Previous posts in this discussion:
PostUS Trade Deficit (John Heelan, -UK, 06/28/17 4:02 am)
JE asked on 28 June: "At what point does a trade deficit (investment surplus?) become a threat to a nation's well-being?"
As John said previously, debt must be serviced with interest payments. The danger is when the owners of trade deficits start to protect their future interests by buying bonds and gilts in the debtor nation. It is a bit like a credit card company loaning the card holder more money so that he/she can pay the interest. This is a recipe for long-term financial disaster whether public or private.
"Foreign governments hold about 46% of all US debt held by the public, more than $4.5 trillion. According to the Treasury, the largest foreign holder of US debt is China, which owns more than $1.24 trillion in bills, notes, and bonds or about 30% of the over $4 trillion in Treasury bills, notes, and bonds held by foreign countries."
"Outside the US, China is the largest foreign holder of the debt, with $1.25 trillion. It is followed closely by Japan, which holds $1.13 trillion"
JE comments: The CNN piece above says that Trump had "implied" he could negotiate down the US debt to 85 cents on the dollar. Huh?
The article is from May 10th. This nugget of Trumpism must have quickly been forgotten. Otherwise the markets would be reeling by now--not to mention the millions of ordinary citizens holding US savings bonds.
on Risky Assets
(Jordi Molins, -Spain
06/29/17 4:27 AM)
In the last decade, the performance of risky assets has strictly correlated with central bank purchases, even on the relatively short term, with an approximate lag of 12 months.
Central banks are expected to slow down the pace of their security purchases during the next few years. Risky assets will probably suffer out of that. Remember that investors have massively switched from active asset managers into passive vehicles (mostly ETFs). Active portfolio managers used to keep a sizable amount of cash, while ETFs do not. This is one of the reasons why markets are so "expensive" now.
It seems likely that central banks (being a centrally managed organization supposed to "know better" than the market) will not know how to exit from QE (by some calculations, the ECB monetary policy stance is equivalent to keeping interest rates at -5.5%), and on the short term at least, risky assets will suffer. FANG asset pricing is crazy, and it clearly resembles other episodes in history (nifty fifty, railroad investments in 1870s, IT stocks in 2000 ...).
Efficient market theory states it is not possible to know how financial markets will evolve over time. I believe markets will suffer, for several reasons outlined in this message, but ultimately due to expensive valuations.
JE comments: Show me your FANGs: Facebook, Amazon, Netflix, Google (Alphabet). I had to look that one up.
Jordi Molins sees a bubble in today's "expensive" securities. Not long ago, Time magazine published an article on how US Price-Earnings ratios are significantly higher than in the rest of the world--meaning, US stocks are overpriced in comparison to securities in other countries. Can Jordi comment?
International Securities and "Transparency"
(David Duggan, USA
06/30/17 5:12 AM)
When commenting on Jordi Molins's post of June 29th, John E mentioned that US Price-Earnings ratios are presently far higher than those of international securities. Only if you believe the earnings stream from US companies is equally perilous as compared with that of companies headquartered abroad. My belief and experience (having invested in international funds for nearly 25 years) is that US companies' earnings streams are more predictable and less subject to manipulation than those of foreign stocks. Put another way, it's transparency.
JE comments: It would be instructive to see a ranking of book-cooking by nation. Such a list would also have to keep in mind each nation's standards for defining income, profits, write-offs, and the like. I would assume that some nations are more "transparent" than the US. Perhaps Ric Mauricio can comment?
International Securities and "Transparency"; from Ric Mauricio
(John Eipper, USA
07/02/17 4:49 AM)
Ric Mauricio writes:
John E (see David Duggan, 30 June) asked about international transparency on financials.
Internationally, GAAP (Generally Accepted Accounting Principles) is applied to all accounting. Having said that, there are countries where GAAP is interpreted in many different ways. I don't know if this is due to culture or what. The US GAAP practices are the best in the world. Again, having said that, there are accountants (think Arthur Andersen and company) who will stretch the interpretation beyond the spirit of the rules. The same is true in Europe, which I rate very close to the US in sticking close to GAAP. Hong Kong, Singapore and Australia also stick very close to GAAP. But what about South Korea, probably the closest in standard of living to the US as can be? South Korea is comparable to HK, Singapore and Australia, but information flows slower to us.
Then there is the big one: The People's Republic of China. They actually are very close to the US in applying GAAP. However, there are times where I think that some Arthur Andersen ex-accountants may have expatriated to that part of the world. Now not all Arthur Andersen ex-accountants were complicit in the bad behavior, but I am referring to those that were. By the way, Alibaba (BABA), the giant Chinese company, is based in the Caymans. Uh, gee, transparency? Good luck with that.
The other big one is India. Now here I have a problem. I am not sure they understand what GAAP is. Really. They drive me absolutely nuts. The problem is that they push on you this arrogant "you don't know what you are talking about" when you try to explain the accounting principle to them. And to think that the Intuit QuickBooks help desk is in India. That is really frustrating.
The Middle East seems to follow GAAP. Here's a question to WAISers. What country is the biggest shareholder of Deutsche Bank? No, not Germany.
But there is always the caveat. Just because a company complies with GAAP doesn't mean the numbers are right. This is why P/E ratios do not come into my valuation studies when I am considering an investment. Earnings can and are manipulated. Due to taxes, it is better to understate your earnings. And with the US corporate tax higher than other countries, it is really imperative that US accountants understate earnings, which drives P/E ratios higher (thus the higher P/E ratio for US stocks). I zero in on free cash flow, which is not amenable to manipulation. In fact, REITs (Real Estate Investment Trusts), which exhibit a very high P/E ratio which skews the entire index, are best analyzed with their AFFOs (Adjusted Free Flow from Operations).
JE comments: I never thought about that, but of course: US companies are always incentivized to minimize their (official) profits.
As for the Deutsche Bank question--Ric did "telegraph" a Middle East answer. I'll guess Qatar...?
Who Wields the "Invisible Hand"?
(John Heelan, -UK
07/04/17 5:43 AM)
Ric Mauricio asked on 2 July: "What country is the biggest shareholder of Deutsche Bank?"
Interesting question! The answer might be related to capitalism's "Invisible Hand" that Adam Smith defined in his 18th-century magisterial Wealth of Nations as "the unintended social benefits of individual self-interested actions. The phrase was employed by Smith with respect to income distribution (1759) and production (1776)." A more parochial question for us Europeans might be "Who wields the 'Invisible hand' in European politics?" Some might answer Goldman Sachs, with its heavy investment in placing alumni in Europe's corridors of political power. Seven of these alumni have been called "Masters of the Eurozone," investing in loss-making countries such as Greece and Italy as well as having a presence in the Fed, IMF and World Bank.
(See http://www.independent.co.uk/news/business/analysis-and-features/what-price-the-new-democracy-goldman-sachs-conquers-europe-6264091.html and http://www.expertinvestoreurope.com/news/1025589/italy-land-opportunity-goldman-sachs )
Perhaps Americans should also be aware of Goldman Sachs' apparent infiltration of the White House
Some might suspect that just as AIPAC and Saudi Arabia are the "invisible hands" behind US Middle East policy, Goldman Sachs might well fulfill a similar role in domestic policy.
JE comments: Isn't the Invisible Hand supposed to be...invisible? In any case, the Golden Revolving Door between GS and government is no secret. Can anyone in WAISworld take us inside GS? What exactly is the "special sauce" that makes its people so irresistible as political appointees?
"Invisible Hand"; from Ric Mauricio
(John Eipper, USA
07/05/17 5:11 AM)
Ric Mauricio writes:
The Invisible Hand? (See John Heelan, July 4th.) Is this the beginning of a discussion of conspiracy theories, Bilderberg and the Masons?
JE asked, "Isn't the Invisible Hand supposed to be...invisible?" Indeed, it is invisible. Goldman Sachs is but a visible face of this "invisible hand." It is the strategy of "hiding in plain sight." So if one were to look at the power shareholders of GS, one can see where the power is. And believe me, it is an intertwined network of power brokers of the world, extremely challenging to decipher, even for this forensic analyst. One can say that we only see the tip of the iceberg. We see what they allow us to see. But the "invisible hand" is merely following the Golden Rule: He who has the gold, makes the rules.
So who is the "invisible hand" that controls the bank that exerts great influence on the European Central Bank? JE got close. Very close. It is not Qatar, but Saudi Arabia, through a shell company in the Cayman Islands, controlled by a royal prince.
JE comments: Does the Invisible Hand have a puppetmaster, in a conspiracy-theory fashion? We probably need a refresher course on Smith's concept, but wasn't his Hand beyond the control of individual human actions?
And a happy (belated) July 4th to you, Ric!
- When the Invisible Hand is Visible (John Heelan, -UK 07/05/17 11:48 AM)
John E asked me on July 4th: "Isn't the Invisible Hand supposed to be...invisible?"
Only until arrogance makes the Hand visible. One would hardly call capitalist "invisible hands" of Trump, his cronies and supporters "invisible" as the Orange One becomes more arrogant on domestic and world stages.
JE comments: There's no shortage of arrogance in Washington these days, but has Trump had any real effect on the economy? What, beyond the Trump Bump that flattened out in March, has changed as a result of Trump policies? Not even for-profit prisons have shown much life of late.
- When the Invisible Hand is Visible (John Heelan, -UK 07/05/17 11:48 AM)
- "Invisible Hand"; from Ric Mauricio (John Eipper, USA 07/05/17 5:11 AM)
- Who Wields the "Invisible Hand"? (John Heelan, -UK 07/04/17 5:43 AM)
- International Securities and "Transparency"; from Ric Mauricio (John Eipper, USA 07/02/17 4:49 AM)
- International Securities and "Transparency" (David Duggan, USA 06/30/17 5:12 AM)