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Cult Hero

12 Sep

If you did not read todays op-ed piece in the NYT by Professor Paul Krugman, it is definitely worth the read. In the piece, Professor Krugman questions the credibility of those that would even suggest that the Fed policies of the last few years are laying the ground work for higher inflation. He calls it the power of the inflation “cult”. Mr Krugman wonders why so many have adhered to a prediction that so far has failed to materialize. I won’t ruin it for you, but his general thesis is that those that would argue that endless bouts of Fed liquidity ultimately will lead to inflation are really arguing against government spending. In Professor Krugman’s view, those in the inflation camp are really opponents of social programs in disguise. As someone who never saw a government spending program he did not like, he should know. In fact, if you follow Professor Krugman’s views in the NYT, he feels quite strongly that the Fed has not gone far enough to cure everything that ails the U.S. Economy. Much like those that he criticizes, Professor Krugman constantly is pressing for more of the same, while completely ignoring the possibility of unintended consequences. Professor Krugman also fails to mention that this sea of liquidity on which the global economy currently resides has been fueled by not only the Fed, but by every other major Central Bank. As someone who puts such credence in the powers of Central Banks, one would think that Professor Krugman would at least give some deference to the possibility that they will ultimately get what they want (higher inflation).

Take my currency-Please

11 Sep

While the volatility in Equity and Credit markets over the past year has been quite benign, the volatility in currency markets has really heated up this year, most likely as a response to a perceived shift in Fed policy. What has really driven capital flows however has not been the relative rate adjustments by Central Banks, but the perceived economic strength of the U.S. vis-a vis almost all other G7 and non G7 countries. We have all heard the cute little analogies used to describe the relative strength of the dollar: ” The cleanest of the dirty shirts”, ” The smartest kid in summer school”, etc..  What is interesting to us is that such minuscule yield spreads are the impetus for such drastic movements in the relative value of currencies. Not only that, we are completely astonished that no one is really advocating the positioning into something which can hold its value relative to all currencies; namely hard assets.  We know that our astonishment is too dogmatic however, as we are all aware that  in reality Financial Markets are constructed to deliver product, most of which is designed to give people what they think they want and not what they really need. We still adhere to the precept of mean reversion (both in returns and relative currency values); a philosophy which is completely contra to todays current ideology. Kings don’t live forever, fade King Dollar and Buy Stuff

Not everything that counts can be counted, and not everything that can be counted counts

8 Sep

If you follow Howard Marks of Oaktree Capital,  you know he is clearly one of the most astute investors around and his newsletters are among the best as well. In his latest missive, he references the above Albert Einstein quote when discussing the measurement of risk and reward. This quote got us thinking as to the state of the investment landscape today. The explosion of Algorithmic trading based on up- to- the second “information” as well as a fixation on monthly data which is itself suspect in its measurement and meaning leaves capital markets appearing to focus on only that which can be counted.  The focus on what cannot be counted has never been more absent, as the prevailing thinking is that the risks associated with the unknown can be alleviated with the existing, or further iterations of, Central Bank policy. Nassim Taleb would refer to these uncountables as black swans, and it would seem as we move further and further away from the events of 2008/2009, the capital markets amnesia regarding the potential for such black swan moments becomes greater and greater. Those asset classes whose returns have been driven by leverage and momentum are most at risk when the amnesia wears off.

We all live under Sharia Law

28 Aug

You may or may not be familiar with the sharia law governing finance and speculation. Under the Islamic code, interest and speculation is forbidden, but followers may share risk through equity participation in physically based assets. The whole concept is actually fascinating as trillions of dollars in Bonds have been devised to synthetically create interest bearing vehicles with some underlying physical component. A quick perusal of negative nominal yields in a number of major sovereign  government bond markets would make it appear like the whole world is currently living under sharia law. As we have mentioned before, it is curious that  one of the criticisms of some particular hard assets is that they throw off little, or no, cash flow/interest. We have a hard time reconciling those kinds of comments with rates that give investors the privilege of taking on sovereign credit risk for a fee. If we are operating under sharia law, in terms of rates of interest, we would prefer to stick to the letter of the law and participate in the ownership of physical/hard assets.

In the land of the blind…

25 Aug

As we look out across the investment opportunities available to investors today, the phrase ” In the land of the blind, the one eyed man is king” keeps rattling around in my head. However, the version that keeps coming back to me again and again is ” In the land of no return, those asset classes with even the slightest hint of return are king”. Whether it is royalty trusts, farmland, MLP’s, or whatever, assets and asset classes whose traditional return profile have hardly made investors giddy have now become the go to investment. Granted, some of these asset classes do possess the benefits of secular shifts (Farmland, pipelines, etc.) but it is clear to us that the reach for yield has morphed into a reach for yield at any price. It  seems like any asset whose income stream can be monetized (and leveraged) is being driven to nosebleed levels.So, what is the proactive investor to do? In our opinion, there has never been a better time to avoid the low level perspective and take the 30,000 foot view. Massive amounts of Central Bank created liquidity will have consequences for currencies and real asset prices. BUY STUFF.

Capital Asylum

19 Aug

The Economist recently discussed the sudden massive influx of Hong Kong Dollar buying in response to the Russian Crisis. Russian oligarchs, ostensibly in response to the recent sanctions, were fleeing to the safety of what they consider to be a politically friendly environment. This influx caused a great deal of frenzied U.S.Dollar buying in order to retain the HK dollar/US Dollar peg. In addition, it also was reported that the strong bid to high end London real estate appears to have severely diminished, most likely due to a diminished Russian appetite for safe haven buying. What is interesting about these flows of capital is that the search for safe haven assets is now dictated by the “safety” of the political environment, and not necessarily by the perceived riskiness of the asset itself (stocks/bonds). Much like those seeking political asylum for purposes of exercising their basic freedoms, capital seems to be seeking out its own level of freedom. Clearly this kind of thinking bodes well for hard assets, particularly those with a higher degree of liquidity. Hard Assets Are Apolitical. BUY STUFF

The Gang that couldn’t shoot straight

18 Aug

We were quite amused at recent comments by Fed Governor Lockhart regarding a shift in Fed policy  occurring when ” They can see the whites of their eyes”. This comment would be funny if not for the fact that markets have gone “all in”  on the accuracy of Fed policy. Not only has Fed policy exacerbated the amplitudes of what used to be called the normal business cycle, they have sought to rewrite history by emphasizing their forecasting acumen when clearly none exists. The prize for the appearance of  perceptiveness has to go to Mario Draghi, who is able to  make similar bold predictions within the context of a Central Bank policy that simply has to make promises to successfully achieve their policy goals (whatever it takes… ad infinitum).  I know that we are walking a fine line here when we rehash the same point over and over, but history and markets ( in our opinion) will ultimately prove that such professed tea reading skills are completely without merit.