"Investors are drawn to China like moths to a flame." – Neil Woodford
That’s a great quote. Neil is the head of investments at Invesco, running the UK’s largest investment fund with a decade of 15% average returns under his belt so let’s take the man seriously for starters. Mr Woodford’s concerns coincide with figures showing that food prices in China were 10.1pc higher in October than in the same month last year – a level of inflation not seen since mid-2007. This is deepening concern that China’s economy is now starting to overheat.
"I do not deny that in the long term an economy like China will grow much more rapidly than the West. But I think one has to be very careful about correlating growth necessarily with economic opportunity, and opportunity to make money," said Mr. Woodford.
And so it is that the moths are all drawn to the light, even as it burns them. For they are blindly drawn to its grace, hitting their heads about the light, destroying their senses, going without food, and becoming easy prey to those that hunt them. Even those few moths that will get within the embrase of the light will burn unable to escape, ever.
There was no escape for Ireland this weekend as the IMF and EU pinned the country down and forced them to swallow a $130Bn aid package at (get this!) 6.7%. $17.5Bn of this money is to come out of Irish pension funds all just to make sure Bill Gross doesn’t lose any of the money he lent to Ireland! I honestly cannot tell you who is the more vile, despicable villain in this debacle. Is it the banks, who started this mess with their idiotic lending practices? Is it the lobbyists and lawmakers, who turned Ireland into a tax haven for EU Corporations and destroyed the economy by funneling tax breaks to the wealthy? Is it the Irish Government, who stupidly bailed out the failing banks with guarantees that put the nation on the hook for more money than their entire GDP. Is it the bondholders, who drove up the cost of financing Ireland’s newfound debt to levels that threatened to break the National Bank or is it the EU & IMF, who are effectively playing the role of loan sharks, borrowing $100Bn at 2.5% and forcing Ireland to borrow it back from them at $5.8%.
Perhaps that’s the answer, this is all just a gigantic global shakedown where the bigger, more liquid nations who can still borrow cheaply, are making a little spare change by forcing smaller, weaker nations to go into debt at much higher rates. Of course Pimpco et al happily play along – they make a fortune on these games but even the mighty Mohammed El Erian can’t FORCE an entire nation to borrow $100Bn over a weekend like the EU is doing to Ireland. Before the bank bust, Ireland had very little public debt, now the EU is forcing Ireland to accept a debt bomb that amounts to nearly half of the nation’s $227Bn GDP. This would be like forcing the US to borrow $8Tn at 7% – it would wreck our country and we wouldn’t stand for it – why should we expect the Irish people to roll over and play dead for the EU, who they were only cajoled into finally accepting the Lisbon Treaty just one year ago after years of rejection?
Now Ireland is betrayed, stabbed in the back AND thrown under the bus by the EU at the first sign of trouble. The people of Ireland are being forced to go about $25,000 EACH into debt at 7% in order to make sure the EU’s bondholders get paid – roughly $75,000 per wage earner! Plus, as I mentioned, their nation’s pension funds are being forced to kick in an additional $6,666 per citizen ($19,000 per wage earner), likely busting them down the road as well. Things are so great in bond land that unsecured bonds are even making a comeback, with $246Bn already sold this year, more than double last year’s pace. And why not, there is no such thing as default anymore – if you buy a bond then you are on the side of the men who seem to be able to economically enslave entire populations to insure they won’t take any losses. The Irish people must vote to accept their fate on December 7th, may God have mercy on their souls…
So we have bond moths throwing money at high rates as they don’t see the risk. We have commodity moths driving prices ever higher as they don’t see the risk. In fact options on $100 oil contracts for December are up over 20% since last week but, even more disturbing, is that there are now 45,424 open contracts (controlling 45.4Mb) at $100 strikes at $5.55 for contracts that expire in 4 weeks at 20% above the current price. Do they know something or are they simply heading into the burning light as the Fed fuels the fire with $45Bn worth of POMO this week? Oil moths seem downright rational compared to the momentum stock buyers in the US with companies like AMZN, BIDU, CMG, DECK, FCX, GMCR, NFLX, PCLN, POT, SBUX, WYNN, etc. trading at valuations even Icarus may think are out of reach. And that’s just from the US perspective, let’s look at those stocks priced in Euros!
Wow, those US markets are on fire! The combination of the rising dollar and exploding MoMo stocks are making those US markets look like very attractive flames to the global moths, just as their own rallies are faltering. Does that make US equities a place to put your paper or simply a place where a large number of investors are likely to get burned? Maybe today’s headline will read "Stocks rose sharply Thursday after Ireland moved closer to addressing its debt crisis, better-than-expected economic data suggested the recovery is accelerating and General Motors (GM) returned to the New York Stock Exchange (NYX) with a massive initial public offering." Oops – silly me, that was the headline from November 18th, when the Dow popped 1.6% to 11,181 – the last time Ireland was "fixed." Surely American investors aren’t stupid enough to buy into the same premise just 11 days apart, are they? Surely you don’t know American investors very well if you answered that with a "no."
50,000 people marched on Dublin to protest the budget cuts. Ireland only has 4.5M people so that’s like 3M people marching on Washington (it’s always a matter of perspective) so there’s no slam dunk on Pearl Harbor Day as the EU attempts to bomb the Irish into servitude. One of our Members said in chat this morning that, as a bond buyer, he expects to be protected "no matter what method I have to employ to get it back WITH INTEREST, otherwise, what is the point of being a creditor?" Indeed that is the pervasive attitude in the investment community but why should the Irish people, or any nation’s people accept it?
Even if the Irish people do agree to each take on $75,000 worth of debt at 7% in order to pay back loans that they never asked for that were used to bail out banks that they never profited from – even if they agree to this insanity – who is to say they can actually afford to pay it back? THAT is the joke that Flip (our Member) and other bondholding moths do not see as they head into the light – we are currently in the stage of replacing one stage of broken promises with a new set of promises that simply haven’t been broken – YET.
In a few years (in 2013, in fact, when the EU already terminates the current deal) we’ll be right back where we are now and you’ll be asking the Irish people to promise to pay $150,000 each to fund the next rollover, maybe next time at 11%. Defaults don’t always come by choice but by artificially preventing defaults and continuing the madness that has already engulfed this planet – we only "extend and pretend" the global debt bomb as bond buyers keep transferring money from one unpayable loan to another under the very, VERY false assumption that there is some infinite amount of money that will keep the game going forever. Only vast amounts of money printing can inflate our way out of this mess and, if that’s the case, then what’s the point of tying up money at 7% if it’s devaluing at the the 20% pace the Dollar was setting for the first 10 months of this year?
So consider this fair warning. Things are not "fixed" and our PSW Holiday Shopping Survey is not giving us as rosey an outlook as the breathless announcers on CNBC are indicating. I am hearing very bullish commentary about retail sales but, so far, none of us are really seeing it in the stores we visit. I’ll have more to say on Retail as we get some real data, the stuff they are quoting today is just thin-sampling nonsense for the most part and should not be taken seriously. Today is Cyber Monday and we’ll probably get those numbers along with store counts on Wednesday and I’m still expecting the numbers to disappoint overall and I have no doubt at all that margins are slipping considerably as Extreme Discounting is now considered the norm in retail land.
We’re still in cash and we will be amusing ourselves by trying to double up our $10,000 to $50,000 Virtual Portfolio, which was up a virtual 160% at $26,000 when we lost interest in risk in early October. Our goal is still to get to $50,000 by Jan 21st (options expiration day) despite our hiatus, and we’ve had great success with our short-term trading this past month, so we’re going to "go for it" in this still-choppy market.
The Dollar is NOT going down. In fact, it’s hitting 81 this morning, just 1 point off our goal. This can provide a nice boost for the markets (in dollar terms) if we get a bit of a pullback to re-test 80 but, after that, it’s anybody’s game as the dollar could break back down or the Irish people could grow a spine and tell the EU and the Bondholders to shove it. If only US citizens had been that wise when we were "only" $75,000 in debt per family, as opposed to the crushing $671,846 per family hole we’re in now. Of course, you don’t really have to worry about national debt as you can just buy a home in a debt-free country and move there after transferring your assets to off-short accounts and relocating your business to a tax haven – like Ireland!
If for some strange reason, you are not wealthy enough to walk out on this train-wreck of an economy before it all hits the fan – don’t worry – we’ll send you a post card…