SheerazRaza had a long post:
Voss Capital is betting on a housing market boom
The Voss Value Fund was up 4.09% net for the second quarter, while the Voss Value Offshore Fund was up 3.93%. The Russell 2000 returned 25.42%, the Russell 2000 Value returned 18.24%, and the S&P 500 gained 20.54%. In July, the funds did much better with a return of 15.25% for the Voss Value Fund Read More
I can’t say I’ve read it all – part of it had some basic misconceptions and other parts I couldn’t quite follow the arguments (perhaps it is just me). So I will – instead of boring with a blow by blow rebuttal – address the main conclusions.
Our long-term view can be summed up in the following points:
- The developed world is overly indebted.
- So far, there is little indication that heavily indebted countries will be able to grow their way out of debt.
- Recent measures to cut government spending will create further headwinds to near-term economic growth.
- Failure to provide added monetary stimulus will likely risk a fall into a debt deflation spiral (this risk is heightened by the Euro zone situation).
- Central banks will continue to “print money”, as needed, to prevent debt deflation.
But first I’ll try and put the record straight on the subject of gold.
There is in economic and finance no such thing as absolute value – every commodity or service is evaluated against each other. Money (coin) is just a common denominator in that respect – and you can use tinned fish, muzzle shells and Nubian slaves as such a denominator. It is a question of practicability – and gold is not particularly practical – silver is historically far better.
Gold played the main role in a comparatively brief span of time form the beginning of the 19th century to about the beginning of the 1920’ies – simply because the amount of gold available grew with approximately the same speed as the world economy.
The theological adoration of gold is probably due to the fact, that through antiquity to the discovery of America gold seeped to the Far East, as there was no Asian demand for European commodities – Chinese and Indians were quite self-sufficient when it came to banging helmeted heads with swords.
But the fact remains that gold prices will probably continue to rise for some time still: Gold has become illiquid in the sense that f.i. China cannot use gold to buy anything for – not without gold price plummeting – so they won’t use gold as a means of payment. It is disconcerting to realize that your nest egg is worthless.
As to the conclusion:
1. The developed world is overly indebted.
Well yes and no! Part of that debt is money needed for transactions and are thus not debt to be paid at all. That is the advantage of having the reserve currency.
The other part is not to be paid either! Not in the sense the creditors expect!
As Alan Greenspan once told the Chinese: “We can promise You, that we will pay; but what we pay will be worth is a matter of conjecture!”
If the Chinese start spending their hoard of US bonds they will discover that the dollar will drop very quickly with respect to the commodities China is interested in buying.
2. So far, there is little indication that heavily indebted countries will be able to grow their way out of debt.
That very much depends on growth in WHAT? If you imagine large amounts of American cars in the streets of Beijing – you are right. But Russia and Brazil both do reasonably well in exporting raw materials to China and India – for the time being – at some point there will be a limit to the construction of empty cities and useless infrastructure. That limit is indeed absurdly high as pictures from North Korea reveal.
No the breaking point is going to be food. Chinese farmers may become more productive (easily); but the total amount of calories produced will not be much higher, as every flowerpot in China makes some kind of food.
Today food is so cheap in the West that you have to destroy it in bio-fuels. This price will rise – as it has indeed done. Just watch it continue – raw materials such as iron ore and copper are stagnating as Chinese industrial production is quietly sinking into the ground with a moaning.
The great tragedy of Chinese economic policy is that they have build infrastructure in China, where they should have build it in Russia to provide access to the vast grain fields – so the price of food could remain reasonable. But rational thinking is not the Chinese leadership’s forte.
Of course the West can grow economically out of their debt! Partly through higher export volume of food, partly through higher prices.
Ross Perot once said: “The future is in production of computer chips – not potato chips.” He might very well be dead wrong!
3. Recent measures to cut government spending will create further headwinds to near-term economic growth.
Defense cuts is the opposite of the traditional US economic stimulus. In fact investment only grew in the US when she started the rearmament preparing for WWII. That won’t happen this time as there is no real threat on a comparative scale.
And yes less public spending will slow economic growth.
But there is more to it than that: The US market is dying on the Chinese (and so is the European) – if for no other reason than the need for China to start overvaluing their currency as they shift from net exporter to become net importer.
This will give Chinese products a higher price on the US market so some jobs will return to the US. Not the same number as what has disappeared; but some. Goods will be produced more economically: Nobody will today build a car like they did in 1980 (thank God!) – and they will not be build in Detroit. Not unless the unions get a reality check.
Just look at what happened in the London docs! Featherbedding and inefficient cargo handling led to ships mooring anywhere but London. So they build banks on the banks – progress is unstoppable! (Bank productivity is a contradiction in terms as far as I’m concerned)
4. Failure to provide added monetary stimulus will likely risk a fall into a debt deflation spiral (this risk is heightened by the Euro zone situation).
Let me interpret that statement as foreseeing deflation without assigning epithets: I couldn’t agree more.
If we look at major economic groups:
- a) Food. Sure we are facing higher food prices; but nothing that will make a dent in a western consumer’s budget. With less than a million farmers in the USA there is an overproduction of food – and overconsumption: The problem of obesity is most pronounced in low income groups.
- b) Raw materials: Well there isn’t really any need for them. If we take steel I believe the major source of it in the USA is scrap. Furthermore is does not strike me as there is a lack of housing in the US – on the contrary after the bubble: The massive stock of foreclosed houses will keep pressing the price down.
- c) Oil: A continued rise in oil prices will depend heavily upon a continued growth in China and India – which is far from reassured – or rather: Very unlikely.
- I had the pleasure of hearing an old lecture by Niels Bohr from before I was born, which had all the dire warnings that have been heard ever since: We will run out of oil if growth is continued! Well an economic prophesy that hasn’t appeared after 60 odd years have very little validity – so let’s not get our facial features out of joint. Oil prices are more likely to drop in the longer – and medium term.
- d) Industrial goods: Well there is not prospect of major demand there. If you watch TV you might appreciate that f.i. locomotives are being reconditioned after 40 years – and then they are ready for another stint of 40 years. Same with stuff like high power transformers. The Boeing 747, which first flew in 1969 is still in production (admittedly as a very different aircraft today).
- e) Military: Some development there; but there has been a huge increase in productivity – when you actually have to replace explosives in bombs for the fear of their destructive power due to precision – then you are probably near the end of that road. And there is no major threat to justify rearmament.
- f) Consumer goods: They will follow the path all of them have gone: Getting cheaper and cheaper.
- g) Service jobs: McDonalds is not likely to move into finer cuisine. The services required by older people? Yes we live longer, but in a much better state of repair.
- So YES there is a massive pressure – as always – towards deflation. The news is there is hardly any technological breakthrough to herald massive new areas of consumption – not in the west.
5. Central banks will continue to “print money”, as needed, to prevent debt deflation.
Yes, and here is the real challenge: How do we deal with deflation as a long term prospect?
We know how to mismanage inflation, though occasionally Zimbabwe makes us flinch, but in general we handle inflation.
The present efforts to curb deflation are rather pathetic – which is why they will probably continue – raised consumer taxes and public cost levied on the producer do have some sort of result: Still inflation is barely keeping up with deflation as the economy is winding down. Lower paid jobs will have the same productivity as the highly paid that were laid off.
So far quantative easing has just replaced the capital lost: Either in downright bankruptcies or in bad debt, where loans are kept on the book, though they are not being serviced. A QE of the continued dimensions as has been seen should have produced a raving inflation – but it hasn’t.
The problem is that any realistic assessment of the banks book value would result in the realization, that few – very few – banks have equity.
The real reason for concern is that to many intends and purposes banks have stopped working. Credit is being given by suppliers and other extra-bank credit extensions.
The hope is naturally that somewhere along the road the real economy will allow the banks to earn sufficient money to write off the bad debt.
That is not likely to happen with interest rates so low – and the need for investments even lower – leaving a very small return on the capital that isn’t there.
It is a common political fallacy that if we just get growth the banks will start earning money again – and be able to take losses. They won’t, they will remain zombiefied.
The losses are far too great to heal themselves.