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Don’t call me Mr. Doom, call me Mr. Realist
I had an interesting conversation last week with a potential investor. I described my thoughts on the US economy, explaining that in our (my firm’s) view the current strength of the US economy is significantly boosted by steroids graciously provided by the US government in the form of stimulus. (I’ve written about it in this article.) I explained that since stimulus exaggerates the true performance of our economy, we’ve positioned our portfolio through stock selection for a subdued, low-growth type of recovery.
Then I shared my concerns about the Chinese economy – it has tremendous overcapacity in the commercial and residential real estate and industrial sectors (see this presentation: “China – The Mother of All Black Swans”). As the Chinese economy painfully readjusts and chews through the excesses, Chinese demand for industrial, energy, and commodity goods will be significantly lower. Thus in our portfolios we have reduced our exposure to these sectors.
And finally, I explained our views on Japan. As you’ll see from charts in the attached presentation (“Japan – Past the Point of No Return”), Japan has an enormous amount of debt (second only to Zimbabwe), a stagnating economy, and the oldest population in the world (this explains why the savings rate has declined from the teens towards zero). These factors will lead to significantly higher interest rates.
As an unbiased analyst it is hard to come to any other conclusion about Japan, and I am going to put it lightly: Japan is screwed! As a consequence, we believe higher interest rates globally are unavoidable, as Japan, now the largest foreign holder of the US Treasuries (together with China, the second largest holder), turns from buyer of Treasuries to net seller. So in our portfolio we are making sure that our companies have strong balance sheets and/or significant free cash flows to pay off debt, if (more likely when) interest rates rise.
With every country mentioned the potential investor got paler and paler; and before I got to the EU, a union that was created, as my friend John Mauldin put it, for prosperity not adversity, he exclaimed, “You are Dr. Doom!”
I don’t have a PhD, thus I can only be called Mr. Doom – but I am not that either. A joke told by Warren Buffett comes to mind: a patient, after hearing from a doctor that he has cancer, tells the doctor, “Doc, I don’t have enough money for the surgery, but maybe could I pay you to touch up the x-ray?” Hope and self-deception are not a strategy. I analyze and accept the conclusions of my analysis, no matter how painful they may be, and adjust my actions according to my findings. I am neither a pessimist nor an optimist, I am a realist. So at my firm we look at risks and constantly ask ourselves: What can we do to avoid them (or benefit from them) in our clients’ portfolios? So don’t call me Mr. Doom, call me Mr. Realist.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007). To receive Vitaliy’s future articles my email, click here.
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The cold hard facts are that the 'world economy' has entered into subdued growth as the tectonic, monetary plates unlink and shift, altering the world governmental structures and economic systems. The cold hard truth is that the imperfect economic 'thought system', which is derived from observing nature's economy but reimaged in the eyes of man, is and has been used for centuries as a mean to control the population and its size. Today is no different economic growth over the past decades was for the sole purpose of laying the communications infrastructure for the world and its corresponding components. Now that most of the grunt work has been finished the spigots are closing and the population growth is being curtailed. We can look for a future disguised with means(policies,monetary reforms) to thining us. The best approach when analyzing your hypotheses about future trends is to keep this in mind because really it is the fuel which drives the decisions, financial or political. RFP a fund strategy.
You Are Not Alone
Feb. 24 (Bloomberg) -- China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt- fueled bubble” within 10 years, sparking a regional recession, according to Harvard University Professor Kenneth Rogoff.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4MydrE5VOEM&pos=4
neither a bear nor a bull be....what wisdom...
i on the other hand, being a fake economist, am a bear...2 quarters of ho hum growth then the fin de siecle....
Argentina, Mexico, Russia, Thailand and Vietnam closed
banks and confiscated pensions and savings...
http://www.jubileeprosperity.com/
So why are you long anything? Your companies might have
fine balance sheets, but you're still going to get
hammered because all the institutional boyz are either
indexing or etf-ing. When the paddwagon makes a pickup,
they will take the good girls with the bad.
Vitaly I agree, but... End of the day the real economy is composed of human capital and installed productive capacity. These have not been significantly impaired. The world is as "rich" today as we were a year ago.
The only problem (very significant) is that the monetary system which we use to allocate resources has broken down beyond the point of repair. What does this mean? Essentially, we have to setup a new monetary system. This means that accumulated paper wealth will likely be drastically confiscated/redistributed. That will be chaotic, but after a few years the world will indeed be as productive as it was before the crisis.
While two years ago I was recommending reading up on the Japanese depression, I am now recommending reading up on the Argentinean crisis/default with all the draconian / illegal measures that were used to wipe the slate clean.
Why would you assume that the productive elements of our society would take part in rebuilding the economy after their accumulated wealth has been "confiscated/redistributed"?
Why would you assume that such confiscation/redistribution would not happen over and over again?
Not to mention millions of heavily-indebted, undereducated graduates that see nothing positive on the horizon. And what about the obviously unskilled blue collar masses?
Situation? Bleak. And that's if you even have a job.
"productive elements of the economy"
"after their wealth has been stolen redistributed"
So basically, most of the people left that are still working and "having taxes confiscated" are in higher tax brackets.
Yet, these are the same people that have been offshoring our jobs and hollowing out this country for thirty years. Productive indeed.
Next thing you'll tell me is that Goldman Sachs is a "productive member of the economy" because they shuffle wealth around to steal from the working class.
Just because (some) people are greedy and have taken all they can from our economy without investing back into it, it doesn't make them very productive.
I made no references to taxation; rather referring to potential loss of paper wealth that would occur in a currency "makeover".
I made no assumptions about the tax brackets of those still working.
I was referring to what's left of the productive middle classes, who are going to take the worst of it when GS et al finish their current business.
And when you presume to know what I'll say next, then give me the pithy moral at the end, you become a tool.
Reread my comment.
There is a clear difference between producing and looting.
and just how is that argentinian policy working
these days?
human capital has been vastly impaired - perhaps
not in its essence - but in its organization and
relationships....human capital is not about
the merits of the individuals but how they relate
in productive output....
as you note the currency allocating their
work is badly impaired, thus the capital itself
is impaired as well....
in addition, even the essence degrades as time
takes its toll in the form of outmoded skills
and knowledge...
Yeah, yeah it’s THEIR money but one of the problems with the investment management business is having to spend tons of time hand-holding clients. My latest is a guy – formerly smart – now in his mid-80’s. After trying to get a lot of my time and money for free he’s bought a BUNCH – 80% - Treasuries and CA munis. He has already lost 30% of a family trust account he manages by investing in a friend’s startup.
Love the Buffet joke or analogy.
Alter the x-ray. That is exactly where we are. As I speak to colleagues I am incessantly bombarded by their ego and passion with next to zero substance. Their incapability to substantiate their altruistic viewpoint is what leads me to self-affirm my own "doom and gloom" perspective.
Too big to fail..the USA/China partnership each with major strengths that will keep the world's economy moving onward and upward. Well at least onward.
make that a subdued low growth type of jobless recovery.
apparently green shoots induce irrational exuberance when dried and smoked.
Vitaliy, you worry to much about that big scraping sound on the side of the ship. The ship is unsinkable; the owner, the press, everyone in the know says so.
We ran over that iceburg like it wasn't there/
Perfect. Just like the Titanic, the impact of the iceberg wasn't the big problem, it was the unstoppable flooding in the bowels of the ship that eventually sank it. Perfect analogy.
My line is...be not too bullish, or too bearish. Benefit from both.