Investment Biker, Jim Rogers

Key take aways

  • Central investment thesis:
    • Always bet against the central banks and with the real world
    • truly down trodden people do not rise, but hell hath no fury like suppressed peoples whose expectations have been aroused
    • people don’t change their ways until their are forced to
    • while it is easy to figure out an investment is cheap, the real work is figuring out if a change is about to occur in the near future. It is important to study markets and their history
    • when seeing a big change coming (the opening of the trans Siberian railway), consider the economic, political and social shift
  • modus operandi
    • Why buy a new sofa when it could be put to work in the markets
    • Only invest in what I can sell quickly
    • do nothing until you can see the money to be picked up around the corner
  • key areas of study
    • geography
    • politics
    • economics
    • history
  • Company assessment criteria
    • Price to book value
    • sound balance sheet
    • pay dividend
    • Price to earnings ratios
    • Viable industries
    • start with largest soundest enterprises
      • banks
      • mines
      • news papers
  • On assessing countries
    • Watch out for statism – governments getting in the way of an organic market
      • democracy does not equal prosperity
      • US government piling more and more regulations
      • SnL crisis of the 1980s
      • Artificially suppressed prices
        • 1970s gold in America
        • 2019 prices of pork in China
      • Foreign aids (IMF, UN and Peace Corps) just props up a system that does not work and delays the actual rebuilding process. Have faith in the locals to rebuild themselves in a configuration that works for them as opposed to a system suited to foreigners liking (hubris)
    • On ethnic strife and separatism
      • Some geographical boundaries don’t make sense.
      • no borders remain stable for long
      • economic hardship will bring to surface these fault lines as they get used as a vehicles to get more
      • Wait till wars are fought and border issues sorted out. It might then become a great investment opportunity to enter at the bottom
      • examples
        • Rise of Islam and Christianity in Siberia prior to Soviet collapse
        • Hong Kong riots
        • Barcelona declaration of independence
        • XinJiang, Tibet
    • black markets as signals: difference between black markets rates and official exchange rates provide an indicator of how much the central bank has propped up the exchange rate. Minimal to no differences are signs of a strong economy
    • major red flags:
      • currency controls, import taxes, export restrictions. Makes it hard to pull funds out
      • is country trying to devalue its way out of its internal problems instead of doing a proper fix?
      • frantic purchase of gold in local jewelry store
    • Positive signal:
      • Is the country trying to get foreign hard currency by making things other people want to buy – quality goods
      • Is the country learning to compete and out innovate its competition
      • an educated population
  • On centrally planned economies
    • the market feedback mechanism is missing
    • resources get ruined due to misuse
    • it would have thrive if it was a sound economic theory
  • On China
    • while Russia abused their resources, China having nowhere to go were more deliberate and took better care of their resources
    • success had a lot to do with economic and political organization
    • example
      • took bees to blooming flowers to work them 5-7 times harder than their foreign counterparts
    • Hong Kong, Guangzhou and Shanghai being captured by the capitalist spirit generally ignores capital’s policies
  • Note worthy collations
    • China (labor) / Siberia (natural resources)
    • Australia (natural resources) / Japan (capital)
    • US (capital) / Canada (natural resources) / Mexico (labor)
  • On commodities
    • most local markets will eventually get assimilated into the global market
    • diamonds have artificially propped up prices that will be hard to maintain in the long run. DeBeers will eventually run out of cash buying up supplies from the black market and it will lead to sudden price collapse. Opt for gem and rubies instead
    • when gold gets too cheap companies will figure out ways to use it thereby depleting its supply driving up price. Same could be said of oil
    • underlying structural issues within a country can stay hidden for long during times of a commodity boom
  • The key to success
    • out of every 1000 people who wants to be rich only 6 can master the discipline to do so
    • stay focus on a single goal for five, ten, twenty years

Related readings

Simultaneous inflation and deflation pressures in China

China simultaneously experiences imported deflation and inflation. 

Drop in global demand for exports causes credit to unwind within the manufacturing sector. 

Swine flu and depleting foreign reserves causes price pig to increase. 

This will be a useful case study to observe the monetary and fiscal policy China implements to deal with simultaneous inflationary and deflationary pressures. 

China Factory Deflation Worsens as Pork Drives Consumer Prices  https://www.bloomberg.com/news/articles/2019-10-15/china-factory-deflation-worsens-as-pork-drives-consumer-prices

Book summary: The Asian Financial Crisis by Shalendra Sharma

This book describes how the 1997 Asian Financial Crisis transpired.

Impacted countries

  • South Korean
  • Indonesia
  • Thailand
  • Malaysia
  • Singapore
  • Hong Kong
  • China

Key lessons

  • Only 2 of these three conditions can be allowed to be true without causing inflationary recession
    • Fixing the currency exchange rates against other reserve currencies
    • Control over domestic interest rates
    • Control over capital inflow
  • On foreign capital flows
    • huge volume of foreign capital flows into a country
      • economic growth rate increases
      • inflation rate stays low
    • huge volume of foreign capital flows out of country
      • economic growth rate decreases
      • inflation rate goes up

Common pattern across countries

The build up

  • Long periods of high export lead GDP growth attracts high levels of foreign investments. Huge volume of foreign funds originated from Japan which was having a very loose monetary policy
  • Countries peg their exchange rates to reserve currency to ensure stable prices for both imports of raw materials and exports value added products
  • Countries currencies are not reserve currency, hence foreign loans were denominated in foreign currency
  • Excessive leverage within the country by domestic parties who take on short term loans denominated in foreign currencies at lower interest rates to finance long term projects that generate returns in domestic currencies
    • Stocks are purchased with borrowed money. These stocks are then further used as collaterals to borrow more money
    • Real estate are purchased with borrowed money. These real estates are then further used as collaterals to borrow more money
  • Moral hazard due to corruption of financial system
    • banks are arm twisted to finance projects that are not financially viable by governments and politicians

The economic headwinds

  • countries face increasing export market pressure
    • Competition at the low end of the export markets from China
    • Competition at the high end of the export markets from Japan
  • Japanese government instructs central bank to tighten monetary policy to reduce real estate. This severely restricted liquidity from Japan and reduced availability of short term foreign loans to affected countries

The crash

  • Borrowers within these countries increasingly experienced difficulties rolling over their foreign denominated short term loans to finance their long term illiquid domestic projects
  • Many of them started defaulting on their loans
  • Foreign investors started getting spooked and started withdrawing their funds or refusing to allow their loans to roll over
  • Non-performing loans builds up amongst banks within these countries
  • Capital flight continues causing downward pressure on the exchange rates of these countries
  • Countries continued defending their exchanges rates by buying up their own currency and selling off foreign reserves (assets held in foreign currencies)
  • Countries deplete their foreign reserves and are unable to uphold their exchange rates. Since most debts are denominated in foreign currencies, they are not able to print money to pay off these loans.
  • The economy grinds to a halt and hyper-inflation occurs within their financial system at this point
    • domestic production stops and locally produce foods is no longer available for sale
    • due to shortage of foreign reserves imported products become very expensive in local currency
  • Countries approach IMF for loans to tide through this liquidity crunch.
  • IMF steps in and with a lack of understanding of the economic patterns imposes these requirements:
    • Countries required to impose high domestic interest rate. It has the effect of further reducing the money supply within these countries causing more defaults domestically.
    • Countries will reform the financial systems to remove cronyism lead financing
  • Riots ensures and Anti-establishment governments get elected in some countries

The recovery

  • IMF releases the misstep in policies and relents
    • Countries lower their domestic interest rates to increase liquidity within their financial system
    • Countries allow their exchange rates to float freely
  • Relatively cheap asset prices within these countries starts attracting foreign investments again

Federal Chairman Jerome Powell on 0.25% interest rate cuts

Overview

  • Outlook for the US economy is favorable but
    • core inflation is only at 1.6% instead of 2%
    • cutting interest rate by 0.25% from 2.5% to 2.25%
  • insurance against downside risk
    • global growth is slowing
    • trade policy tension is a new stimulus to the equation and it is a concern
  • key objectives
    • strong job economy
    • 2% inflation rate
  • adopt an iterative approach by observing how economy reacts to policy changes

Key areas of concern

global growth slow down

  • US core inflation rate is at 1.6% – excludes food and energy inflation which are cyclical
    • US GDP sustained
  • US manufacturing declined in 2019Q1 and 2019Q2
  • US business fixed investment slowed in 2019Q1 and fell in 2019Q2
    • companies uncertain about investment spending
    • not seeing additional demand for products
  • June US job growth slowed in 2019Q2
  • disinflation rates observed in other countries
    • manufacturing in rural China and the EU are slowing

highly leverage business sector within the US

  • Business borrowings are excessive
  • loans have moved off balance sheet of banks to market based vehicles

Positive signals of sustained US economy

  • rising household income drives confidence
  • no booming sectors observed hence no concerns for busts

Federal Reserves framework for monitoring risks

  • Excessive leverage in the Financial sector
  • Excessive asset valuations
  • Excessive debt loads in households and business
  • Funding risks that could result in sudden shortfall of liquidity

Structure of the US economy

  • US capital requirements within banks are at 2X of what is required to tide through tough times
  • Allocations
    • 70% consumer
    • 30% investments and manufacturing
      • not growing
      • remains healthy

Related references

Manias, Panics and Crashes – balance of trade mechanism

In a world where currencies are not pegged to gold or other currencies price stability is achieved when major trading partners all target the same inflation rates. Otherwise wild fluctuations in rear asset prices and exchange rates will likely occur.

We should expect the following loops to occur.

Loop #1 – When central bank pursues expansionary monetary policy

  1. Central bank pursues an expansionary monetary policy
  2. investors expect inflation rates to go up
  3. investors expect currency value to drop in overseas market
  4. investors sell off real assets within country and exit funds out of country to other countries
  5. due to decreased demand, stocks, real estates and commodity drops in value.
  6. Exports become more competitive and balance of trade surplus results.

Loop #2 – When central bank pursues deflationary monetary policy

  1. Central bank pursues deflationary monetary policy
  2. investors expect inflation rates to go down
  3. investors expects currency values to increase in overseas market
  4. investors move funds into country to buy up real assets
  5. Due to increased demand, stocks, real estate and commodities within the country appreciates in value
  6. Exports become less competitive overseas and trade deficit results

Key insights

US has been experiencing a balance of trade deficit since 1980. This is partially due to the result of going off the gold standard.

While it did not actively pursued a deflationary monetary policy, it’s stable politic system and high level of technology innovation, relative to other countries, has an overall deflationary effect on its economy.

The net effect is the same as if the central bank pursues a deflationary policy.

Related readings

Analysis of the Facebook Libra Token

High level

  • The launching of Libra Token will allow large swath of people access to banking
  • It will also allow corporations with a huge stock pile of cash the access to alternate forms of investment

Libra currency liquidity

Every Libra token that gets created is backed by a reserve of real assets. Close examination of partner balance sheet figures shows approximately USD148 billion dollars of cash and equivalent available for deployment right out the gates.

Libra social impact

One of Libra’s goals is to provide banking access to segments of the world’s population that don’t. Close examination of partners’ reach to this segment of the world shows 7.9million people. This is not including the 204 million African Internet Users on Facebook.

Related References

20190619 – Federal reserve chairman Powell’s speech

Federal Reserve’s two pronged mission

  • Maximum employment
  • Price stability at 2% inflation

Indicators utilized to proxy inflation

  • Unemployment levels
  • wage levels
  • consumption levels
  • Agriculture
  • manufacturing
  • Business investments
  • trade levels

Departments overview

US treasury and Federal Reserve are non-political entities

  • Government
  • US treasury – controls exchange rates
  • Federal reserve focus on domestic concerns only

Observations

  • will not act on sentiment driven from cross currents like Trade war and China’s deleveraging
  • will wait to see more of how trends pan out before acting
  • most countries find it challenging to sustain a 2% inflation rate
  • wage level increases has remained subdued despite increase demand for labor
  • balance sheets of banks are well stress tested
  • balance sheets of non-banks like mutual funds are not well tested

Reflections on the subject of economics

Man as an automaton

The average man eats, sleeps, shits and reproduce.

When presented with environment stimulus that signals more of the above, his brain emits dopamine which elicits are warm fuzzy sensation in his body which he interprets as pleasant.

When presented with environment stimulus that signals less of the above, his brain emits adrenaline which elicits muscular tension and heat in various parts of his body which he interprets as unpleasant.

Physics as the upper bound constrain for economic activities

Economic activity is what man as a collective organism engages in as it goes about fulfilling its above stated needs.

A quantum leap in economic activity is only possible when there is significant break through in the field of physics.

A large increase in numeric valuation of such economic activities without corresponding increase in actual physical throughput volume will result in either an inflation or a subsequent correction.

Characterization of economic activities

Aerobic economic activity is when the environment remains at equilibrium during energy extraction for the above stated needs.

Anaerobic economic activity is when the environment equilibrium is disturbed during energy extraction for the above stated needs.

Framing as a high level principle

He who controls the frame determines what goes within it.

The jug shapes the water.

The player controlling the outer edges of the Othello board generally wins the game

The country which controls the currency for all international commerce control the direction and level of cross border commercial activities.

US controls the global USD supply which majority of foreign economic activities and debts are denominated in. US controls the future economic outputs creditors will receive in the future.

Major creditors for US debts like China and Russia are moving towards Gold as the denominator.

Key take aways from The Governance of China by Xi JinPing

Vision

  • The Chinese dream
    • make country strong and prosperous
    • revitalize the nation
    • make people live better lives
  • 2 centenary dream
    • baseline being the 1840 opium war
    • a moderately prosperous society by 2021
    • fully rejuvenating China to its former glory by 2049

Modus operandi

  • perpetual learning and improvement
  • the path of socialism with Chinese characteristics
  • further develop the theory of socialism
  • system to guarantee outcome
  • holistic view when developing policies
  • A wise man changes his way as circumstances change; a knowledgeable person alters his means as times evolve
  • Employ the way of the gentleman
  • Fostering of core values to ensure population knows what the right thing to do
  • A warlike state, however big it may be, will eventually perish

Strategic objectives

  • System integrity
    • stem out corruption within the public service
    • safeguarding state sovereignty
    • coordinating national security in the environment of rapid technology innovations
    • staying close to the people in the grassroots
  •  Reform
    • figuring out the relationship between the government and the market
    • Free the mind
    • Develop productive forces
  • Progress
    • Education to cultivate young people to boldly strive forth and including overseas
    • Technological invention and innovation combined with social development
      • internet
      • Bandwidth
      • cyber security
      • AI
      • robotics
    • Management know-how
    • Urbanization of rural areas
    • Military build up
    • Energy sufficiency – one belt one road, climate change
  • Consolidation
    • Hong Kong
    • Macao
    • Taiwan
    • All foreign Chinese nationals

Key challenges

  • Allow market to play decisive role in allocating resources and let government perform its function better
  • imposing order on the markets to prevent people seeking economic benefits through
  • dealing with production lags
  • effective competition to yield superior outputs
  • inconsistent market rules leading to rampant protectionism within local markets
  • fiscal and taxation systems to divide power between national and local government
  • management of technology security risk

foreign relations

  • inclinations
    • averse to hegemony
    • averse to war
    • averse to intervention
  • Mexico, Latin America
  • Russia – trade using local currencies and go off the USD
  • US – on cyber security
  • Asia
    • 67% of world’s population
    • aims to become leader in region
    • increase imports from this region into China
    • improve regional security
  • One belt one road
    • Africa – technology transfer and trade via one belt one raod
    • EU – trade
    • Central Asia and Middle East – invesments, trade and oil for energy needs via one belt one road

Related references

  • Taoism
  • Mohism
  • The Mencius, Meng Zi
  • Strategies of the states, Zhan Guo
  • The Great Learning, Confucianism
  • The book of songs, King Wen
  • The book of rites
  • Advice to my son, Zhuge Liang
  • The methods of Sima, Si Ma Fa