When Doves Cry – Crisis of Confidence 2013

Bipolar disorder is a condition in which people go back and forth between periods of a very good or irritable mood and depression. Source : US National Library of Medicine.

Being immersed directly in the sludge of the marketplace is extremely unhealthy when you are bombarded with conflicting information that the press so chooses to selectively regurgitate in bizarre interpretations.

My head is whirling from the deluge of opinions on 2013 but I am starting to make sense of my scattered thoughts.

The world or rather, the people who are heard, has diverged into 2 polar opposites camps now. They are the thinkers  and the think-nots.

Let’s talk about the think-nots as  I am one of them. It is an easy job to be a think-not. You would be working in the financial system, whether you are a bank economist or a trader or salesperson.

You are hired to work. You have to keep the ideas coming and make money. The system is imploding. The BOJ, the FED and the ECB are all indulging the printing presses. So you keep your head down, and assume that there is someone out there that just knows better and you should just stick to your corner of the food chain and plod on. This has never been truer in my entire experience in finance.

You see, it is really too much to ask specialists which we have all become over the years, to turn generalists overnight. When your entire sphere of expertise lies in a particular region or country, you usually have, at best, vague impressions of the rest of the world. And now, we will have to become experts in the Greek economy or the fiscal cliff. That is a mighty dangerous situation for professionals to be in because the professionals pass this on to the man on the street.

The first assumption of a think not is that life goes on and there is a greater power that controls the schematics. The power held by central banks and policy decision makers.

Central banks have never been so powerful (ECB, FED, PBOC) or powerless (RBA, HKMA, SNB) before. The powerless aspect arises from their inability to extricate their countries individually from the, now, widespread global malaise. There is little ammunition left and every country is now sucked into the global currency wars of devaluation ie. printing.

The situation is plain precarious and very simple. If the world manages to pull through without any hysterics in between, economic balance could return sooner than later. If, however, the world wises up to the unsustainability of the stimulus and the incapability of leaders to spear head a way to solution, there is a high chance that nothing is what it seems.

But seriously, what can we do ? All decisions are concentrated in the hands of those in power and if they choose to step into quicksand, we will all just have to learn to float.

We know that the printing presses are full on, taxes are choking off the millionaires in the West and we just wait for the results in the doses of economic data we receive, cheering ourselves on knowing full well there will be a price to pay.

To digress a little. I had to explain inflation and QE3 (now QE4) to my son the other day. Strangely, I found it easy and got a little worried that I could be retarded at 12 for that (hmmm).

10 bucks buys you 10 Cokes but now 100 bucks buys you 5. Which will you take ?
The kid opted for 100 bucks. Then changed his mind on second thoughts.

The point of the story, I told him, was that it was irreversible.

My pork floss bun is now $1.80 and will not be $1.60 again. And QB House haircuts are now $12 and will also never be $10 again.

Robert Reich gave simply the best way to look at it on Twitter yesterday.

“Logic of Chained CPI : If you can’t afford the rising price of hamburger, so substitute dog food and you don’t need much $ to cope with inflation.”

He is of course referring to the fiscal cliff talks where budgetary savings will come from assuming people will eat cheap when they have less money. That can be applied to everything else and if anything, made me feel more acutely inadequate about my finances in the future because hamburgers should be the final frontier and it is inelastic. (Cos I would rather die before I eat a Chinese cabbage !!!)

That is because pork floss buns are obviously not in the CPI numbers of Singapore so Breadtalk will not be under pressure from the governmental groups but the poor chicken rice seller in Ghim Moh better not raise his price too soon or HDB would be after them.

And I will spend my days ahead thinking of innovative ways for money to be made knowing that henceforth, enough will never be enough but nonetheless, it is still necessary do or die trying.

So lets talk about thinkers. A fallacy of thinking is the hazard of thinking too much.

We have layers of information presented to us each day. But at the back of our heads, we need to be cognizant of the main themes besides being swayed by the sounds of the daily think-not rhetoric.

A suitable backdrop would be the World Economic Forum’s list of global issues for 2013.

1

Eurozone stumbling under pressure

2

Unstable global economic outlook

3

Digital communications revolution

4

Scarcity of resources

5

Global power shifts

6

Lack of global leadership and coordination

7

Global interdependency

8

Instability of financial markets

9

Climate change/Natural disasters

10

Public debt crisis

11

Unemployment

12

Growing inequality

13

Changing values

14

Social unrest

15

Rise of emerging economies

Global Theme Remains Populist

Out of these, the 2 most underestimated risks were picked as income disparities and resource scarcity.  It does not take much to conclude that we are going to see a whole lot of populist measures ahead.

My understanding of populism is rather naïve. I assume that populist movements occur when there are growing divides in society caused by unemployment. In short, dissatisfaction with the ruling class is caused by lack of opportunity and prosperity.

The solution would be a redistribution of wealth which is what America and Europe are attempting is to TAX THE WEALTH BACK. Watch out tax evading US and European companies and citizens, they will be hunting you down to the South Pole and even, Singapore ?

Some Asian countries’(including China) solution is a non redistribution method because the ruling class holds the wealth which  is easier execute by raising minimum wage, bump up the low to middle class and allow wealth effect to take hold without really improving the situation. This is easier when there are current account surpluses and endless FDI inflows into the country seeking investment opportunities. That way, the rich will get even richer as the poor become rich and the gap continues to grow.

Political transitions all round the world has bought time for world leaders to distract the general populace and focus the media attention to regular beat ups of the financial sector but the world has time to wise up in 2013. They now say Occupy Wallstreet was just the tip of the iceberg. We’ll see.

Social rifts cannot be measured in economic numbers.  And when the population realizes that inflation is measuring the dog food index instead of chicken prices, I am expecting the market to think-not until something implodes somewhere.

Inflation – Why do I say chicken prices will go up ?

Because one thing we noticed this year is that minimum wages are going up everywhere. Imagine 100 million Indonesians, whose wages have gone UP 44% recently want to eat chicken 3 times a week instead of once. That is going to seriously dent the chicken supply. And it is not just Indonesia, it is Malaysia too and … Bangladesh and China.  When they realize they cannot buy chicken with more money, it is going to get ugly.

There is a considerable supply of lower income masses in the BRICS and MIST that can be nurtured to be the consumers that we are, firstly chicken for dinner to McDonalds, Starbucks and then, to Pradas, Audis and Samsonites. And overnight, wasteland will turn into condominiums and wealth is created as they get themselves nice mortgages and work their lives for a flushing toilet. Make them richer and you will be richer too. It is called wealth inflation to me, not the CPI basket inflation but a broad based recalibration of value and wealth creation.

Make them too rich, and make yourself poor. Like what we did with China in the 80’s. Now China is sucking up your good faith in new IPOs daily and using their wealth to buy up the rest of the world and challenge for their share of natural resources.

I think the WEF got it spot on but sounds a hell more politically correct.

The  sad note is that Baby Boomers are the biggest hostages in this game. Because their wealth has inflated the most and they have the most to lose, yet they need returns that they will never get to support them in their retirement. The returns are tied to their wealth balloon of bonds and real estate which are negatively impacted if the printing stops and interest rates go up. It is a double edged sword, to grow wealth or to get higher returns.

Investment Collectivism and Central Bank Influence/ Reserve allocation

Central banks are the new emperors of the financial markets and will continue to reign supreme. Reserves will keep growing as long the 3 biggest loansharks keep printing and the fat lady will not sing until the Reserve Bank of Australia files for bankruptcy.

That is my call and I am not alone. A former governor of the RBA also highlighted the potential of a currency attack sometime last month ala Soros on GBP style. And the main premise is, WHY NOT ?

The RBA is by far one of the more vulnerable.  RBA has neither  reserves nor ammunition and they are paying about the highest interest rate in the developed world on current accounts. Why not borrow CHF to park in AUD ? -1% vs +3% ?

Central banks are leading the charge in reserve diversification. AUD, CAD, SEK, GBP, NOK and SGD are the only AAA/Aaa ones left and AUD rates, at 3% are simply towering above the rest of the developed world like a sore thumb. There will be no challenge to central banks going ahead, as far as I can see, for there is none too powerful nor foolhardy.

We can just hope that they will work in unison to steer the investment mindsets in the desired direction and woe betide any resistance even in their midst. At the moment, it does look like Brazil is not cooperating too well.

The Precedence of Greece and Paupers Rushing for the Backdoor

For the countries mired in debt, the backdoor method to prosperity has been taken by Ireland, Iceland and Greece, so far this time round. Simple write off.

How does it work ? Just blow up the IMF, which does not fall into the balance sheets of any nation and is easy to assume that the asset(loan) will be safe enough there.

The bigger nations could be tempted down the same path particularly with unstable politics which would be classified a black swan event and not worthy of further discussion here.

Saving the Best For Last

Now that I have given everybody a peak into my warped thoughts, I will unleash the think-not trade ideas I have been hoarding for 2013.

1. Gold / Silver

I wrote some weeks back that I would not buy gold at 1,700 and would look at 1.650 to buy. That day is today.
Overall, GOL D IS A BUY. Central banks do not like Gold because they do not want folks to lose faith in their money. But the millions of Indonesians, Chinese, Africans, Indians and Mayan descendents will NOT BE BUYING BONDS ! Gold is the currency of the ancients but I think Indonesians like Silver more.

2. Agriculture

Do not ignore the signs. China just set up an agriculture fund. I am long AIGA LN and will load up more as well as all the complementary supplier agencies for fertilizers and equipment.

Meanwhile will look out for alternative food resource companies and Olam is NOT ON THE RADAR.

3. Oil

The fracking headlines have got me a little fearful. I am still long DIG US and it has done well this week but I am not sure if I  should hold for some serious violence to erupt whether it is between China and Japan or in the Middle East.

Natural Gas was a nice bet for me this year and will continue to be part of a long term game plan which fits in well with my personal investment philosophy of clean energy and environmental conservation.

4. Equities

My equity strategy will have to change next year. I have mixed feelings about equity especially in times of austerity. Companies are cutting back on R&D and technology upgrades and spending on stock buy backs.

So short term trades for me in general stock indices and again will invest time in sniffing out the companies with intellectual know hows that will pave the way into the future.

I had small gains in Nokia and RIM this year and Facebook too !! But next year will be a year of Chips and Clouds. Am watching Intel, Google and ARM.

5. Currencies

I will be honest and confess I have nothing meaningful to say about currencies and the meddlesome central banks who are now directly influencing markets with their “reserve diversification” moves. I do not see any of them paying any manipulation fines !! I don’t think many people realize that central banks are sort of civil servants and are supposed to SERVE and not DICTATE.

I am bullish the USD because it is evident they will be out of the woods whether they like it or not. That most of the jobs created are low value add does not matter. We are seeing reverse migration back to Mexico as well and manufacturing is moving home, starting with Apple’s announcement. USD is going home, QE 4 or 5 or 6.

I will trade from the side of long USD in 2013.

My other big trade would be to monitor for the “Soros” attack on AUD. Will keep you posted.

One thing for certain is I would AVOID CNH/CNS/CNL AND CN-anything at ALL COST. Maybe I am uncomfortable about China buying up everyone but themselves these days, with all the headlines that Australia is almost Chinese owned now. Mainly it is also because my banker sent me a long page of disclaimers on my rights of recourse in CNH investments, all in very fine print (hoping I wouldn’t read it) and then calling me up the next day and offering me a CNH loan to buy some new CNH bond !

Ok, for an impartial view. Go for SAR, MEX, BRL, TRL and the gangsters. They will fly against whimpy SGD if Argentina stays out of trouble next year. We will start coverage if there is interest.

6. Interest Rates and Corporate Bonds

From a personal investment perspective, I will have no interest in fixed income investments next year. I may trade the odd bond or two on leverage but I will not be holding for coupons.

Capital preservation and principal protection has become a joke because the more you save, the less you can buy. It has to be double up versus the print press.

Yes, many of my friends have cashed out home equity to invest in fixed income for enhanced returns. It is admirable and will be rewarding. Just note the pitfalls that will hit the market with the new Basel rules as well as SEC’s Dodd Frank rules coming up. I cannot tell what the implications will be yet.

7. Real Estate

My biggest regret in life, I save for last. The many a nice houses I could have bought even as recent as 2009 that have quadrupled since.

That was because, at a young age, I told myself that my generation would never enjoy the capital gains of property appreciation that my parents had enjoyed. I was wrong.

But it is not too late. After the “Soros” AUD attack, I will probably be looking to buy a couple of properties there. After reading about all the suffocating tenants here, I think Singapore Reits are in a nasty ride even as they hold their tenants hostage. Just saw that 15 Minutes closed down in the news. You think there will be many more sucker tenants out there  who want to waste their time doing retail business ?

As for all the golden opportunities arising in Myanmar, Mongolia and nearer in Malaysia, I will stick to my morals.

Naaaah. Let’s all just trade from home.

So, Am I Bipolar ?

The shrink does not think so and would not even give me a borderline personality disorder diagnosis. Sigh. That makes me sane and whoever who has finished reading this, a purveyor of good bullshit.

2013 will be a year of REFLECTIONS because 2012 has given us BIG FAT HOPEs after many dark moments of despair.  The thinker me says that social transitions lead to a new global order whilst my confidence in the establishment has been severely shaken this year.  I do not want to be a pessimistic because humanity has found its way to become the dominant species over the past 100,000 years with countless crises along the way and it will take a lot more to wipe them out.

I regret that I have no concrete trades to share now except for maybe a brave call on Gold since I was spot on 2 weeks ago. Read here. And of course, my infernal love hate relationship with USDJPY – 83 – 93 – 103 in 2013 !!

Happy Holidays All !!