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Capitalist Exploits is a team of globe-trotting professionals dedicated to seeking out and investing into unique, undiscovered, and profitable opportunities worldwide. This could be an asymmetric trading opportunity in the global currency markets, seeding a tech startup in Israel, or... More
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  • The Implications Of "Red Monday"

    Regular readers will have been very well positioned to take advantage of what is happening in emerging markets and specifically currencies as we can see from the fairly dramatic chart below.

    (click to enlarge)

    We've been positioning for a USD bull run for some time now. Back in October we made the call that the yuan looked like it was providing us an asymmetric payoff opportunities as volatility was extraordinarily low, meaning that the market was not anticipating either volatility and certainly not weakness in the yuan. Here is what Brad said.

    As mentioned in my writing on the Singapore dollar, the most dangerous thing in finance is the "thing" that never moves. This stability creates an illusion of control around which many positions are built, the greater the perceived stability the greater the positions, and the more other assumptions and forecasts are made.

    Then in November Brad mentioned that:

    A bull market in the US Dollar is underway and its magnitude and duration are likely to catch everyone by surprise. I believe it isn't out of the question for the USD Index to advance by at least 50% within the next 5 years. If this forecast proves correct, there will be profound ramifications for the global economy and many financial markets, particularly emerging markets.

    Not to beat a dead horse earlier this month we detailed further reasons to get long USD and short yuan.

    We believe this trade has some legs and though volatility is no longer as cheap as it was when Brad first began yelling from the rooftops we believe we've some ways to go in this yet.

    Since we believe it's of such importance over the coming 2015 year we're putting the finishing touches to a comprehensive guide to profiting from this which we'll be sending to subscribers. If you're not already on our list make sure you're on it :)

    With that prelude I wanted to share an article on recent events in Russia (NYSEARCA:RSX) from our sister site Emerging Frontiers which covers the frontier and emerging markets.


    Mayhem! Carnage! Каtасtрофа!

    These are the messages that blared forth from my TV screen and broker notes this morning. Monday - hereafter branded as "Red Monday" - was a day of reckoning for the Russian economy. The schadenfreude on display in Western media is nearly as relentless as the ruble's sell-off:

    "It couldn't happen to a nicer guy" - WSJ, on Putin

    "Russian sanctions could be lifted 'within days' if Vladimir Putin makes different choices, John Kerry says" - Daily Telegraph

    Let's disregard the fact that Secretary Kerry may be a bit premature with the sanctimony after two years of diplomatic outmaneuvering and general поражении (beatings) at Putin's hands in Syria, Libya, and Ukraine. It might be easy to get caught up in the media hype around yet another Russian currency crisis, but time can be better spent in considering what Putin's next moves might be, and the ramifications for the global economy.

    Few will disagree that Vladimir Putin is easily the most effective head of state on today's world stage. Americans may not like him, but Russians love and adore him. Trust me on this one, Mr Putin is not going anywhere and the only effective outcome of Kerry's sanctions has been to unite the Russian people in defense of their president.

    Let's quickly recap the facts as we know them now:

    • Crude (NYSEARCA:UCO) prices are at a five-year low; WTI traded below $57, and Brent just passed through $60 for the first time since 2009.
    • On Monday the ruble (RUB) dropped nearly 10% against the US Dollar (NYSEARCA:USD) in a single day of trading.
    • In the early morning of Tuesday the Russian Central Bank (NYSE:CBR) raised rates from 10.5% to 17% - a 62% increase in the overnight lending rate. This stopped the RUB's downward slide - for less than two hours - before continuing down past the 75 handle.
    • The RTS, Russia's benchmark equity index, was down 12% on Tuesday when I wrote this and lost nearly 40% in the month of December.

    Courtesy: Financial Times

    All of this information is readily available - but what does this mean for the global markets? How can we predict the "second bounce of the ball" or the unintended consequences of the Russian implosion?

    I lived and worked in Moscow for a couple of years, and during my tenure the RUB never breached the 32 handle. This morning a friend told me via email that middle-class Muscovites are piling into IKEA, 7th Continent and other large retailers to buy every consumer good on the shelves before the inevitable mark-ups are applied. I only wish that I were there to load up on deeply-discounted bottles of Kalashnikov vodka - a much better souvenir than the NFL-themed matryoshka dolls from the tourist traps at Ismailovskiy Park.

    Russia's first post-Soviet currency crisis, in 1998, pre-dates my arrival there but I often heard about how market traders would price their goods in "conditional units" instead of rubles - a thinly-veiled attempt to price their goods in USD (which is illegal; Russian businesses can only price their goods in RUB).

    It is virtually indisputable that Russia will experience a painful recession next year; their economy's most significant shortcoming is its near-total reliance on resource exports. Russia's break-even production cost of crude oil is just over $100, so the country's famed $400bn "stabilization fund" will soon begin to draw down. Russia has its problems, to be sure, but their fiscal policy has actually been quite solid since they launched this fund in 2004 to mitigate volatility in the crude oil market.

    Let's tick off some other, lesser-known (but no less true) facts:

    • Remember the European mega-banks that were imperiled in the Greek sovereign debt crisis of 2012? Disaster was only averted when ECB President Mario Draghi pledged to do "whatever it takes" to save the Euro? Let's take a look at current exposure to Russia for some of the largest European banks (courtesy of Bloomberg). How much of this exposure was denominated in US Dollars? I suspect that we'll soon find out. This week's events will surely serve as a wake-up call for the sovereign debt markets - remember that, less than three months ago, Spain and Italy were pricing bond issuances at a lower yield than US Treasuries!

    Russian GDRs

    • Russia's gold reserves are at a 20-year high now, with over 1,150 tons (worth over US$ 1.5B) on record. Theirs is the fifth-highest stockpile, having just passed China and Switzerland. Does the US hold more in Fort Knox? Good question! The Fed refuses any attempt to independently audit its reserves. Even if you're not a "gold bug", you have to appreciate the (image of) stability that these holdings can convey to the world in a full-on currency crisis.
    • Russia has made no secret of its interest in dethroning the US Dollar as the global reserve currency. Recent moves such as the establishment of the New Development Bank (also known as the "BRICS Bank"), and joint efforts with China to begin direct currency conversion with their respective trading partners (and each other) are beginning to chip away at global dollar hegemony.

    Make no mistake, this sell-off is a big problem - not just for Russia, or for the other over-levered emerging market currencies (TRY, INR, ZAR) that stand to be traumatized by a rising US dollar, but ultimately even for the US itself. As US capacity utilization returns to pre-2001 levels, and inflation gains momentum, dollar-pegged currencies around the world are about to come under increasing strain. I expect that Putin's plans to chip away at the global reserve currency - the US Dollar - are about to shift into high gear.

    I'll be watching this situation closely. In the meantime, some food for thought... it might be time for investors to give some serious thought to the major Russian names out there. Here is what I saw in the GDRs this morning...

    Current prices, P/Es and dividend yields for Russian majors, namely Sberbank (OTCPK:SBRCY), Gazprom (OTCPK:OGZPY), Lukoil (OTCPK:LUKOY) and Rosneft (OTC:RNFTF):

    Bank Exposure to Russia

    Of course one must remember that these companies' ability to pay such attractive yields may be imperiled by crude prices that are currently 40% below Russia's production break-even. Nonetheless, it's indisputable that there are going to be some real bargains in this market. (Disclosure: I own all of the stocks on this list in my personal account. This is not a recommendation; make your own decisions please!)

    I'll write more about this in a few days. I'm increasingly of the opinion that 2015 is going to be a year that investors will someday tell their grandchildren about.


    Certainly something to think about over the weekend which I hope you enjoy as much as I plan to. I'll be enjoying some quiet time and staying well away from any retail outlets where people will be amassing in force trying desperately to figure out what to buy for people who don't need anything and who in turn will be out doing the same thing, all the while maintaining the same fake enthusiasm for Christmas as North Koreans did for Jim Jong Il.

    - Chris

    "Under the most negative external economic scenario, this situation can last two years." - Vladimir Putin on 18 December, 2014

    Disclosure: The author is long LUKOY, RNFTF, OGZPY, SBRCY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

    Dec 19 4:07 PM | Link | Comment!
  • Did Someone Say Deleveraging?

    By: Chris Tell at

    For reference I should mention that I recently wrote about debt in a post titled Debt Chart Porn, and we are about to mail out our comprehensive debt report to our registered readers. All of this has led me to thinking a lot about debt and the state of the world geopolitically, currencies, commodities, and all the interconnected pieces that make up our global economic ball of yarn.

    When discussing the global financial crisis (NYSE:GFC) and what I call a global debt crisis, what is really terrifying is how well the media have pulled the wool over the eyes of well-educated people.

    "Well, the banks, governments and businesses learned a hard lesson and are far more stable today."

    That isn't an exact quote, but it is something like that which I hear all too often - from people who's businesses are in finance, banking, and investment.

    No, they're not more stable, I scream. People everywhere should be soiling their pants at the numbers.

    The world is still leveraging up. After the 2008 crisis it didn't take long to get right back on that particular wagon and continue this absurd path. Just because the wagon's wheels fell off seemed no reason to stop using it - just get a new set of wheels. Contrary to what seems to be widely held views, global deleveraging has yet to start. The debt ratio continues rising to all-time highs.

    Japan, a country we've spoken about in these pages at length, is just simply off the charts. Japan is that wild guy at college who you were convinced would kill himself. Every time you bumped into him it was something new and more terrifying. He's still around and his death defying stunts are more daring than ever. Right now he's at the controls of a runaway train, and for those of you who've never been on a train, it runs on tracks which ostensibly means it can't turn. On the tracks ahead are 127 million Japanese citizens. Remember, he can't turn so he's just going to keep going until his windscreen is all meaty and red. They are calling it Abenomics. It's insane.

    Staying on that side of the globe for a minute we have China. China has become a driving force of leverage post 2008. Mark Hart, the legendary but secretive hedge fund manager behind Corriente Advisors believes that China may well be the next major problem. Even more terrifying than breathing Beijing air is the speed of this leveraging process in China.

    Take a look at the below chart on corporate debt as a % of GDP.

    (click to enlarge)

    Now, I'll concede that in the main Anglo Saxon economies - you know, where "round eyes" live - the corporate, household and financial sectors have reduced debt levels, though this has come at the expense of the government sector. A quick view of the chart below provides ample fodder for underwear soiling.

    (click to enlarge)

    Federal Reserve balance sheet as a % of GDP

    Here we sit six years on from the beginning of the GFC in the advanced economies, and despite all the trouble that crisis inflicted on the global economy, the world is not yet deleveraging. Indeed, not only is the world NOT deleveraging but it has kept increasing leverage at an unabated pace and it's breaking new highs - up 38 percentage points of GDP since 2008 to 212%!

    (click to enlarge)

    All of this should be of absolutely no concern to you if you're unfathomably rich or perhaps living on a desert island, with monkeys for companionship. For the rest of us it's going to affect us one way or another over the coming decade.

    Have a great weekend!

    - Chris

    PS: I'll be meeting up with a few friends in Hong Kong on the evening of the 17th. If any readers are in the area and would like to join me please send me a message through the contact box and I'll let you know the details.

    "When an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are." - Carmen M. Reinhart and Kenneth Rogoff, This Time is Different

    Tags: Debt, Macro
    Oct 10 11:44 PM | Link | Comment!
  • Replace These People With An App Already

    By: Chris Tell at Capitalist Exploits

    I spent a recent weekend looking at some real estate. It used to be a favourite way for me to spend time and I realized how much I really miss it. I was reminded of how 99% of real estate agents are completely useless.

    No, I mean not just incompetent but really useless and thick... really thick. Sometimes it's easy to tell thick people apart. You can ask them random questions or just initiate conversation, and when their knowledge fails to extend beyond what's on TV and the weather, you've probably got yourself a thickie.

    Alternatively, you can measure the distance between their eyes, measure their arm length to height ratio, count the number of times they repeat the same meaningless words such as "fab" or "retro" when trying in vain to describe a crappy box of a house, or you can leave them in a room full of banana skins and see what happens. I say this because it's important to try to steer clear of thick people. Your sanity demands it.

    To be fair, I had one great experience amongst 4 dismal ones. Pareto's law seems to run true.

    Normally, I don't pay a heck of a lot of attention to peoples attire, what car they drive or such things, just ask my wife. That said, some things stand out, and like a goat in a fish tank you can't help but notice.

    The first agent I met for the day was such a "goat". He arrived 20 minutes late, pulled up in a 20 year old Ford Falcon complete with a purple sparkly paint job, lowered suspension, darkened windows and a Fatboy number plate. I was immediately worried. The car screamed "I want to be a Fatboy but can't afford a Ferrari and I have no style."

    Of course, driving around in a Ferrari for work as a real estate agent, selling anything other than multi-million dollar mansions screams, "I am a shark" and would probably distract clients from the houses they're meant to be buying, while they instead glare at the car thinking ill thoughts about the agent. Let's just say that as a salesperson's appearance matters.

    When it comes to looking at the property, whether it be land or buildings, any monkey can look around and see what there is to see. What an agent needs to be able to do is to explain what can't be seen by the naked eye. In this instance any modicum of knowledge outside of "there is the dishwasher" would have been useful. Clearly my expectations were too high.

    I looked at 4 properties, all in the same area, and asked the 4 different agents the same questions:

    1. What is the areas growth rate?
    2. Who is coming to live here and why?
    3. Are there any major projects in the area that are going to affect demand - either positively or negatively?

    I'd done a bit of research prior to stepping out the door. I referred to this earlier in "6 Ways to Improve Decision Making". I hate wasting time so I'm not going to bother looking at something which I haven't got at least some level of knowledge about. As such I could have answered all of the 3 questions above but wanted to use them as a starting point to find out more. Alas, I completely flummoxed all 4 of these "experts".

    It would have come as a gigantic surprise that a 14 ha development was already underway for a very exclusive private school just 2 kilometers away. A simple Google search would reveal this but that might interrupt getting Facebook updates. Growth rates in the area have been off the charts for the last 10 years and employment opportunities have been opening up causing demand growth. Anyone living in the region should have some level of knowledge of this but don't go expecting to be educated by most real estate agents.

    This is far from my first encounter with real estate agents and it is not unique. What this means is that the buyer has to do the work themselves. This is a good thing really for the buyer, especially if you're an educated buyer and know what you want.

    I recall for example buying a property some years back. I wanted to put a contract to the vendor and the agent was unaware how to proceed. I walked out to my car, and 5 minutes later came back with a signed contract. I always used to keep a few copies complete with the relevant clauses I needed. The agent, a middle-aged woman, obviously completely in a flap as to what she was meant to be doing, began recoiling and actually trying to dissuade me from buying. She'd probably never had a sale before and had no idea what to do. I helped her out in a big way. I explained to her how difficult it would be to drive home without legs and that, unless she took my contract to the buyer immediately, that was the only way she'd be traveling.

    Back to my weekend fun. The absolute best agent by far was a woman who clearly was running multiple things in her life. Namely being a mum as well as selling real estate.

    How do I know this? Well she drove one of those chest freezers on wheels as the car salesmen call it. People mover. The only reason anyone would drive such a horrible box is to transport screaming, messy kids around. I know, trust me.

    This woman was awesome. She knew the demographic because she lived in the area and her kids went to local schools, she also knew about the new school coming in, she knew what arterial roads bordered the property she was showing me, she knew what traffic was like, what demographic was living in the area, what zoning existed and where, she knew that 80% of people living in this area were home owners not renters, she knew what the typical yield on properties was, what it had been in the past and how cap rates have collapsed, and she had a list of recent comparable sales drawn up to provide me. Hallelujah, I was in love!

    What then is the solution?

    Well, I propose using technology. Everywhere I look people are far more engaged with their phones than with real people. Let's further this trend and profit from it. Heck, why fight the trend?

    App Cartoon

    Let's develop an app for real estate buyers. At the push of a button we can find out area details, historic growth rates, median incomes, median sales prices, strategic plans such as highways being built etc. In short, let's take that wonderful woman, driver of the chest freezer, and put her onto your smart phone. We could even use her voice to guide you through the topics you browse. That will take care of the generic statistic driven data.

    Then what we'll do is combine that technology with another technology which is far from fictitious and a company we have invested in via our Seraph private syndicate. This technology is augmented reality. Check it out here.

    Now imagine for a minute what can be done with this technology. In the real estate space you could "virtually" walk through that property you want to view while augmenting yourself into the picture, or perhaps augmenting your furniture in the lounge, your dog chasing the cat in the garden. I'm sure you can think of a number of amazing uses yourself. Let's get it done before Google snaps up this company making shareholders, yours truly included, very happy indeed.

    Most importantly we'll do away with countless unnecessary real estate agents and we'll have our own virtual agent at our fingertips. Like it or not, this is coming. Based on my weekend experience I can't wait.

    - Chris

    "Any sufficiently advanced technology is indistinguishable from magic." - Arthur C Clarke

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 08 11:21 PM | Link | Comment!
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