Monthly Archives: June 2011
Enjoy the Dollar Rally While it Lasts.
Any trader will tell you the trend is your friend, and the overwhelming direction for the US dollar for the last 220 years has been down.
Our first Treasury Secretary, Alexander Hamilton, found himself constantly embroiled in sex scandals. Take a ten dollar bill out of your wallet and you’re looking at a world class horn dog, a swordsman of the first order. When he wasn’t fighting scandalous accusations in the press and the courts, he spent much of his six years in office orchestrating a rescue of our new currency, the US dollar.
Winning the Revolutionary War bankrupted the young United States, draining it of resources and leaving it with huge debts. Hamilton settled many of these by giving creditors notes exchangeable for then worthless Indian land west of the Appalachians. As soon as the ink was dry on these promissory notes, they traded in the secondary market for as low as 25% of face value, beginning a centuries long government tradition of stiffing its lenders, a practice that continues to this day. My unfortunate ancestors took him up on his offer, the end result being that I am now writing this letter to you from California—and am part Indian.
It all ended in tears for Hamilton, who, misjudging former Vice President Aaron Burr’s intentions in a New Jersey duel, ended up with a bullet in his back that severed his spinal cord. Cheney, eat your heart out.
Since Bloomberg machines weren’t around in 1790, we have to rely on alternative valuation measures for the dollar then, like purchasing power parity, and the value of goods priced in gold. A chart of this data shows an undeniable permanent downtrend, which greatly accelerates after 1933 when FDR banned private ownership of gold and devalued the dollar.
Today, going short the currency of the world’s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer. But once it became every hedge fund trader’s free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began six month ago, and could continue for months or years.
The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations. I’m talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback. Think of these as emerging markets where they speak English, best played through the local currencies.
For a sleeper, buy the Chinese Yuan ETF (CYB) for your back book. A major revaluation by the Middle Kingdom is just a matter of time.
I’m sure that if Alexander Hamilton were alive today, he would counsel our modern Treasury Secretary, Tim Geithner, to talk the dollar up, but to do everything he could to undermine the buck behind the scenes, thus over time depreciating our national debt down to nothing through a stealth devaluation. Given Geithner’s performance so far, I’d say he studied his history well. Hamilton must be smiling from the grave.
Who is Ben Bernanke?
Since nothing less than the fate of the free world depends on the judgment of Ben Bernanke these days, I thought I’d touch base with David Wessel, the Wall Street Journal economics editor, who has just published In Fed We Trust: Ben Bernanke’s War on the Great Panic.
I doubted David could tell me anything more about the former Princeton professor I didn’t already know. I couldn’t have been more wrong, as David gave me some fascinating insights into the inner soul of our much vaunted Chairman of the Federal Reserve.
Bernanke was the smartest kid in rural Dillon, South Carolina, who, through a series of improbable accidents, and intervention by a local black civil rights leader, ended up at Harvard. He built his career on studying the Great Depression, then the closest thing to paleontology economics had to offer, a field focused so distantly on the past that it was irrelevant. Bernanke took over the Fed when Greenspan was considered a rock star, inhaling his libertarian, free-market, Ayn Rand inspired philosophy in great giant gulps.
Within a year the economy had suddenly transported itself back to the Jurassic Age, and the landscape was suddenly overrun with T-Rex’s and Brontesauri. He tried to stop the panic 150 different ways, 125 of which were terrible ideas, the remaining 25 saving us from the Great Depression II. This is why unemployment is now only 9.5%, instead of 25%.
The Fed governor is naturally a very shy and withdrawing person, and would have been quite happy limiting his political career to the Princeton, NJ school board. To rebuild confidence, he took his campaign to the masses, attending town hall meetings and pressing the flesh like a campaigning first term congressman.
The price tag for Ben’s success has been large, with the Fed balance sheet exploding from $800 million to $2 trillion, solely on his signature. The true cost of the financial crisis won’t be known for a decade or more. The biggest risk is that we grow complacent, having pulled back from the brink, and let desperately needed reforms of the financial system and the rebuilding of Fannie Mae and Freddie Mac slide.
How Bernanke unwinds this bubble will define his legacy. Too soon, and we go back into a real depression. Too late, and hyperinflation hits. That’s when we find out who Ben Bernanke really is.
Quote of the Day
“We’ve seen the S&P 500 drop 50% twice in the last decade. That is the new normal”, said Richard Kang of Emerging Global Advisors.
My Briefing from the Joint Chiefs of Staff.
I have always considered the US military to have one of the world’s greatest research organizations. The frustrating thing is that their “clients” only consist of the President and a handful of three and four star generals. So I thought that I would review my notes from a dinner I had with General James E. Cartwright, Vice Chairman of the Joint Chiefs of Staff, and known as “Hoss” to his close subordinates.
Meeting the tip of the spear in person was fascinating. The four star Marine pilot is the second highest ranking officer in the US armed forces, and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes. As he spoke, I was ticking off the stock, ETF, and futures plays that would best capitalize on the long term trends he was outlining.
The cycle of warfare is now driven by Moore’s Law more than anything else (XLK), (CSCO), (GOOG). Peer nation states, like Russia, are no longer the main concern. Budgeting for military expenditures is a challenge in the midst of the worst economic environment since the Great Depression.
Historically, inertia has limited changes in defense budgets to 5%-10% a year, but last year defense secretary Robert Gates pulled off 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.
The war on terrorism will continue for at least 4-8 more years. US troops in Iraq will wind down to 35-50,000 by this year to support a large State Department presence. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. “We’re not going to be able to kill our way or buy our way to success in Afghanistan,” said the general. However, a 30,000 man surge there over the next 18 months will bring an improvement on the ground situation.
Iran is a big concern, and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.
Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.
Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites. We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of “voluntarism.” General Cartwright said “Anyone in business will tell you that they’re losing intellectual capital on a daily basis.”
The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI). The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.
I left the dinner with dozens of more ideas percolating through my mind, which I will write about in future letters.
Only Buy Companies You Hate.
The Wall Street Journal published one of the funniest investment strategy pieces I have ever read. Dilbert cartoonist Scott Adams argues that you should invest in companies you hate because only the most unprincipled and rapacious firms make the greatest profits.
Moral bankruptcy is a great leading indicator of success, and the best ones can get you to balance your wallet on the end of your nose and bark like a seal, as you buy products that you utterly despise. Companies with the work ethic of a serial killer, like British Petroleum (BP) come to mind, but you can also add other firms to the list, like Goldman Sachs (GS), Citicorp (C), Pfizer (PFE), and Altria (MO).
Adams initially started investing in companies he loved, like Enron, WorldCom, and Webvan, and absolutely lost his shirt. Adams’ advice to BP is not to waste money on artificial sincere ad campaigns apologizing, but get us to hate them more. Bring on more dead bird pictures!
Who is Adams about to hate next? Apple (AAPL), because he irrationally craves their products, resents their emotional control over his entire family, can’t get ITunes to work, and is appalled by those aloof black turtlenecks that Steve Jobs wears. For my own recent piece on Apple, please click here. To read the entire, hilarious piece in full, please click here.
CNN’s John Lewis; the Death of a Colleague.
I was deeply saddened by the death of my old friend, CNN Asia correspondent, John Lewis, a legend in television journalism.
I first met John in Tokyo at the Foreign Correspondents’ Club of Japan back in 1974, when he was a decorated Vietnam vet from Ohio trying to claw his way into TV, bootstrap style. Personable and easy going, he was one of the few in the club who got along with most of the cantankerous, suicidal, or just plain drunk writers there, and was often the first to step in to stop a fight. In those days you didn’t get fired in this rough and tumble business for punching out competitors.
At my 1977 wedding at the club, John graciously shot the stills because I was too poor to hire a professional. In 1979, rumors spread that this wild man millionaire named the “Mouth of the South,” Ted Turner, was going to start up a 24 hour news cable channel called CNN, and was looking to hire a full time Asia correspondent. We both jumped at the job, and Lewis won out. Everyone was impressed, but kept their fingers crossed.
I was left part time stringing for NBC news, reporting to the late Bruce McDonald, who had worked his way up from writing for Johnny Carson’s Tonight show to the network producer for Asia, which is a big deal. And you wonder where I got my wicked sense of humor.
I often ran into John in the field, he covering the typhoons, floods, and wars, and me the business angle, which often blended into the same story. So we covered the corrupt Marcos regime in the Philippines, the assassination of Indira Ghandi in India, and the opening up of China. We never missed an opportunity to swap contacts and war stories at dingy, dubious bars from Seoul to New Delhi, and all points in between.
We parted ways in the eighties when my career made a sharp jag to the right with my joining Morgan Stanley in New York. John shot to international fame when he ignored Chinese orders to cease covering the Tiananmen Square massacre in 1989, and kept beaming reports abroad until the heavies cut the power off. Gutsy move, John.
I heard that John died of a heart attack at 63. Foreign correspondence did not exactly offer a healthy lifestyle, with all the smoking, drinking, and general carousing that went on. There were also the occupational hazards of the occasional stray bullet, bouts of amoebic dysentery, and stints in jail at the behest of some third world dictator. It was a larger than life existence, but not exactly conducive to a family life, so I moved on. John stuck with it, but what a price! I was appalled when I saw his recent picture. The years had not been kind.
John was one of a dying breed of journalist whose sole interest was to get the story right and get it fast. There was no pandering to a particular political viewpoint, stealth marketing, or surreptitious product placement that has regrettably become endemic in the trade today. His was really an old fashioned kind of reporting, almost quaint in its principles.
He will be missed.
Quote of the Day
“Free choice is not relevant in financial markets because there are too many players. A stock with a million holders is much more predictable than one with five,” said Charles Nenner, of Charles Nenner Research in Amsterdam.
Diamonds Are Still an Investor’s Best Friend.
If you forgot to buy your loved one a Valentine’s Day gift and spent a week sleeping on the sofa, eating canned food, and cleaning out the cat box, you now have a chance to redeem yourself.
A revolutionary new website has just launched called Mazal Diamond, which promises to turn the online jewelry business upside down. I went to the privately held company’s website and found an entertaining assortment of free tools. You can design your own jewelry, and even order a custom cut, which Mazal will supply out of their massive 100,000 stone inventory.
Just for fun, I appraised the diamond I bought for my late wife, which I bought from a Hasidic Jew in an alley off of Manhattan’s West 47th street. He kept his inventory hidden in an envelope in his sock. How times have changed! The two carat, VVS1, round cut, yellow diamond that I paid $3,000 for in 1977, would fetch $16,800 today. Great trade!
Mazal Diamond’s game changing advantage is that they cut, design, and manufacture their own jewelry, enabling them to undercut prices offered by established industry leaders. In fact, the $30 billion a year diamond industry is undergoing radical change by moving online, much the same way as the book, music, and travel industry have gone. Your local neighborhood jewelry store is about to get wiped out, or become a quaint relic.
Blue Nile (NILE) pioneered the way, and instantly became the 800 pound gorilla. The company cut costs by keeping inventories low, relying instead on a secretive web of anonymous suppliers. Now, second generation entrants are snapping at its heels and eating its lunch with polished websites, better service, and lower prices, seducing potential customers with free diamond blogs. Mazal Diamond even offers a year of free insurance.
They are getting a boost from a 30% price gain, a woman’s best friend has seen since the March, 2009 stock market bottom, taking them back to pre crash levels. The US accounts for about half the world market, so the new frugality will be a challenge. That will be offset by flight to safety purchases by inflation wary Americans, and new demand from the emerging market middle class.
Investment grade diamonds have been steady earners, gaining an average 5% a year over the last three decades. Blue Nile shares rocketed 370% from the lows last year, while Zale’s (ZLC) saw a ballistic 800% gain, offering a call on consumer spending with a real turbocharger. That means avoiding these stocks like the plague now, but entertaining a look when you think the economy is about to surprise to the upside. To avoid another week on the sofa, you might even think about buying next year’s Valentine’s surprise