The Big Winners from the Worst Market Crisis in 60 Years
Today's comment is by Mike Burnick, Senior Editor and Global Markets Analyst.Dear A-Letter Reader, There was a great article in the Financial Times the other day that I want to point out to you, because it's well worth your time to read - especially considering the source: George Soros.For those who may not be familiar with the name, George Soros is one of the few "living legends" in the pantheon of world's great investors...who actually deserves the title. Along with Jim Rogers, Soros co-founded what's perhaps the most famous hedge fund of all time, the Quantum Fund. Over a period of more than 30 years, Quantum returned an astounding return of more than 30% per year. If you placed US$100,000 in the care of Soros and Rogers at the beginning in 1969, you would have made about US$400 million profit by the year 2000! Now that's the magic of compounding at work!
Soros' Views Worth Listening To
In this day and age, it's very difficult to identify one out of the thousands of hedge funds that can actually match, much less beat, the S&P 500 Index on a consistent basis. That's why Soros' achievement with the Quantum fund is so remarkable.There are only a few investment legends who are worth listening to. Soros is one of these. Unfortunately, Soros has largely moved away from active investing on a daily basis. He chooses to focus instead on his philanthropic endeavors, and considering the investment returns he generated—why not!That's why I took notice when I saw the name George Soros in the byline of an article he penned for the Financial Times. The subject: What else but the global credit crunch?
Credit Super-Boom Goes Bust
Today's comment is by Mike Burnick, Senior Editor and Global Markets Analyst.Dear A-Letter Reader, There was a great article in the Financial Times the other day that I want to point out to you, because it's well worth your time to read - especially considering the source: George Soros.For those who may not be familiar with the name, George Soros is one of the few "living legends" in the pantheon of world's great investors...who actually deserves the title. Along with Jim Rogers, Soros co-founded what's perhaps the most famous hedge fund of all time, the Quantum Fund. Over a period of more than 30 years, Quantum returned an astounding return of more than 30% per year. If you placed US$100,000 in the care of Soros and Rogers at the beginning in 1969, you would have made about US$400 million profit by the year 2000! Now that's the magic of compounding at work!
Soros' Views Worth Listening To
In this day and age, it's very difficult to identify one out of the thousands of hedge funds that can actually match, much less beat, the S&P 500 Index on a consistent basis. That's why Soros' achievement with the Quantum fund is so remarkable.There are only a few investment legends who are worth listening to. Soros is one of these. Unfortunately, Soros has largely moved away from active investing on a daily basis. He chooses to focus instead on his philanthropic endeavors, and considering the investment returns he generated—why not!That's why I took notice when I saw the name George Soros in the byline of an article he penned for the Financial Times. The subject: What else but the global credit crunch?
Credit Super-Boom Goes Bust
According to Soros, the current financial crisis, precipitated by the U.S. housing market bubble, "is the result of a "super-boom" in easy credit that has gone on pretty much since the end of WWII. Whenever financial markets ran into trouble, "the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy." Of course this created a dangerous "moral hazard." Investors grew comfortable with the fact that the Fed and other central banks were always there to "bailout" their risky investments. Naturally, this only encouraged even greater credit expansion. And of course, Wall Street helped grease the skids, aided by reduced market regulation. In fact, the financial sector "encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared."
The Fox Ends Up Managing the Financial Hen House
Where things got out of hand, according to Soros, was when the unregulated Shadow Banking System (as Bill Gross calls it) began creating new products (derivatives, collateralized debt obligations, and other dangerous three letter acronyms) that nobody could understand. "New products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility." What's that old saying about the Fox guarding the hen house?Or course, the blow-up was inevitable sooner or later. The housing market bust was merely a convenient catalyst. It was the wrong "bust" at the right time. In its aftermath, Soros sees a "period of contraction" in the credit super-boom. That's because "the ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves."
Can the Fed Stimulate its Way Out of This Credit Crunch?
Soros warns that because of the dollar's weakness and inflation in commodity prices, the Fed may no longer be in a position to pump more hot air into the credit bubble by aggressively cutting rates. "If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield," Soros cautions. When this point is reached, "the ability of the Fed to stimulate the economy comes to an end."That's when the whole debt-laden financial house of cards comes crashing down - derivatives and all! This sounds a lot like the doomsday scenario that we have been warning Sovereign Society members about for some time now. I'm happy to see that George Soros has come around to our point of view!Still, there is a big silver lining in this doom and gloom scenario, according to Soros. A recession in the U.S. and the rest of the developed world may be "inevitable" but Soros believes "China, India and some of the oil-producing countries are in a very strong countertrend."In fact, Soros sees a significant shift of power and influence away from the U.S. in particular - and the rest of the developed world (Europe, Japan, etc.) in general. Likewise, he's expecting this shift to favor emerging markets in the developing world, particularly China.
Global Decoupling: Economic Reality or Busted Myth?Asian stocks of course have been plunging the past few months, right along with the U.S. and most other markets around the world. So much for "decoupling" say the critics. But decoupling was never meant to explain short-term investment returns, where manic-depressive investor sentiment always rules over fundamentals. Instead, decoupling is the notion that emerging markets have grown up, and are now capable of standing (and running) in their own right - perhaps even without the support of the American consumer. The long-term fundamentals case for emerging markets remains intact, and the long-term growth potential is head-and-shoulders above the United States. There is growing evidence that shows economic decoupling is in fact taking place. For example, the financial press is abuzz about the apparent collapse in U.S. consumer spending after dismal December retail sales were reported. However, data on U.S. personal consumption expenditures (that's Fed speak for consumer spending) shows a peak way back in 2004. Since then, yearly growth in consumption spending has declined by one-third. Meanwhile, emerging market capital spending has surged to new highs over this same period. Emerging market exports are booming too, growing about 12% annually last year. Since 2000 in fact, emerging market exports have been growing twice as fast as exports from developed countries: 10.8% a year compared to just 5.1%.
A "Radical Realignment" in Favor of Emerging Markets
So if U.S. consumer spending is still the engine of global growth and has been slowing for several years, how is it that emerging market industrial production and exports are still booming? The answer is increased trade between emerging markets that's taking up the slack for slowing U.S. demand, and this dynamic should only get stronger going forward. This is one strong piece of evidence that decoupling isn't dead yet. Still, only time will tell for sure. However, I think it's a mistake to so quickly pronounce decoupling dead, until all the evidence is in. Just because stock markets in China, Brazil and other emerging markets sold-off with virtually every other market around the globe - this doesn't disprove decoupling. Instead, this is what happens in the panic of a bear-market - all stocks go down together - the good, the bad, everything gets ugly. Putting aside recent short-term market volatility, over the long-run, emerging markets are turning the tables on the developed world and have much greater growth potential. As Soros writes... "The current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the U.S. and the rise of China and other countries in the developing world." Now you're playing my tune by George!
The Fox Ends Up Managing the Financial Hen House
Where things got out of hand, according to Soros, was when the unregulated Shadow Banking System (as Bill Gross calls it) began creating new products (derivatives, collateralized debt obligations, and other dangerous three letter acronyms) that nobody could understand. "New products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility." What's that old saying about the Fox guarding the hen house?Or course, the blow-up was inevitable sooner or later. The housing market bust was merely a convenient catalyst. It was the wrong "bust" at the right time. In its aftermath, Soros sees a "period of contraction" in the credit super-boom. That's because "the ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves."
Can the Fed Stimulate its Way Out of This Credit Crunch?
Soros warns that because of the dollar's weakness and inflation in commodity prices, the Fed may no longer be in a position to pump more hot air into the credit bubble by aggressively cutting rates. "If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield," Soros cautions. When this point is reached, "the ability of the Fed to stimulate the economy comes to an end."That's when the whole debt-laden financial house of cards comes crashing down - derivatives and all! This sounds a lot like the doomsday scenario that we have been warning Sovereign Society members about for some time now. I'm happy to see that George Soros has come around to our point of view!Still, there is a big silver lining in this doom and gloom scenario, according to Soros. A recession in the U.S. and the rest of the developed world may be "inevitable" but Soros believes "China, India and some of the oil-producing countries are in a very strong countertrend."In fact, Soros sees a significant shift of power and influence away from the U.S. in particular - and the rest of the developed world (Europe, Japan, etc.) in general. Likewise, he's expecting this shift to favor emerging markets in the developing world, particularly China.
Global Decoupling: Economic Reality or Busted Myth?Asian stocks of course have been plunging the past few months, right along with the U.S. and most other markets around the world. So much for "decoupling" say the critics. But decoupling was never meant to explain short-term investment returns, where manic-depressive investor sentiment always rules over fundamentals. Instead, decoupling is the notion that emerging markets have grown up, and are now capable of standing (and running) in their own right - perhaps even without the support of the American consumer. The long-term fundamentals case for emerging markets remains intact, and the long-term growth potential is head-and-shoulders above the United States. There is growing evidence that shows economic decoupling is in fact taking place. For example, the financial press is abuzz about the apparent collapse in U.S. consumer spending after dismal December retail sales were reported. However, data on U.S. personal consumption expenditures (that's Fed speak for consumer spending) shows a peak way back in 2004. Since then, yearly growth in consumption spending has declined by one-third. Meanwhile, emerging market capital spending has surged to new highs over this same period. Emerging market exports are booming too, growing about 12% annually last year. Since 2000 in fact, emerging market exports have been growing twice as fast as exports from developed countries: 10.8% a year compared to just 5.1%.
A "Radical Realignment" in Favor of Emerging Markets
So if U.S. consumer spending is still the engine of global growth and has been slowing for several years, how is it that emerging market industrial production and exports are still booming? The answer is increased trade between emerging markets that's taking up the slack for slowing U.S. demand, and this dynamic should only get stronger going forward. This is one strong piece of evidence that decoupling isn't dead yet. Still, only time will tell for sure. However, I think it's a mistake to so quickly pronounce decoupling dead, until all the evidence is in. Just because stock markets in China, Brazil and other emerging markets sold-off with virtually every other market around the globe - this doesn't disprove decoupling. Instead, this is what happens in the panic of a bear-market - all stocks go down together - the good, the bad, everything gets ugly. Putting aside recent short-term market volatility, over the long-run, emerging markets are turning the tables on the developed world and have much greater growth potential. As Soros writes... "The current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the U.S. and the rise of China and other countries in the developing world." Now you're playing my tune by George!
No comments:
Post a Comment