It was a rough week for global markets. Across the markets, there was clear evidence of big investors reducing exposure. The theme was persistently risk-off (which means some money moving out of stocks and into bonds, out of broader commodities and into gold).
Unusually, it had nothing to do with economic data or central banks.
It had everything to with politics.
With the perception that the gap has closed on the presidential race this week, the uncertainty surrounding the outcome has elevated. And that’s being reflected in some skittishness across markets. And all we hear from Wall Streeters is that they don’t like uncertainty, and can’t calibrate properly on the potential outcomes on the presidential race might bring — as if they’ve been operating with such certainty and precision for the past eight years.
The reality: As we’ve seen over and over, throughout the crisis period, the global political environment has been anything but predictable. The economic environment has been anything but predictable.
If we think about all of the events along the way, over the past eight years: we’ve had the near global economic apocalypse, there was Cypress, Greece, the near defaults of Italy and Spain, the debt ceiling sagas, government shutdowns, Russia/Ukraine, threats from North Korea, the Ebola scare, an oil price crash, Brexit, and more.
Each has brought a potential shock to a global environment that was already on very shaky and uncertain footing, within which some semblance of stability and recovery was only present because it was being manufactured and managed carefully by the world’s biggest central banks.
With that, little, if any, credit can be given to the current President for the economic recovery. And it’s unlikely that the next Presidency will move the needle much either, unless it can come with a supportive Congress, to approve big and bold fiscal stimulus.
The debate last night was entertaining. It’s sad to see how the media manipulates facts and cherry picks quotes to fit their narrative.
But that’s what they do and it ultimately shapes views for voters, unfortunately.
Today, I want to focus on China and Trump’s comments on China’s currency manipulation. Everyone knows the U.S. has lost jobs to China. Everyone knows China has become the world’s manufacturer. But not everyone knows how they did it.
Is it just because the labor is so cheap? Or is there more to it?
There’s more to it. A lot more.
China’s biggest and most effective tool is and always has been its currency. China ascended to the second largest economy in the world over the past two decades by massively devaluing its currency, and then pegging it at ultra–cheap levels.
Take a look at this chart …
In this chart, the rising line represents a weaker Chinese yuan and a stronger U.S. dollar. You can see from the early 80s to the mid 90s, the value of the yuan declined dramatically, an 82% decline against the dollar. They trashed their currency for economic advantage – and it worked, big time. And it worked because the rest of the world stood by and let it happen.
For the next decade, the Chinese pegged their currency against the dollar at 8.29 yuan per dollar (a dollar buys 8.29 yuan).
With the massive devaluation of the 80s into the early 90s, and then the peg through 2005, the Chinese economy exploded in size. It enabled China to corner the world’s export market, and suck jobs and foreign currency out of the developed world. This is precisely what Donald Trump is alluding to when he says “China is stealing from us.”
Their economy went from $350 billion to $3.5 trillion through 2005, making it the third largest economy in the world.
This next chart is U.S. GDP during the same period. You can see the incredible ground gained by the Chinese on the U.S. through this period of mass currency manipulation.
And because they’ve undercut the world on price, they’ve become the world’s Wal-Mart (sellers to everyone) and have accumulated a mountain for foreign currency as a result. China is the holder of the largest foreign currency reserves in the world, at over $3 trillion dollars (mostly U.S. dollars). What do they do with those dollars? They buy U.S. Treasuries, keeping rates low, so that U.S. consumers can borrow cheap and buy more of their goods – adding to their mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth (and the cycle continues).
The U.S. woke up in 2005, and started threatening tariffs against Chinese goods unless they abandoned their cheap currency policies. China finally conceded (sort of). They agreed to abandon the peg to the dollar, and to start appreciating their currency.
They allowed the currency to strengthen by about 4.5% a year from 2005 through 2013. That might sound good, but that was a drop in the bucket compared to the double digit pace the Chinese economy was growing at through most of that period. Still, the U.S. passively threatened along the way, but allowed it to continue.
With that, the Chinese economy has ascended to the second largest economy in the world now – on pace to the biggest soon (though it still has just an eight of the per capita GDP as the U.S.). But China’s currency is a bigger threat, at this stage, than just the emergence of China as an economic power. The G-20 (the group of the world’s top 20 economies) has had China’s weak currency policy at the top of its list of concerns for a reason.
The current global imbalances are the underlying cause of the global financial crisis, and China’s currency is at the heart of it.
And without a more fairly valued yuan, repairing those imbalances — those lopsided economies too dependent upon either exports or imports — isn’t going to happen. It’s a recipe for more cycles of booms and busts … and with greater frequency.
Are big tariffs the answer? Historically that’s a recipe for disaster, economically and geopolitically.
What’s the solution? I’ve thought that the Bank of Japan will ultimately crush the value of the yen, as the answer to Japan’s multi-decade economic malaise and as an answer to the stagnant global economic recovery. It’s an answer for everyone, except China. A much weaker yen could crush the China threat, by displacing China as the world’s exporter.
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All eyes are on the Presidential debate/face-off tonight. Heading into the event, stocks are lower, yields are lower and the dollar is lower — all a “risk-off” tone.
And the VIX (implied S&P 500 vol/an indicator of uncertainty) has popped higher from the very low levels it had returned to as of Friday. Speculators are out today making bets on a political firework show tonight, and thus betting on more uncertainty in the outcome and in post-election policy making.
If we step back a bit though, given the difficulties in getting through the legislative process, the biggest potential market influence from the election may be more about the prospects of getting a fiscal stimulus package done, rather than the many promises that are made on an campaign trail. Both candidates have been out promising a spending package to boost the economy. And on the heals of a package from Japan, and the unknown risks from Brexit, the idea is becoming more politically palatable.
As we discussed on Friday, the Fed has taken a strategically more pessimistic public view on the economy, in effort to underpin the current economic drivers in place (stability, low rates and incentives to reach for risk).
Following the Fed and BOJ events last week, the 10-year yield is back in the 1.50s and sitting in a big technical level. This will be an important chart to keep an eye on tomorrow.
If you’re looking for great ideas that have been vetted and bought by the world’s most influential and richest investors, join us atBillionaire’s Portfolio. We have just exited an FDA approval stock for a quadruple. And we’ll be adding a two new high potential billionaire owned stocks to the portfolio very soon. Don’t miss it. Join us here.
Yesterday was the deadline for all big investors to submit, to the SEC, a public snapshot of their portfolios for the quarter ended June 30th.
On that note, as we’ve discussed, this information is covered hot and heavy by the media. You often see headlines like these (these are actual headlines from yesterday): “Activist hedge fund ValueAct takes about 2 percent stake in Morgan Stanley” or “George Soros sells off Apple stake during the second quarter.”
On the above stories, if you own Morgan Stanley should you feel good about it? Conversely, if you own Apple, should you be worried? The heavy coverage of the topic both online and on television implies “yes” to both, which likely gets the average investor stirring. But there’s never context given as to whether or not the information is meaningful, and there’s never evidence given as to what the results tend to be for those that follow. The reason is, it requires a lot of hard work, experience, ingenuity and proprietary research to draw any conclusions from the information.
Still, it’s safe to assume the UK event had considerable influence on the holdings of the world’s biggest investors. Global markets swung violently on the news back in June. Remember, between June 23rd and June 27th, the S&P 500 fell as much as 5.7%. It made it all back the subsequent four days.
So given the timing of the portfolio snapshot with the Brexit fears, let’s talk about Apple, the most widely held stock in the world and the largest constituent in the market cap weighted S&P 500. The headlines were scrolling fast and furious on Apple yesterday, following the filings from billionaire investors David Einhorn, George Soros and Chase Coleman – all of which sold Apple shares in the quarter. Now, it’s important to understand that these funds can trade Apple with virtual anonymity between quarters. The stock is too large for anyone one investor to take a 5% “activist” stake, which would trigger the requirement of a 13D filing with the SEC, which would require updated filings (or amendments) within 10 days of any change in the position size (sell one share, you have to report it).
On that note, let’s start some perspective on Einhorn’s Apple stake: Going into the second quarter Einhorn’s biggest position, by far, was Apple. He had 15% of his fund in the stock (a huge position). It would only make since that he would trim the position and neutralize some risk into an uncertain macro event. In fact, in his second quarter letter, Einhorn brags that they have done a good job of “trading” Apple (i.e. managing the downside). Still, as of the end of Q2, Apple was a very large position, at 12% of his fund.
What about the tech investing genius billionaire Chase Coleman? Coleman had 9% of his $7 billion fund (long public equities) in Apple going into the second quarter. By the end, he had cut it by 75%. Again, playing defense into Brexit. Apple stock is 16% higher than it traded on June 30. Coleman may very well have put the full position back on since the June 30 snapshot (likely).
George Soros? First, we should note that Soros is the world’s best global macro investor. He’s an agile investor that will load up on a theme and just as quickly reverse course and position for another probable outcome. For a career, Soros’ bread has been buttered betting on the unexpected outcome. That’s where the big wins come. Brexit was unexpected, thus his trimming of Apple, the stock with the biggest contribution to his view on a slide in the S&P 500.
And then we have arguably the greatest investor of all-time, Warren Buffett. While others ran from Apple, Buffett increased his stake by more than 55%. Why? Buffett has made his living for more than 50 years buying good companies when everyone else is selling. As he says, “be greedy when others are fearful.”
That’s a sliver of perspective on the popular 13F filings of the past few days. As I said yesterday, the presence of a big investor in a stock is rarely valuable information. Only a small percentage of those reporting investors have the powerful combination of size, influence and portfolio concentration to make their presence alone a potential catalyst for change in a company/and a repricing of the stock.
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In the middle of June we have perhaps the two biggest events of the year. On June 15 the Fed will decide on rates. And hours later, that Wednesday night, the Bank of Japan will follow with its decision on policy.
This is really the perfect scenario for the Fed. The biggest impediment in its hiking cycle/”rate normalization process” is instability in global financial markets. Market reactions can lead to damage to consumer sentiment, capital flight and tightening in credit—all the things that can spawn the threat of a global economic shock, which can derail global recovery. Clearly, they are very sensitive to that. On that note, the Brexit risk, while a hot topic in the news, is priced by experts as a low probability.
So, the Fed has been setting expectations that a second hike in its tightening cycle could be coming this month. But the market isn’t listening. The market is pricing in just a 23% chance of a hike in June. But as we’ve said, markets can get it wrong, sometimes very wrong. We think they have it wrong this time. We think there is a much better chance. Why? Because they know the BOJ is right behind them. If they do hike, any knee jerk hit to financial markets can be quelled by more easing from the BOJ.
Remember, as we’ve discussed quite a bit in our daily notes, central banks remain in control. The recovery was paid for by a highly concerted effort by the world’s top economic powers and central banks. And despite the perceived hostility over currency manipulation, the powers of the world understand that the U.S. is leading the way out of recovery, and that Europe and Japan are critical pieces in the global recovery. The ECB and BOJ have been passed the QE torch from the Fed to both fuel recovery and promote global economic stability. And playing a major role in that effort is a weaker euro and a weaker yen.
The Bank of Japan is operating with one target in mind, create inflation. Now three years into their massive program, they haven’t posted a positive monthly inflation number since December. Inflation is still dead, just as it has been for the past two decades. So, not only do they have the appetite and global support to do more, but the data more than justifies more action.
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This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
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We charted very closely the risks of the oil price bust. We thought central banks would step in and remove the risk. They did. From there, we thought stocks would track the path of oil. As long as oil continued higher, stocks would follow and slowly global sentiment would mend. It’s happened.
When oil sustained above $40, we turned focus to the extremely negative sentiment that was weighing on markets and economies. But given the extreme views on the world, we thought things were set up for positive surprises. We said this surprise element creates opportunities for asymmetric outcomes (bad is priced-in, good … not at all). That sets up for the potential of “good times” ahead for both markets and broader sentiment.
Fast forward: Earnings expectations were ratcheted down and broadly surprised on the positive side. Global economic data has been ratcheted down and is positively surprising. It’s happening in Germany, which is a very important indicator for a bottoming of the euro zone economy. If the threat of further spiral in Europe has lifted, that’s a huge catalyst for global sentiment. When global sentiment has officially moved out of the doom and gloom camp and back to optimism the horse will have already had plenty of steps out of the barn. And we think we are seeing it reflected in stocks, especially small caps.
With this backdrop, we think everyone could benefit by having a healthy dose of “fear of missing out.” Stock returns tend to be lumpy over the long run. When we you wait to buy strength, you miss out on A LOT of the punch that contributes to the long run return for stocks.
Consider what we said on February 11th (stocks bottomed that day and are up 16% since): “We often hear interviews of money managers during periods like this, and the question is asked “are you getting defensive?”
That’s the exact opposite of what they should be asking. When stocks areup 15–20%, and acknowledging that the long–run average return for stocksis 8%, that’s the time to play Defense. When stocks are down 15–20%, that’s the time to play Offense.
The reality is most investors should see declines in the U.S. stock market as an exciting opportunity. The best investors in the world do. The same can be said for average investors.
Here’s why: Most average investors in stocks are NOT leveraged. And with that, they should have no concern about stock market declines, other than saying to themselves, “what a gift,” and asking themselves these questions: “Do I have cash I can put to work at these cheaper prices?” And, “where should I put that cash to work?”
As Warren Buffett says, bad news is an investor’s best friend. And as his billionaire counterpart says, and head of the biggest hedge fund in the world, ‘stocks go up over time.’ With these two basic, plain-spoken, tenets you should buy dips and look for value.
Broader stocks have just gone positive for the year. Small caps are still down small. Remember, when the macro fog cleared in 2010, small caps went on a tear, from down 6% through the first seven months of the year, to finish UP 27%. Don’t miss out!
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
Last week we talked about Warren Buffett’s new stake in Apple. Today we want to talk about the investor that recently sold Apple: Carl Icahn.
In a world where information is abundant, markets are priced quite efficiently. The way a stock re-prices is through CHANGE.
And that’s precisely what the influential investors that we follow in our Billionaire’s Portfolio specialize in. And that’s why they have such a tremendous record in posting consistent superior returns – and, in turn, building tremendous wealth for themselves and their investors.
No one has done a better job at creating change for shareholders than Carl Icahn – certainly not over the span of the past three decades. That’s why we have 20% of our Billionaires Portfolio in stocks owned and controlled by Icahn.
We consider Icahn the god-father of activism. Very early on, Icahn found that, among all of the complications people like to add to investing, there is a very simple opportunity to take advantage and capitalize on the simplicities that we all know about human nature.
In his words, “some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.”
I’ll interpret that remark with these three simple points: 1) People will take advantage of opportunities to satisfy their own self-interests. 2) People will find ways to justify their self-serving actions. 3) People will be greedy.
Add this human nature to a concoction called the public equity markets, and you find, among many things, a witch’s brew of bad management teams at publicly traded companies.
To most investors, identifying a company that’s run poorly is a red flag – something to stay away from.
For Icahn, it’s opportunity. It’s blood in the water. Why? Because it presents the opportunity for CHANGE. And when you get change, you have a chance to make a lot of money as the stock re-prices to reflect that change.
Icahn has done this over and over throughout his long career. That’s why he has been able to compound money at nearly 30% a year for almost 50-years. That’s the greatest long-term investment track record in history (as far as we know). One thousand dollars with Icahn when he started has gone to$275 million.
Even at the age of 80, Icahn has been as vocal and as influential as ever. He influenced Apple to a near double by encouraging Apple to use their treasure chest of cash to buy back stock. Cash sitting on a balance sheet idle does nothing for shareholders. Share buybacks create shareholder value.
That’s the name of the game. Despite what some CEOs may think, that is precisely why they have been employed, to create shareholder value. And that is often the change that has to take place (the CEO or the mindset of leadership).
Icahn’s continued investing success can be attributed to one important talent: He’s a change-maker. When we follow him, we can be assured that he has a plan for change and that he will fight to make it happen. Plus, when we follow Icahn, we get an added bonus that few, if any, other big time investors summon: Because of his great success, his campaigns tend to attract other influential investors to join in – stacking the odds even more favorably for shareholders.
We’ll talk more about the “Icahn effect” tomorrow.
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaires Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
Buffett’s famed annual letter is due to be released this weekend. With that, today we want to talk a bit about his record, his philosophy on markets and successful investing and the high conviction stocks that he has in his $130 billion plus Berkshire Hathaway stock portfolio.
First, only one living investor has a length of track record that can compare to Buffett’s. That’s fellow billionaire Carl Icahn. Icahn actually has a better record than Buffett, and it spans a little longer. But he gets a fraction of the attention of the man they call the Oracle of Omaha.(more…)
People continue to blame softness in global markets on China. For years, there has been fear and speculation of “hard landing” for the Chinese economy.
When we talk about China, it’s all relative. China was growing at double digit pace for the better part of the past 25 years. Now Chinese growth has dropped to below 7%. That’s recession-like territory for the Chinese economy.
But the Chinese have powerful tools to promote growth. And we expect them to use those tools, sooner rather than later.
As we know their biggest and most effective tool is their currency. They ascended to the second largest economy in the world over the past two decades by massively devaluing their currency, and then pegging it at ultra-cheap levels. It allowed them to corner the world’s export market, sucking jobs and valuable foreign currency out of the developed world. This is precisely what Donald Trump is alluding to when he says “China is stealing from us.”
Interestingly though, it’s China, most recently, that has been getting hurt by currency. Over the past four years, the Bank of Japan has devalued their currency against the dollar by nearly 40%. And other export-driven emerging market economies have had massive declines in their currencies (Brazil, Mexico, Argentina, Russia). Given that China has actually been appreciating its currency against the dollar for the past 10 years (albeit gradually), they’ve given back a lot of ground on their export advantage.
Source: Reuters, Billionaire’s Portfolio
In the chart above, you can see the yen weakening dramatically against the dollar (the purple line moving higher = stronger dollar, weaker yen). The orange line is the dollar vs. the Chinese yuan. You can see the relative advantage that the BOJ’s QE program has created (the gap between the purple and orange lines). With that, the orange line rising, since 2014, represents China backing off of its pledge to appreciate its currency. They are fighting to preserve their export advantage by weakening the yuan again.
In August, they devalued by less than 2% in a day and global markets went haywire. That move is nothing extreme in currencies, especially an emerging market currency. But given China’s currency history and their policy stance, since 2005, to allow their currency to appreciate under a “managed float” (managing a daily range for the currency), it has markets confused. When people are confused, they “de-risk” or sell.
Now, China will likely continue this path. Our bet is that markets will finally realize that, in the shorter term, this will be good for global growth and good for the health and stability of global financial markets. Better growth in China, at this stage, is good.
Among their other tools to stimulate growth, China has interest rates. While most of the world is pegged at zero rates (or close to it, if not negative) China’s benchmark interest rate is still 4.35%. And their inflation rate is running 1.5%, well below their target of 3%. That’s a recipe for aggressive rate cuts, which would be a boon for the Chinese economy and for the global economy.
We have an explosive growth Chinese internet stock in our Billionaire’s Portfolio that is positioned to benefit from aggressive Chinese policy moves. We are following one of the best billionaire technology investors on the planet. He has a massive stake in the company. Click here to join us!
