Some forecasts, notes, observations, and high-conviction forecasts
High-conviction forecasts:
1. Many shall be restored that are now fallen and many shall fall that are now in honour
2. The predictions spouted throughout the general media shall be proven to be shortsighted
3. Nobody today has any clue about what the world will look like in five years’ time
4. But, within the next five years, there will be attractive valuations again seen in a developed economy stock markets
Observations/ notes:
1. Stock prices are still too high, especially in the US and in Europe. Value still exists in Japan. This is why I am hedging Japan value positions with short positions in the US. We have had a modest move downwards in prices, but given valuations, expectations, bullishness, and unusual interest rates and corporate margins, this recent sell-off is nothing yet, in my view.
2. I believe that it is sensible to use currencies as part of a hedging programme. I have been fortunate in picking up on the Turkish lira story early on. I am now wondering what is the possibility of a reflexive downward spiral in the Polish zloty. The country recently robbed investors, and needs to roll over some debt soon. Inflation is low and falling, and interest rates could be lowered, but I suspect not raised without a crisis. The current account is not great, and the currency is hardly a go-to store of value. At any rate, I see the risk of a great appreciation here to be low, and I have started to sell the currency short while observing the situation. I have been also borrowing GBP to buy JPY, for reasons I have written about before.
3. There is one country in Asia I am going to on Tuesday, in order to open a brokerage account in, and I am very positive about the prospects for their stock market. More details later.
4. My general feeling is that events are forcing interest rate movements upon the markets, despite the best efforts of politicians and non-elected individuals in suits. Turkey has been forced to raise interest rates, and will nonetheless need a cheaper currency going forwards anyway. The same dynamic is happening in other vulnerable countries. If the same thing happens elsewhere (which I think it is perhaps reasonable to anticipate and speculate on), one would be advised to carefully observe low-quality fixed income firstly in peripheral economies and then in the US and Europe (both corporate and junky-national). I think the problem can be summarised thus: low interest rates give rise to high interest rates – although not in the borrowing stimulation -> increased capacity utilisation -> inflation route, but rather that of excess yield chasing -> increased system fragility -> sudden falls in yielding assets triggering more falls in yielding assets. As an aside, is anyone else out there fed up yet with the blanket use of the term “emerging” markets? When will we start to say “submerging” for e.g. Turkey? What has Russia got in common with India (other than a falling currency and as a shortcut for lazy journalists)?
5. Corn is apparently below the cost of production. It is interesting, because many US farmers are flush with cash and not yet desperate, and little of the 2014 crop has been sold. Sugar is too, but that is a messed-up market you do not want to get involved in. Also, chicken prices in Pakistan are below the cost of production, while those in the US are high.
JP
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