Every week I get at least one email from my friend Alexander Ineichen in Zürich. He does this fabulous analysis of scores of momentum indicators all over the world. It’s a good way to get a quick read (well, not that quick, at 90 pages) on what is happening in the real world. Let me give you an example of one of his recent charts:
What I see when I glance through his PowerPoint is that leading indicators are beginning to stall, Eurozone economic sentiment is collapsing, and momentum is not in Germany’s favor. In general, Europe sucks (that is a technical economic term for newbies).
Recently, I’ve become aware of a fabulous young macroeconomic writer from Dubai by the name of Jawad Mian. Remember that name. I read a lot of macro letters, and his is one of the best. Rather than spend the pages that he deserves on his analysis, I just want to acknowledge that he brought to my attention a quote that I’d forgotten from my friend George Friedman of Stratfor. Friedman was responding to a comment by Louis Bacon, who had just returned $2 billion to his investors, complaining, “It is hard to figure out how to invest when actions taken by politicians can affect financial markets more than basic economic factors. The political involvement is so extreme – we have not seen this since the postwar era. What they are doing is trying to thwart natural market outcomes. It is amazing how important the decision-making of one person, Angela Merkel, has become to world markets.”
Friedman objected on the grounds that political decisions are in fact subject to analysis and constraints. He pointed out that Merkel was not acting on whims but on the basis of very real circumstances. Jawad quoted at length from George, but let me pull a few poignant paragraphs that we can all relate to:
The investors’ problem is that they mistake the period between 1991 and 2008 as the norm and keep waiting for it to return. I saw it as a freakish period that could survive only until the next major financial crisis – and there always is one. While the unusual period was under way, political and trade issues subsided under the balm of prosperity. During that time, the internal cycles and shifts of the European financial system operated with minimal external turbulence, and for those schooled in profiting from these financial eddies, it was a good time to trade.
Once the 2008 crisis hit external factors that were always there but quiescent became more overt. The internal workings of the financial system became dependent on external forces. We were in the world of political economy, and the political became like a tidal wave, making the trading cycles and opportunities that traders depended on since 1991 irrelevant. And so, having lost money in 2008, they could never find their footing again. They now lived in a world where Merkel was more important than a sharp trader. Actually, Merkel was not more important than the trader. They were both trapped within constraints about which they could do nothing. But if those constraints were understood, Merkel’s behavior could be predicted.
The real problem for the hedge funds was not that they didn’t understand what they were doing, but the manner in which they had traded in the past simply no longer worked. Even understanding and predicting what political leaders will do is of no value if you insist on a trading model built for a world that no longer exists. What is called high velocity trading, constantly trading on the infinitesimal movements of a calm but predictable environment, doesn’t work during a political tidal wave. And investors of the last generation do not know how to trade in a tidal wave. When we recall the two world wars and the Cold War, we see that this was the norm for the century and that fortunes were made. But the latest generation of investors wants to control risk rather than take advantage of new realities.
We have re-entered an era in which political factors will dominate economic decisions. This has been the norm for a very long time, and traders who wait for the old era to return will be disappointed. Politics can be predicted if you understand the constraints under which a politician such as Merkel acts and don’t believe that it is simply random decisions. But to do that, you have to return to Adam Smith and recall the title of his greatest work, The Wealth of Nations. Note That Smith was writing about nations, about politics and economics – about political economy.
It is getting close to time to hit the send button, and I must confess that this letter became overly long. Simply looking around at what was on my radar screen took me close to 15 pages, and I wasn’t even halfway through! Discretion being the better part of valor, and wishing to take pity on my ever-faithful readers, I simply cut the last half. Perhaps it will show up in some later missive.
But maybe this will give you a little understanding of the angst I go through each week, trying to decide what to write about. In 2006 I was beginning to reach for topics. Today there is literally no end of them.
In deleting half the letter, I left considerable notes on Japan and Europe on the cutting-room floor, as well as concerns about the current brouhaha over secular stagnation. Don’t even get me started on Fed policy and the cult that has developed around central bankers. I would probably start ranting about how monetary policy is about the fourth most important thing but has become an excuse for politicians to do nothing about the more important things that are at least obstensibly under their control.
So what’s on your radar screen?
I mentioned last week that my friend Tony Sagami is now publicly working for Mauldin Economics, and we can finally tell you that he has been the brains behind Yield Shark,which is our take on how to find yield in a low-interest-rate environment. Tony ranges all over the world finding those little anomalies which when put together can make a portfolio that generates reasonable yields in a tough investing environment. And every now and then he’s been able to capture some capital gains, which help the overall returns.
You will soon get an important email from Ed D’Agostino, the publisher of Mauldin Economics, telling you about the newest addition to our growing family of letters. Tony and I have been talking about this for some time, and we’ve decided to take advantage of his natural talent and launch a newsletter that will be called The Rational Bear. My good friend David Tice, who ran the successful Prudent Bear fund here in Dallas for so many years (and who lives in the same building I do) has spent a great deal of time with Tony, getting to know how he sees the world, and we agree that Tony has the right philosophy. And with the markets looking a little topping, the timing is not bad.
Just as with Yield Shark, Tony will be our international man. He will look for special situations all over the world that are just screaming “overvalued!” and work out how we go about timing what can be very difficult and sometimes dangerous trades. Shorting stocks is not for beginning investors. Seriously, don’t even think about trying to get your feet wet shorting by subscribing to The Rational Bear. Do your homework about all the risks first, before you start looking at the potential rewards!
With that caution, I think Tony will provide a very valuable service for serious traders. You will have another very astute set of eyes and ears scanning the world to help you with your portfolio research. And frankly, while we don’t talk about it much, we are building up a pretty cool team of researchers that help our writers dig deep and think wide. My partners at Mauldin Economics are handling our expansion, rapid though it is, in a very systematic and businesslike manner. We are all in good hands.
I know that some of you won’t need a letter from Ed to be persuaded to subscribe to The Rational Bear. Here is a link. Note that there is a serious discount off of the subscription price, which will last for only a short time. This is an introductory offer that will go away after launch. Also note that the letter is not cheap. The very nature of the letter means that there is a practical limit to how many subscribers we can have. Again, if you are serious, active investor, this is something you really want to look at. Subscribe now or wait for Ed’s note to tell you more, if you like.
I head to the Casey Research Summit in San Antonio, September 17-21. It actually takes place at a resort in the Hill Country north of San Antonio, which is a fun place to spend a weekend with friends. Then the end of the month will see me traveling to Washington DC for a few days.
I’ll be back in Dallas in time for my 65th birthday on October 4, and then I get to spend another two weeks at home before the travel schedule picks back up. I will make a quick trip to Chicago, then swing back to Athens, Texas, before I head on to Cambridge, Massachusetts, for conferences. There are a few other trips shaping up as well.
Tiffani (my oldest daughter) just sent me a text. It seems she is cleaning out her garage after accumulating a large number of boxes that have gone unopened for many moons. (That trait may be genetic.) I’m not quite sure how she got it, and neither is she, but she came across a paper that I wrote in my first year in seminary, back in 1973, entitled “Poverty and the Poor.” I have absolutely no idea what it says, but I’m looking forward to (and will probably be greatly embarrassed by) reading it. And yes, I went to seminary. I’m a full-fledged master divine or whatever they call the degree holder. I probably needed a 12-step program for that, too, for many years. Fortunately, I seem to have fully recovered. Time heals a multitude of sins, or something like that.
Taking a very full course load while also working a 40-hour week was tough, and it might have affected my academic effort. Evidently the professor who graded this paper thought so, as he or she gave me a B-. Tiffani said the prof wrote in the margin, “You need to do better research.” I’m sure there are lots of readers who concur with my professors. Now, however, my full-time job is research, so I have no excuse. If you give me a B- now, we just have to blame it on sloppy execution.
I’m really looking forward to being with so many friends in San Antonio this coming weekend. It will be my first opportunity to test my new travel resolve, which is to exercise more on the road. Having been home for more than a month and having been in the gym for at least six out of every seven days, I can see and feel a significant difference. It is tough for me to exercise on the road, but I have to figure out how to do it. Maybe I will start holding meetings on the treadmill.
I mean, last time I was in Singapore I had a morning meeting with Jim Rogers. I went to his house and sat outside while he pedaled like a madman on his exercise bike. He would have been about 70 at the time, and there is no way that I could even marginally keep up with him today (or ever!). He went for at least 90 minutes all-out. Outside in the heat and humidity. I was drenched with sweat just watching him. But he held his own in the conversation the entire time. He wasn’t even breathing hard when he got off the bike.
Have a great week and be sure and get a little exercise. You will live a little longer and feel a little better if you do.
Your always trying to think about what to write next analyst,