Investor fatigue

Buy when others are selling and sell when others are buying is, on its own, about as realistic as anticipating a no-claims bonus from your insurer after employing a stop at a green light and drive-on through a red strategy. Sooner rather than later you'll get it wrong, very wrong.

100 monkeys sitting in a tree eating superficially identical fruit; half the fruit poisonous and the other half not. Underneath the tree lie the monkeys poisoned. The last monkey sitting in the tree would have guessed each fruit correctly until he doesn't. Is he smarter? Perhaps. He's just a monkey remember..

I can't recall a time when retail volumes were so thin. That's applicable across the instrument spectrum and true for most markets. Investment fatigue, a concept birthed in what has become a headlines-driven market, is very prevalent. Hedge-fund gurus of yesteryear, usually wholly reliant on their say-so to influence a  market, find little solace in the fact that the average investor just doesn't care anymore.

What Mr. Buffett really means when he says buy when others are selling and sell when others are buying is this: - buy only when you know what you're buying and sell only when you know why you're selling. If, like many others, you suffer from investment fatigue and are frustrated at consistently poor investment performance don't look to the other monkeys in the tree for guidance. The grass is not greener because it's on the other side. It's greener because it's watered. Now, more than ever, do your own homework. Accept that you won't always be right. Understand that a bad investment can stay that way regardless and do something about it.  

It's an economic force majeuere..

Where to from here?

For one thing we need to appreciate the burgeoning economic ‘disconnect’ from one region to another. Economic disparities, regional and global, are real and here to stay. Here’s how I see it.

1. The so-called BRICS are all but dead in the water. Aside from China (modest growth) the rest of the team are looking at zero to marginal growth at best. Even Brazil, which raised rates last week in a declining growth environment (historical hyper-inflation jitters), has little chance of beating the average even though they, along with Mexico, are seemingly viewed more positively than all the other economies in that region. 
2. Europe is struggling – period. It’s a self-imposed period of self-loathing rather than a function of external threats.
3. Asian growth is moderate comparable with their immediate past but moderate nevertheless.
4. Japan is ‘in trouble’, by ‘Western economic measurements’; has been for decades and yet enjoys a standard of living seemingly at odds with their GDP-growth. It’s an economic conundrum that might possibly be a function of culture ie: non-spending /savings, rather than anything else. Even so, both Japan and Europe have the financial / structural means to artificially boost their respective economies. 
5. The US is coming up for air at last even if the debt-ceiling is expected to limit their festivities in the next few months. 

The problem in Russia is exactly the same as the one we face in South Africa. Infrastructural-spend / maintenance has been neglected. Commodity prices have plummeted on a scale unprecedented. It’s rumoured that both the oil and iron-ore markets are being manipulated and from the activity on the respective markets that could quite possibly be true. What we don’t appreciate is the following – lower energy prices are stimulatory; significantly more so than giving money to banks to gamble (ie: invest) in the derivative markets. The benefits of lower energy prices is money in the peoples’ pocket; across the board (On the assumption the benefits are not absorbed into the political ether).

The other issue both Russia and SA face is cronyism and the long-term prognosis is much more concerning. Infrastructural neglect from non-compliance, apathy or incompetence has the same end-result. It helps very little to bemoan managerial ineptitude, at state-owned / run enterprises (parastatals), if basic-compliance, compelled by the laws of the day, is effectively / serially circumvented or was ignored in times past. On this point the Zimbabwe-lesson is first-hand experience of the long-term catastrophe caused by misplaced loyalties and or cronyism. Incidentally if Putin was caught ‘flat-footed’ by a collapse in oil markets then, quite frankly, he is more of a threat to the Russian people, in the immediate short-term, than he has already been given the credit for. For what it’s worth that’s been on the cards ever since the US shale-reserve came online, so to speak. In SA the nepotism is less subtle and has the same negative consequences for the country as a whole. The underlying difference, however, between SA and Russia lies largely in the extent of their respective ‘cash-in-the-bank’ reserves. Russia has sufficient for the immediate future; SA does not.

BTW – in my last note to you I said the derivatives market was approximately $600 trillion. I was wrong. It is, in fact, $710 trillion and significantly higher now than it was prior the financial crisis. The risk ‘to the system’ is an obvious code red and the US appreciates the fact. Don’t forget it’s the US banking industry which has the most to lose if the system fails. Hypothetically (ie: for fun) if Putin could /would engineer a black-swan event on global markets or even threaten the US with something along those lines the derivatives market could /would implode. You might be forgiven for guessing that if anything of that sort came to light commodities would recover (remarkably); oil included and sanctions against Russia lifted or lightened.

On the flipside if Russia had to comply with the dictates of sanity only Putin's pride would suffer. Putin likes to box. As an individual he must appreciate the fact that he’s deep in the twelfth looking for a knock-out just to survive. Why they don’t give Ukraine back to the Ukrainians is beyond all comprehension. Access to the Black Sea via Donets’k is in the bag anyway.

Here’s my solution to the economic woes of the world and I will use the financial carrot as a catch-all. Homo sapiens is, after all, a creature of logic premised on material comfort –

• Europe is a ‘welfare-state’ paying good money after bad to protect a lifestyle that is simply obsolete. Siesta time is over. If we are to take Europe seriously then productivity /price efficiency needs redress. Wages must reflect that fact. Protecting intellectual capital is the promise of salvation! The French will revolt..
• Close the tax loop-holes for multi-nationals /transnationals eg: Google, eBay, Intel etc which pay as little as 3% in some countries. Spend this tax-revenue on removing the draconian regulations under which legitimate corporate-Europe currently labours.
• The US political system is defunct. Urgent redress required! Meddling in international affairs is / should be a UN-sanctioned solution. Save the money spent on international peace-keeping efforts and on which moral-legitimacy is worn as a mask for cheaper oil, and reinvest the savings on domestic infrastructure, the manufacturing sector and on national productivity / skills-enhancement programs. 
• Expel China from Africa with immediate effect. Mine the resources and value-add / up-skill the raw material ie: sell the finished goods at a valued premium. China competes in a lob-sided market, premised on skills bought or otherwise and I’m not sure why that has to be. China has the financial resources to absorb the short-term wrist-slap for the ‘good of all’
• If Japan isn’t the perfect example of a nation fed-up with incompetence and mediocrity what is? What Japan has achieved, post WW2, largely hindered by the US btw. is astounding. It’s an example to all that solutions lie in value-add rather than raw product and perhaps, in a more modern context, solutions-driven in technology rather than on human capital alone. Europe’s threat or her obsolescence, if you like, is the forfeiture of technology and other intellectual capital to the East for short-term import-pricing gains at the expense of their own industry.
• As for South Africa if the infrastructural decay continues at the current rate and corruption / incompetence / apathy is not addressed, the best is in the past and that's the truth. Paradoxically, South Africa's issues are, however, possibly the easiest to address if the authorities apply themselves honestly and with some urgency. By way of example the first step [also the easiest] is to declare force majeure at Eskom and cancel the 'electricity at half-price / below cost' contract signed with a private-sector multinational more than 20-years ago. This same multinational uses approximately as much electricity as the rest of the country combined... On this basis Eskom's solvency is assured. Nepotism / cronyism next and an emphasis on adding value to our own raw materials and so on.. 

The chickens & the cows

'...OPEC manipulating supply to drive US shale producers into non-profit...'

Whilst I concede the facts his conclusions are wrong. Here’s the way I see it.

1. The US shale industry is here to stay, either in free-float or with Federal assistance. One of the key policy riders in the US is energy independence. That’s been the case since WW11. If OPEC depress oil  by manipulating oversupply, to such an extent, that shale producers become unprofitable, the US Federal government will subsidise the industry. As it is the tax conditions for US energy companies are being reviewed favourably anyway.
2. The US, very recently, signed an agreement with the Saudis to buy oil at a specific price for the foreseeable future. That means this is not a price war aimed at the US. The price war is, in fact, aimed at Russia. It’s OPEC and the US squeezing Russia out of the European market, destabilising Putin and deflating the political escalation along Russia’s borders.
3. What’s more interesting is a sidelined China and an even less vocal Iran. China buys most of its oil from Iran and if I was to guess they have been appraised of the price war and are being compensated for their cooperation i.e.: for turning a blind eye. The compensation in Iran’s case is pretty obvious given the relaxation of Western sanctions against that country. In China’s case I would submit that a strong Russia on their borders is not exactly in their best interests. This then their motivation for cooperation.

No sir, if OPEC wanted to punish the US the easiest way to do so  would be to demand payment for oil in any currency other than the US $. As long as the US $ remains the international currency of exchange the US controls price through debt. A weakening dollar on long-term debt makes the market progressively cheaper for the US, not so? Get the US to pay in Euros, riyal, Yen or Yuan and we would have a financial Armageddon unlike anything we have ever seen before. The US would immediately default [be unable to pay even the interest] on ALL their international debt and we’d ALL be hammered back to the stone age. 

The financial derivatives market, by way of example and for interest, has an open-interest value of $600 trillion. That means $600 trillion worth of geared debt, on global exchanges, is held by Big Banks on behalf of clients. If the markets collapse, as they did in 2008, banks cease to exist, so too global financial structures. By way of comparison US GDP is about $17 trillion and the US economy is by far and away the largest economy on earth. That means it would take 35 years to pay off the current derivative debt – an impossibility obviously.

The world has been effectively bankrupt for decades ie: ever since we went off the 'gold standard' and have legislated the printing of money without asset-backed security. We’ve made it worse by using this non-asset-based currency for debt and then compounded it further by gearing it up in the derivatives markets by more than 10 times (1000%).

One day both the chickens and the cows will return home; they’ll have to because that’s what we’ll be reduced to, subsistence.

Out of Ashes, An Opportunity!

The rate-fixing scandal is quite simply a systemic cultural failure. London burns and the ramifications are difficult to quantify. Even so, you cannot deny the gift-wrapped opportunity for the US. Opportune US regulators can now, at last, justify / demand or fix associated trade in US dollars. The expected shift in trading and jobs away from London to New York should, if nothing else, convince the global community that Europe's star has waned.

As for the individuals specifically implicated in the so-called rate-fixing scandal, whether they emanate out of Whitehall, the BOE or from the formal financial community only, there are a range of criminal sanctions and punitive guidelines covered by legislation. Deliberate attempts to rig or manipulate interest rates allow for little justification and although there is evidence of unsubstantiated mudslinging, the ramifications for the individuals so implicated, are dire.

In a remarkable quirk of timing, today's testimony by a US-born ex-CEO of a UK bank could denote a banking shift away from London to the US. Free at last?

Wishing our US friends a safe and Happy 4th of July. 

Europe's next World War is one of ECONOMIC relevance

Speak to an educated, politically astute European and don't be surprised when he / she tells you that Europe is embroiled in a war so bitter that subsequent social divides will take generations to bridge. 

An influential colleague contends that Europe is in a fight to the death and the enemy is none other than Britain and the United States! 

Why have the Europeans been so slow to respond to the EU crisis?  It’s a function of an outdated institutional structure and cumbersome Legislative, Judicial & Administrative bodies.

These are just a few of the institutional bodies / individuals responsible for the well-being of the European Union:

1. Ministers and parliamentary secretary generals.
2. Commissions / Committee of regions, economic and social council-BEI (European Bank of Investments)
3. FEOGA-(European Agricultural Guidance and Guarantee Funds).
4. (EMCF) -European Monetary Cooperation Funds.
5. Secretary General of the Council of Europe
6. Parliament
7. W.E.U (Western European Union)
8. EUROCORPS 
9. E.C.B (European Central Bank)
10. O.E.E.C (Organisation for Economic Co-operation and Development)
11. The Council of Europe
12. NATO (North Atlantic Treaty Organisation)
13. CSCE (Commission on Security and Cooperation in Europe)
14. The legislative council has powers.
15. The commissions and the legislature and the executive for the E.C.S.C. 
16. E.I.B (European Investment Bank)
17. E.B.R.D (European Bank for Reconstruction And Development) 

It’s understandable why Europe has responded so slowly to a deliberate, well-coordinated economic attack and why the consequences have been devastating. Germany has alluded to this fact and is demanding structural reforms.

Britain is the enemy… 

(A simple example) - Britain proposed the purchase of significantly subsidised New Zealand sheep in exchange for British-made vehicles offered cheaply. The sheep are sold to France at excessively inflated prices and the commission shared…It's open to scrutiny and is a tangible and deliberate attempt by Britain to collapse the EAGGF. 

The United States is the enemy… 

(A simple example) - European banks have been driven to the cusp of bankruptcy by a co-ordinated attack by US banks intent on creating problems where there are none in an effort to destroy the Euro. Interbank rates are open to scrutiny and confirm the intent.

Whichever way you look at it it's certainly a refreshing take on the European Crisis and perhaps an opinion we should not dismiss too lightly. 

Emerging markets - NEUTRAL?

It's quite clear that Europe's economy is currently non-sustaining ie: more liquidity is required, especially in the short to medium term. With the systematic transfer of private-sector debt to the public sector there's not too much doubt that the ECB will inject liquidity into the system. That being the case Europe's impact on the global market should be fairly muted in the second half of this year.

More interesting is the debate on China's economy and the commensurate market reaction on the price of commodities. BHP Billiton projects a rosy outlook for commodities, generally and iron-ore specifically. Even so, housing data released this morning suggests that China may be headed for a 'less-soft' landing than initially expected. In addition, one or two developing political nuances in South America and Southern Africa adds fuel to the emerging-market-neutral debate.

Given the global- market aberration and the historically low equity-ratings in the US, it's no surprise that recent global equity-investment flows are US positive. Even so, the currency of the land of the free is only for the brave.

You, me, a German & an economist walk into a bar...

Buy a German a drink and you'll be told that the economy is wundenbar, prices are robust and unemployment is at a generation-low. Change seats, if you have the stomach for it, and do the same for an economist and he'll be squealing like a bag-full of pigs... You could argue that the economist is highly-skilled, well-educated and therefore worth the price of a beer but more often than not you'd be wasting your money..!

The disconnect between the economy and stock-market performance is not always fully understood. The supposition that the stock-market reflects the economy is false, palpably so! If anything, the stock-market tries to predict the future, usually one year out, which is why traders and professional money-managers will talk about the '12-month economic lag' on current pricing. That means current stock-market prices reflect the predicted conditions 12 months hence... The variables we scan from which we make our predictions are mostly the subjective interpretations of the current circumstances we find in 'the real world'. Euphemistically, these predictions elevated in status to FORECASTS by analysts or economists are nothing more than, well, predictions and unless the forecaster has divine authority it's nothing more than, yes you guessed it, a prediction! Extrapolating this theory in the media, a Bloomberg or a Reuters or any other similar financial-media company would then collate these FORECASTS (ie: predictions), calculate the middle-ground (an insipid concept at best) and elevate the average FORECAST (ie: prediction), to unimaginable status by renaming this number the CONSENSUS FORECAST (ie: the average prediction). In reality that's the same as buying lukewarm tea because half the world likes ice-tea and the other half like their tea hot. 

These CONSENSUS FORECASTS (ie: average predictions) are applied to a company specifically, a sector broadly, an economy generally and in recent times to the global economy as a whole. Investment strategy is a discussion for another time. Even so, applying CONSENSUS as reality to your personal investment strategy is, quite simply, intellectually poor... You'd be selling yourself short. 

Returning to our two lechers above, whilst the German lives in the now, the economist lives in the future. One lives in ignorant bliss and the other is blissfully ignorant for everybody knows that today's reality is not always tomorrow's certainty. The same applies to markets, today's prediction is not always tomorrow's reality. One more thing, three years ago the US financial crisis heralded the end of America and by implication the rest of the world. Surprisingly then we're still here. We'll say the same about Europe...