 | | The Daily Reckoning | Wednesday, October 6, 2010 |
- Big money in not-so-little China: a closer look at boomtown Asia,
- Insider selling goes ballistic as those in-the-know dash for the exit,
- Plus, Bill Bonner on the idiocy of the "old normal" and the flight of the millionaires...
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|  | | Investing in the World of the New
Normal
| | And how to cope with the lower returns you’re likely to find there | |  | | Eric Fry |
Reporting from Laguna Beach, California...
First, a personal note...
My sincere thanks to all the Daily Reckoning readers who offered kind words about the untimely death of my cat, Uzi. I truly appreciate the emails - both from those who offered condolences and from those who merely appreciated this real-world illustration of asymmetric risk.
Many thanks!
But since no other pets, family members or relatives perished during the last 48 hours, today's edition of The Daily Reckoning will not impart any additional hard-life lessons about risk or reward. Instead, we'll return to our usual diet of dispassionate analysis, co-mingled with skepticism, disbelief, bewilderment and/or pure panic.
In his latest investment commentary, Bill Gross, CEO of PIMCO, notes that long-time hedge fund manager, Stan Druckenmiller, is finally hanging up his (gilded) spurs. According to Gross, Druckenmiller's retirement is "reflective of a broader trend in the capital markets, one which saw the availability of cheap financing drive asset prices to unsustainable heights during the dotcom and housing bubble of the past decade, and then suffered the slings and arrows of a liquidity crisis in 2008 to date."
Gross asserts that "cheap financing" also fueled "lots of other successful business models over the past 25 years: housing, commercial real estate, investment banking, goodness - dare I say, investment management." Druckenmiller, and his 30% annulized returns were merely one notable beneficiary of the Easy Money Era. But the easy money is gone...and so is Druckenmiller.
"The New Normal has a new set of rules," Gross cautions. "What once pumped asset prices and favored the production of paper, as opposed to things, is now in retrograde. Leverage and deregulation are fading from the horizon and their polar opposites are in the ascendant. Some characterize it in biblical terms - seven fat years to be followed by seven years of lean. Others like Michael Moore and Oliver Stone describe it in terms of social justice - greed no longer is good. And the hedge fund guys - well, they just take their ball and go home...
"The unmistakable fact is that future investment returns will be far lower than historical averages," Gross predicts. "There are all sizes and shapes of 'investors' out there who have not correctly visualized the lower return world of the New Normal."
Gross does not name names, but he does single out pension plan managers for their failure to understand the New Normal.
Despite the fact that median annualized pension plan returns for the past 10 years have averaged 3%, most pension plan managers and consultants continue to assume 8% annualized returns in perpetuity. "Best of luck," Gross scoffs. "The last time I checked, the investment grade bond market yielded only 2.5%," which means that a 60/40 allocation of stocks and bonds "would require 12% from stocks to hit the magical 8% pool ball."
Gross is skeptical...and so are the insiders of America's largest public corporations. The latest ratio of insider selling to insider buying was 1,413 to 1. That's not a typo. During the week ending September 24, insiders sold a whopping $417 million worth of company stock, while insiders purchased only $295 thousand worth of stock. Do the math.
Even if we were to eliminate the $233 million of Oracle shares sold by insiders, the ratio of selling to buying would remain a hefty 656-to- one - or nearly identical to the prior week's ratio of 650-to-one.
Interestingly, finance company executives are conspicuously frequent members of the "Insider Selling" list. More than one year has passed since an insider purchased a single share of Citigroup or J.P. Morgan in the open market. More than 18 months have passed since an insider purchased a single share of Wells Fargo or Goldman Sachs in the open market. Meanwhile, dozens of insiders at these firms have sold shares during the last 18 months - raising billions of dollars in the process.
These remarkably large and lopsided insider transactions suggest that the Great Unwinding of the credit bubble may still have some unwinding left to do. Notwithstanding yesterday's hoopla on Capitol Hill that Treasury's Troubled Asset Relief Program (TARP) would lose "only" $30 billion - and the knock-on inference that the credit crisis has ended - the insiders at most of the largest TARP recipients are selling their stocks, not buying them.
The TARP owes its "success" to a flukey combination of dumb luck and large-scale market manipulation. That's the "why" of the story. But the "what" of the story is that the TARP bought low and sold high. The insiders at most of the largest TARP-recipient firms have done, and are doing, the exact same thing.
Maybe these insiders are raising a little cash to pay their country club dues...or maybe they're raising cash because the Troubled Asset Relief Program is winding down...even though the troubled assets are still hanging around.
"Deleveraging [remains] the fashion du jour," says Gross, and meager stock market returns remain the likely outcome.
"Stocks are staring straight into new normal real growth rates of 2% or less," Gross warns. "There is no 8% there for pension funds. There are no stocks for the long run at 12% returns. And the most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living. Stan Druckenmiller is leaving, and with good reason. A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead."
Bill Gross said it; we merely thought it.
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| |
| The Daily Reckoning Presents
| When Emerging Markets Emerge
| |  | | Chris Mayer |
Sometimes the best way for an investor to see ahead is to take a look and see what happened in the past. This is why Charlie Munger, the wise old vice chairman at Berkshire Hathaway, likes to say, "There are answers worth billions of dollars in a $30 history book."
The history books have a riveting story to tell about emerging markets. This story has clues that tell us what might happen in the big emerging markets of today - such as China, India and Brazil. And these clues, like a trail of breadcrumbs, lead to one great investment theme. It's so sweeping and powerful that it has even huge multinationals giddy at the opportunity.
First, a little of that history, beginning with postwar Japan and the "three electric treasures"...
In the 1950s, Japan was the hot story. In the postwar era, Japan's economy began to industrialize in a big way. Investment poured in from all over the world. Steel mills and power plants and factories sprouted up quickly like bean plants. Japan soon became a big producer of ships, electronics, petrochemicals, photographic equipment, synthetic fibers and automobiles.
The Japanese people also moved from rural areas to the cities in large numbers. The population of Tokyo, for example, more than doubled in less than 10 years. With that came a hunger for new consumer goods. People ate better - that's always the first thing to change. But these new consumers also coveted the goods that make life easier, such as washing machines, refrigerators and television sets.
In fact, demand was so high for these three goods that people called them the "three electric treasures." Sales of washing machines quadrupled between 1953-55. Then sales doubled again in 1956. The number of TVs went up nearly fivefold in one year - 1957. And then the number doubled again in '58!
Yet while this was going on, there were still a lot of growing pains. There was still widespread poverty. Masses of people huddled up in tiny apartments. Sewage facilities were inadequate. Water was often unsafe to drink. Traffic was terrible, since road building couldn't keep up with the ballooning number of cars on the road. Pollution was a big problem.
Does this sound familiar? I could easily be writing about China today!
I owe these observations on Japan to the late Robert Shaplen, a longtime Asia correspondent. Shaplen first arrived in Asia in 1944, near Leyte, in the Philippines. He was a war correspondent with the 1st Cavalry Division and he landed on a beach softened up by US Navy artillery. Walking through the surf, Shaplen recalls the acrid smoke and shattered coconut trees. What a way to begin a long tour in Asia! But his departure was even more dramatic. In 1975, he would leave from Saigon aboard a Sea Stallion helicopter flown by US Marines taking communist rocket and small-arms fire near the American defense compound at Tan Son Nhut Air Base.
In between these poles, Shaplen managed 30 years of distinguished reporting on the Far East as a New Yorker correspondent. I've been reading pieces of his A Turning Wheel (the '79 edition). It's a kind of summing up of his 30-year tour of duty in the Far East, based on thousands of interviews and his own research and observations traipsing throughout Asia over that time.
In his book, Shaplen also has striking observations about that other superstar of the period: South Korea. "Seoul became Asia's biggest boomtown," Shaplen writes, "a throbbing metropolis of 7.5 million (one- fifth of the South's population) and the hub of what was probably the fastest-developing nation in the world except for the petroleum powers."
The pattern of development was the same. A man living in Seoul then saw the factories sprout up out of nowhere. In came the steel mills, cement plants and shipyards. He saw apartments and high-rise office buildings and industrial centers fill in the city blocks. He watched the massive migration of people from the farms and villages to the cities. New subways and hotels opened. It became hard to find an empty taxi. And good restaurants stayed crowded until 10 at night. People got richer. Per capita income in 1977 was four times what it was 10 years before.
I am struck by the similarities of these development stories and the ones unfolding today. I wonder if we're seeing the same thing all over again, only the names are different. Today, it's about China and India and Brazil. I also see another wave of similarly sweeping changes and growth in other parts of the world. I have my eye on Vietnam and Indonesia, on Colombia, the Middle East and parts of Africa.
The telltale patterns are all there...
Look at Vietnam, a market of 86 million people - more than half under 25 years of age. One of the other books I'm reading is Vietnam: Rising Dragon by BBC correspondent Bill Hayton. It's a new book about Vietnam's swift rise. Again, you see the same patterns repeat. "Vietnam is in the middle of a revolution," Hayton writes, "capitalism is flooding into a nominally communist society, fields are disappearing under new industrial parks, villagers are flocking to booming cities... It's one of the most breathtaking periods of social change anywhere, ever."
The money is pouring in. The factories are going up. Samsung has a $700 million plant in Hanoi. Intel has a billion-dollar chip plant outside of Saigon. Canon, Hon Hai, NEC and many others are already there. Yet ports are congested and roads are poor. It reminds one of the early years of Japan or South Korea...or China.
If you listen to what companies are saying - especially some of the big multinationals or some of the small pups with operations overseas - these kinds of markets get them excited.
They think about all the razor blades and batteries and beer they can sell. Really, for the first time, we'll have hundreds of millions of people that can buy simple things like a can of baked beans. (As one H.J. Heinz manager working in Nigeria says, a can of baked beans is "considered a special treat here.")
Take Proctor & Gamble, a huge consumer products company. It estimates that if people in China and India spent at a level comparable to that in Mexico, P&G's sales would grow by $40 billion. That's huge for a company that generates $79 billion in sales today. That potential $40 billion prize has sharpened the attention of P&G's top brass. And it's a lure for competitors as well.
What will drive these sales is the bulging global middle class. That middle class gets more than 70 million new members a year - on its way to 2 billion in two decades.
I am most optimistic about investing when I think about this big picture. The emerging markets will provide lots and lots of investment opportunities over the next several years. Watch this space...closely and continuously.
Chris Mayer,
for The Daily Reckoning
Joel's Note: Fresh from his recent "flip-flops-on-ground" research trip to Brazil, Chris is busy planning another excursion for this coming January. In short, a handful of readers and investors will join both Chris and Daily Reckoning editorial director, Eric Fry, as our two intrepid correspondents venture to Southeast Asia.
Already the buzz is growing around the region with, as Chris mentioned above, some irrepressible macro trends puffing the sails of countries like Viet Nam, Cambodia and Thailand. Chris and Eric will visit all three of these picturesque opportunity havens, as well as the regional banking hub of Singapore. Having tagged along on a similar field trip to Beijing with Chris earlier this year, I couldn't recommend this opportunity more highly.
If you'd interested in taking part in the excursion - which runs from January 18-31, you're invited to check out the details here.
These groups tend to be pretty small, so don't delay. Learn more here:
Southeast Asia Profit Expedition Singapore, Vietnam, Cambodia, Thailand - January 18-31, 2011
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| | | | Bill Bonner |
Feds Plan to Duplicate the "Success" of
Quantitative Easing | |  | | Bill Bonner |
Reckoning from Paris, France...
The time to hesitate is through
No time to wallow in the mire
Try now, we can only lose
And our love become a funeral pyre
- The Doors
The Fed spoke. The markets soared.
The Dow rose 193 points yesterday. Gold shot up $23.
The dollar sank, of course...and is now back down to $1.38 per euro.
What did the Fed say to cause so much agitation?
It said that its first round of "quantitative easing" (AKA money printing) was a great success and that it planned to do more. No sitting on their hands at the Fed. No idling on the sidelines. No waiting to see what develops.
Uh uh... They're going to take action.
Japan too. They've been watching their long, slow, soft depression for the last 20 years. They've had it. Enough! Basta! Or whatever you say in Japan.
The Japanese feds and their American colleagues have apparently decided that the time to hesitate is through. They're going to set the night on fire!
They've got the will. They've got the way. They've got the weapon in their hands. They're going to use it. Collateral damage? What?
Stand clear, dear reader. Hold onto your gold.
Meanwhile, now that Ken Fisher has spoken on the subject, our fears and doubts are greatly salved. Our anxieties relieved. Our nerves are settled.
Fisher says the whole idea of a "new normal" - with slow growth and high unemployment - is "idiotic."
Bloomberg has the details:
Sept. 28 (Bloomberg) - The next decade will be as good for investors as the 1990s, said Ken Fisher, the billionaire chief executive officer of Fisher Investments Inc., dismissing notions that developed economies face below-average growth.
Fisher said the concept of a "new normal" is "idiotic," pitting him against money managers including Mohamed El-Erian, the CEO of Pacific Investment Management Co., which coined the term to describe a world of high unemployment, more regulation, and the shrinking importance of the US in the global economy.
"We are chimpanzees with no memory," Fisher said at the Forbes Global CEO Conference in Sydney. "The next 10 years are going to be just as good as the 1990s. The problems in this current environment we think are so different, and so new and so unique. It's the same stupid old normal we've always had. We've got a great future." Whew!
That puts our mind at ease. But wait. We seem to recall Ken relieved our worries in 2007 too. Yes...we were concerned that the bottom was falling out of the housing market. He came to our office in London. Ken told us not to worry. Here's what he said in March 2007, just as the subprime market was beginning to crack apart:
For months now the debate has been over whether America will have a hard landing or soft landing, the answer hinging on how big 2007's housing disaster turns out to be. Well, there won't be any housing disaster. We won't have a landing at all, soft or hard. Right now the US and global economies are both accelerating.
You can see right through the housing crash story by looking at the prices of housing stocks. The market knows what the economic worrywarts do not, which is that the housing sector is already making a comeback. In the last six months housing stocks are up 24%, well ahead of the overall market. If housing were destined to fall apart in 2007 these stocks wouldn't be so strong now.
Did you know that housing sales are up in the last few months, not down, and that inventories are lower than six months ago? We're accelerating, not landing. Oh, and here's Ken, turning his eye to the US debt situation in 2007:
We shouldn't reduce debt. In fact, we need more debt - even from stupid borrowers. The right level of debt would be when we've borrowed enough to drive interest rates up, the return down, or a combination of both. Then, we'll be optimal. But we're far from that. The US has $55 trillion in debt of all types - mortgages, car loans, local and federal, according to the Federal Reserve Flow of Funds Accounts. I would argue that tripling all these types of debt would probably get us close to profit maximization and increase wealth for society. Imagine what we could invest in! Let's see. Triple debt. Hmmm... That would be $165 trillion worth of debt...or about 13 times GDP. So, let's say this moved interest rates to a reasonable 5% level. That means that more than half the entire nation's output would be used just to service the debt.
Well, you gotta hand it to Ken. You gotta love him. Most analysts and economists waffle. Most of them give you "on one hand this...on the other hand that"...most hedge their bets and temper their opinions with doubt and maybes. Not Ken. It's all out in the open...100% nonsense...pure, undiluted claptrap.
And more thoughts...
Expatriation. It's happening. Thousands of people are picking up stakes and leaving. They're leaving their high-tax home states.
"I'm outa here. I've had enough," said a friend at dinner last week. "[Maryland Governor] O'Malley thinks he can tax us all he wants. But I don't have to put up with it. I can move. We bought a place in Florida.
"He probably thinks it doesn't matter. What's a single taxpayer, more or less? That's not going to change the outcome of an election. But I'm taking my business with me. I'll set up shop in Florida. I don't have to be in Maryland. I can get crab cakes in Miami too."
What had set him off was an article in The Wall Street Journal. "Millionaires Go Missing: Maryland's fleeced taxpayers fight back."
The WSJ:
Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."
However, there were two things that Maryland politicians didn't count on (1) a world-wide economic crisis decreasing the number of million dollar earners and (2) millionaires simply leaving (or taking in less income). "By April 2009, one-third of the millionaires have disappeared from Maryland tax rolls. On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year - even at higher rates. What the WSJ failed to mention was that 6.25% isn't the end of it. There are local taxes too. And in Baltimore City and Montgomery County, for example, the additional local taxes bring the total take up to nearly 10%.
If you have $100,000 of taxable income, in other words, you pay almost $10,000 for the dubious privilege of living in Baltimore rather than, say, some low-tax city in the Sunbelt.
In our own business, we have an office in Baltimore and one in Florida. We can't move our entire business to Florida, but more and more we hear from employees in Baltimore who want to move to Florida. So the business moves...organically, naturally. And when we create new businesses we put them in Florida, rather than in Maryland.
We already see the results of this and similar policies in Baltimore. People who create wealth tend to live outside the city...or move out. In the city limits, zombies have taken over - with a high percentage of cities' populations on government payrolls or various forms of welfare. They're less interested in creating wealth than they are in redistributing it to the shuffling, mouth-breathing masses.
The city's largest employer, for example, Johns Hopkins, is a private institution. And a great one, from what we've heard. But it is hardly independent of the zombies. Much of its research and operating budgets are funded by the government.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Millionaires Collect Unemployment. Zombie Takeover Spreads.
We’re not talking about people breaking the law. Or people doing anything wrong. We’re just talking about zombification...in which you fully comply with the law...and begin standing in lines, filling out paper work...angling...chiseling...and getting something from the government. A special parking place...drugs...jobs...food... Then, once you get it...you don’t want to give it up.
Free Trade: The Only Fair Trade
A Market for Long-Term Investors | Holding Gold in the Face of Hyperinflation
Every time I see some government “official” pronouncement of inflation, I am always reminded of John Williams at shadowstats.com, who calculates inflation the pre-Clinton way, and as such, routinely finds that actual inflation is actually running 3 or 4 times as much as the government says, and sometimes more, probably!
Connecting the Dots of Chinese Gold and Currency Reserves
Buying Gold Before the “Blow Off Phase” | Daily Show Interview: Elizabeth Warren on the “Hacked at” Middle Class
Elizabeth Warren — Harvard Law School Professor and Special Advisor to the Treasury on the Consumer Financial Protection Bureau — appeared on Jon Stewart’s Daily Show earlier this year beating the drum for Wall Street reform. From her perspective, banks have gotten the cops, regulators, off the beat in order to sell predatory credit cards, car loans, and home mortgages for huge profits and bonuses, while also taking on ever-increasing risk...
Emerging Market Infrastructure Set to Drive Demand for Commodities
Is the Fed Better... as the Devil You Know? | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  | |
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