACKING AND RISING U.S. ENERGY SUPPLY IS REAL BUT SO IS EMERGING MARKET GROWTH. ON NET THEY WILL BALANCE OUT, LEAVING OPEN PRODUCTION NEAR CURRENT LEVELS. SAUDI ARABIA HAS NOT ‘ENGINEERED’ THE PRICE DROP FOR POLITICAL REASONS. THEY WERE JUST PROTECTING MARKET SHARE. PRICES SHOULD FIRM SOMEWHAT IN THE COMING MONTHS.
THE PART OF THIS STORY THAT NO-ONE IS TALKING ABOUT? INCREASED ENERGY PRODUCTION OVER THE NEXT 25 YEARS WILL REQUIRE $37 TRILLION IN CAPITAL SPENDING TO DO. THAT IS MORE THAN HALF TOTAL WORLD MARKET CAP TODAY. DEVELOPED COUNTRY GOVERNMENTS ARE NOT GOING TO STOP BORROWING. AS A RESULT, THERE WILL BE A LOG-JAM ACCESSING CAPITAL. THIS IS VERY GOOD FOR LONG-TERM, PATIENT INVESTORS.
JR
