By Chris at www.CapitalistExploits.at [12]
Perhaps, like me, you've been hearing "the dollar is going to die" rhetoric nonstop for the last few years.
Our stance, well documented in these pages here [13], here [14], here [15] and here [16], amongst many, many other posts, has been that for the last 12 months we've been long, and remain long - very, very long!
Last week I woke to 3 articles forwarded to me by some friends. I don't typically pay any attention to these particular investment writers, as I categorize them in the "marketers," not "professionals" basket.
The reason they were forwarded to me was to point out the duplicity. All three have been in the "dollar's going to Hell" basket, and equally interesting, literally overnight all three have begun the spin process of changing their tune! The "unexpected" PBOC devaluation of the renminbi has been the catalyst.
Politicians could actually learn a few tricks from these guys! Here are a couple of the rules of their playbook:
Rule number 1: Never admit to being 100% wrong, and;
Rule number 2: Ensure you spin any market event to appear as if, "Why yes, of course we knew all along that the RMB was going to devalue."
Quite frankly, the articles my friends forwarded me are a pig to read. They are filled with emotionally laden sound bytes, arrogance, inaccuracies, and logic which, like a cardboard cutout, simply goes soggy in the rain. It gives me a headache, and as I read through them, I found myself yelling obscenities at my computer.
It's commendable in a morbid, psychologically imbalanced sort of way. A few simple Google searches reveal the deception, but no matter, press on we must, and revel in the fact that the vast majority of sheep will never do any meaningful due diligence.
When I see that sort of duplicity, then all credibility disappears for me. We have to be able to acknowledge our mistakes otherwise we're bound to repeat them.
We've gotten things wrong before and we'll certainly get them wrong again, but I always encourage a debate on the topics. Nothing can be more valuable than a rigorous debate in order to flesh out and better understand. After all, what if I'm wrong?
I have no particular ilk with any of these "investment experts," aka "newsletter writers." As a keen observer of market psychology and history I view them simply as another cog in the zeitgeist wheel which I find fascinating. Wolves will be wolves and sheep will be sheep.
Along the same lines, another tale that's been as popular as a Kim Kardashian nipple slip video, has been this idea that investors should be long the RMB because really, no really, it's going to replace the dollar soon, and possibly even while you sleep this evening. Yep, it's gonna happen that fast. Never mind it'd be the first reserve currency in the history of the world to disappear overnight (and there are sound reasons why this is the case), but let's not let rigorous analysis get in the way of sensationalism.
Before you send me any emails about the insolvency of the US government let me stop you right there. Yes, the US government is bankrupt (I know that "technically" that isn't possible, but you get my drift). Yes, they have a pension nightmare and yes, the country is a police state. But, looking at the world in isolation, together with an oft agenda-driven myopic view, needs to be seen for what it is - marketing - nothing more and nothing less. No different to that "must have" shampoo that miraculously gets you a gorgeous, loving, nymphomaniac girlfriend.
Why?
I never fully understood why people would write such rubbish, and how they get away with it. It wasn't until just the other day, during a conversation with a friend, that it all made perfect sense to me.
My friend, who I'll leave anonymous so as to not get him into any trouble, is a true "professional investor" who authors an investment newsletter (or two). His niche is value investing, and year after year he's soundly beaten the market. All he focuses on is finding great companies that have a high probability of success and capital appreciation. Novel idea.
Our discussion ran to the publishing business, and this is when it all made sense to me. Publishing houses test "copy," and when they find "copy" that works well, they devise a product around it and sell it. Boom!
I remarked how bass-ackward this really is. Marketing hype sans rigorous intellectual and analytical thought. No matter... if the narrative works marketers push it and push it big.
My friend's particular newsletter is less financially successful than many of its competitors, even though, like clockwork, it beats them all hands down on a pure return basis.
Shortly after this conversation I spoke with a long time reader who has become a friend. We discussed a purchase of land in Chile which he made some time ago. I pointed out that he's lost over 50% on his investment in dollar terms since 2011, and over 40% since 2013. It wasn't something he'd thought about, and thankfully he is un-leveraged.
To break even on this investment he now needs 100% appreciation. Think about that for a moment. What's more is I think the Chilean peso goes even lower. In fact, it's just broken a long-term trend line (as have some other LatAm currencies, including the Colombian Peso), and this is where we get big acceleration phases. We think you have to be short. We may be wrong, and of course we have been in the past. Our thinking, if interested, is laid out in our report entitled: USD Bull Report [17].
Chilean peso
My friend (now a bit more depressed than he was before our call) and I discussed what likely lies in store. He was (falsely?) comforted by the idea that this is temporary, a short-term setback for the Chilean economy and currency. I think this is a huge risk. Failing to understand why the USD is rallying in the first place means that the odds of understanding why and when it will end are vanishingly thin.
Part of the disconnect lies in failing to understand global capital flows, why the USD is rallying, and why on the balance of probability we're still at the beginning of this run, not near the end.
Back to China and the RMB
I've heard the argument that China can sell their USD holdings to defend the RMB. Even if that were the case this fails to take into account the entire picture. There are many reasons for China to devalue, not the least of which is that it's politically palatable. They are still an export driven economy who have seen their currency rise substantially against their competitors such as Japan.
Trying to quantify their FX reserves as a % of GDP is nuts. Their numbers are bollocks and can't be trusted. Mark Hart has a more meaningful measure of reserve adequacy. This is FX reserves divided my M2.
2/ the best measure of reserve adequacy is fx reserves/m2. China's is 17%: $3.69T/$21.49T. Pre 97 crisis Asian tigers averaged apprx 28%
— Mark Hart (@MarkHar13514700) August 11, 2015 [18]
This means that with a meaningful capital flight China will NOT have sufficient reserves to defend its currency. The USD will be strong NOT because it's the reserve currency, that has always been the case, but it's NOT the answer now. The USD will be strong principally due to an unwinding of the carry trade [19]. If you don't understand this you'll be lost. If you have to pay back a loan to an individual who is insolvent it doesn't matter a damn. You still have to pay that money back. That the US Government is insolvent is IRRELEVANT right now. The low hanging fruit then?
Turkish lira
Poster child of external debt.
South African rand
Both of these two currencies are at major long term resistance levels. If they break from here it's waterfall time.
Colombian peso
Korean won
Bottom line? Don't go walking into an investment without understanding its context.
When someone (newsletter writer or other "professional") has a vested interest in telling you something, make sure you understand their bias and their agenda. One day, when I'm involved in a fund or funds (soon), please be sure to question me on my bias and my agenda. You'll get the truth.
Until then (soon) I have no stake in the fight, other than to make money by being positioned correctly.
- Chris
"Fortunately for serious minds, a bias recognized is a bias sterilized." - Benjamin Haydon