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
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
Company assessment criteria
Price to book value
sound balance sheet
Price to earnings ratios
start with largest soundest enterprises
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
Rise of Islam and Christianity in Siberia prior to Soviet collapse
Hong Kong riots
Barcelona declaration of independence
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
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
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
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)
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
This book describes how the 1997 Asian Financial Crisis transpired.
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
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
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
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
Central bank pursues an expansionary monetary policy
investors expect inflation rates to go up
investors expect currency value to drop in overseas market
investors sell off real assets within country and exit funds out of country to other countries
due to decreased demand, stocks, real estates and commodity drops in value.
Exports become more competitive and balance of trade surplus results.
Loop #2 – When central bank pursues deflationary monetary policy
Central bank pursues deflationary monetary policy
investors expect inflation rates to go down
investors expects currency values to increase in overseas market
investors move funds into country to buy up real assets
Due to increased demand, stocks, real estate and commodities within the country appreciates in value
Exports become less competitive overseas and trade deficit results
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.
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.
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.