George Dorgan

Contrarian, hedge fund manager, macro, long-term horizon
George Dorgan
Contrarian, hedge fund manager, macro, long-term horizon
Contributor since: 2012
Company: SNBCHF.COM
It makes absolutely no sense to compare a world-wide depression like 1931 to a small problem country like Greece. Such a cash-crunch happens regularly in African countries, when their currencies collapse, and nobody writes such lines.
Given that the Greek GDP more than doubled between 1999 and 2007, it must contract again. It was inflated with debt and deflated again later.
The closing of the banks and the following PMI contraction was a necessary warning to comply with the requirements of the creditors: A simulation of a currency collapse.
The previous government complied and the country recovered, this government wants to live on others money.
Certainly Europeans can live together with the euro. There was just an initial mistake to raise Greek GDP and labor costs too much, as compared to Germany. Same with Spain or Portugal...
Now, economists should be calm and wait until German labor costs have risen again and bridged the gap. It will take some years, the economy does this job alone. No need for economists any more (as opposed to 2007 when they should have warned).
Sumner criticizes the central bank because Switzerland is in "mild deflation". He ignores that deflationary pressures come from outside. Internal inflation is +0.5% while imported inflation is around minus 1%.
Due to regulation on rent hikes, massive asset price inflation has not translated too much into higher rents. This will certainly come in the future and will be accentuated when the SNB will need to hike rates, because by regulation existing rents are coupled to SNB interest and mortgage rates.
http://bit.ly/1746R3B
This, however, is a very good statement and I believe that the SNB might finally file for bankruptcy or recapitalisation.
"In the long run, there is a very strong negative correlation between the rate of NGDP growth and the size of balance sheets as a share of GDP. The faster the rate of NGDP growth, the higher the level of nominal interest rates, and the lower the demand for zero interest base money. Tighter money means bigger balance sheets"
However, it is based on my view that the difference between higher Nominal GDP growth as opposed to real GDP reflects an inflation run-up that investors do not like. The SNB finally opted for higher real GDP growth and lower NGDP, which helps the central bank to keep rates low and companies competitive.
See also our core thesis. http://bit.ly/173X79E
Scott says: "Update: Some commenters have questioned my claim that SNB purchases slowed after the peg was enacted in late 2011. Evan Soltas has a post explaining why this occurred."
This is complete rubbish, sorry. I regularly provide the statistics:
http://bit.ly/1z0ZUHm
Interventions in July- Sept 2011: 190 bln.
Interventions from April 2012- Sept 2012: 256 bln.
Thank you very much, Colin, for referencing our site snbchf.com
If you could use links to the relevant article on our site instead of using the link-less text "source snbchf.com"
Your contribution is to connect the different pieces I have provided, into one view.
If we could cross-post it on snbchf.com
Incredible "plague" caused by low food and gas prices.
Wages are rising by 3.5%
http://bit.ly/1rnkI6V
They are really desperate these Germans!
I cannot believe the claim that Russian firms have a lot of USD debt. If they had it, they got rid of it already already when the ruble started its descent.
The reasons for the weak ruble are FX speculation, capital flight of oligarchs and default fears after the 1998 experience.
As I explain above, default fears are irrational and oligarch money will come back.
Russians and Putin are and were not risk-averse enough. As opposed to the risk-averse China, there are no capital controls.
Putin and the central bank finally decided to drive Russia into a recession and I am very happy that they do it. I was desperately waiting for higher unemployment to fight against rising wage expectations.
Many market participants are looking at Russia’s hike from 10.5% to 17.0% and saying “wow”.
Sergej Glazyev already before:
"With the average profitability of manufacturing in 7.5-8% loan issued at rates of 10% and above [Now we are at 17%], cannot be used by most companies either for investment or for working capital. With the exception of a number of oil and gas, and chemical and metallurgical sector, the real economy that decision cut from credit emitted by the state."
JPM (via Zerohedge http://bit.ly/13s5Pga)
"The rate hike occurred after today's 10% depreciation of the RUB despite attempts by the CBR to intervene earlier in the day. The decision was aimed at "limiting substantially increased ruble depreciation risks and inflation risks" according to the CBR. This emergency move suggests to us that household deposit dollarisation had increased significantly (official October data had already suggested dollarisation re-accelerated again). Tonight's large rate hike should in the short term help to slow retail dollarisation demand. However rate hikes do little to help the underlying demand for USD from corporates and banks who continue to front load their demand in order to apy their FX debt payments further down the line. With limited access to USD funding markets and oil having yet to find its bottom, the perceptions of local banks and corps on RUB continues to be negative, fuelling this hoarding behavior.
Bottom line: expect the market to react positively to the rate hike in the short run, but further measures are needed from the CBR for us to turn more bullish on RUB in the medium run, particularly in the absence of improved geopolitical risks and higher oil prices."
But Goldman is less negative on the move: "The decision clearly removes the uncertainty over the CBR's strategy that in our view was a major driver of the recent Ruble volatility and hence is positive. "
As I anticipated the Dubai stock market is finally crashing.
http://bit.ly/1wJ2m6z
So for you it was obvious already in March that the Brent oil price would fall from 105$ to 60$?
Sorry for that, false friend for a native German like me.
I meant "lending to Americans".
Currently it is driven by the combination of 2.5% yield on Treasuries combined with the expectation of a stronger dollar.
I call it: "A new financial cycle has started. Germany grows thanks to local demand and the above mentioned rising wages.
My judgement is that thanks to German internal demand, the euro will perform better than gold in the next year.
Thanks for the challenging feedback.
1) I incorporated a reference to Luzi Stamm's petition in my rather neutral article on Swiss gold sales:
http://bit.ly/12Eu3Dj
2) On Italian or German stocks:
Please read the article on "Irrational exerburance" that explains that higher wages point to lower profits of German companies. The latest GDP release speaks of 3.6% higher income of wage earners.
Be aware that I still buy Swiss stocks thanks to currency manipulation.
http://bit.ly/1spsPlz
Moreover, I have a 30-40% monthly savings rate with salaries paid in CHF. Purchases of Italian stocks hedges against a potential purchasing power destruction of my francs orchestrated by the SNB.
3) Deflation isn't deterimental to gold.
Correct, I mentioned this in a recent tweet.
"Rising gold to oil ratio points to low Fed rates for longer."
Gold maintains value thanks to limited supply, while for example ipads and any other technological gadget loses value.
We live in period of positive deflation thanks to free trade, global distribution of labor and technological improvements. Therefore I do not expect a deflationary shock on wages and do not hold gold at current prices. I am ready to buy around 1000$ and will do so.
4) As for the difference between 1200$ (gold purchasing level, suggested in the article) and my personal level: I already possess an inflation hedge, namely CHF income, I do not need to hold so much gold. The situation is completely different for Americans.
In the part on today's situation, it was already in. I clearly state that the money side of trade flows move into Europe, while financial flows (from Europe) bet on Fed rate hikes.
I am sorry, my fault not to mention it.
In the underlying history article,
http://bit.ly/1w0FTm9
I clearly state that yield-seeking Europeans were borrowing to Americans, while US capital went back from Asia to the US.
Possibly it was too evident for me that higher GDP growth in the US attracted foreign capital, so I missed the sentence here.
I submitted a change to the article
@Tom see my comment on the CB gold sales and correlations above
see my comment on the CB gold sales and correlations above
If you read my page on the gold sales of the BoE or SNB, you will understand that buying euro-denominated bonds was considered a good alternative at the time. Income + at least for the BoE: currency gains on the undervalued euro in the year 2000 .
http://bit.ly/12Eu3Dj
Moreover the euro is positively correlated to gold, when the dollar appreciates then gold falls in price. Sterling rather belong to the dollar category.
The reason for the relation between euro and gold is the heavy German exposure in Emerging markets.
Good challenge,
if central banks like the SNB sold gold at 1900$ in 2011, would have been perfect for them.
Certainly I cannot predict how far gold prices will fall with the new "irrational exerburance" phase in the US. Splitting purchases at different levels is a psychological help. I personally do not own gold currently, but I possess undervalued stocks, like Italian ones.
Gold could rise far higher than the 1900$ during the next inflation round when both US and Chinese wages rise quickly. This will possibly only happen when China becomes a democratic country and when ageing reduces global labor supply. We are possibly 20 or 30 years away from that.
On the other side, global competition puts a cap on wages. Money-printing has triggered huge investments in China and other EM that brings some beautiful deflationary pressures.
you miss to understand the global macro background for exactly these high NASDAQ valuations. They are explained above.
Also bear in mind that Americans often spend and increase debt based on the "wealth effect", namely rising stock and home price valuations.
Very good comment. I expect stocks to be strong in the next 5 years.
Basis: explained in the article about the upcoming repetition of the irrational exuberance.
http://bit.ly/1I2yRCA
Important:
Currently what one might call "exuberance" is caused more by higher company debt and investments than by households debt. Many people still prefer to pay down debt, while companies sit on cash already for a decade. So you could even say this is no exuberance at all.
Still household savings rates are close to zero, wages do not really rise, maybe due to global competition and slack in labor market.
The latest BEA labor costs release showed that companies do not transfer their profits to wage earners. This is a slowing as compared to my findings in the exerburance post.
Exactly what I am saying: The dollar was strong and logically gold weak. We completely agree :-)
Then you must ask yourself why the dollar was strong. It was strong because of strong GDP growth that was favored by rising private debt and spending. I argue that dot com was only the tip of the iceberg.
We could go into discussion if the US was more competitive compared to the rest of the world at the time, maybe it was.
LONDON (MarketWatch) -- Russia's economy is poised to shrink much more than previously expected, the country's economy ministry said on Tuesday, according to media reports. The ministry now expects overall gross domestic product to shrink by 0.8% in 2015, down from a previous estimate of growth of 1.2%. It also predicts the economy will slip into recession in the first quarter of the year. The oil price forecast was cut to $80 a barrel from $100 a barrel, according to Dow Jones Newswires.
Good news that the government finally admits what the economy must do. Create some more competition in the labor market, so that wages stop rising (in RUB terms). Rubel down 5% to USD/RUB 54.
"Sergei Glazyev on neo-liberals in Russia's Central Bank
Sergey Glazyev published a scathing critique of Russia's Central Bank, which seems to be safely in the hands of neoliberalism and international oligarchy.
That's also Glazyev's basic argument.
The study is in Russian and is very substantial (which means also somewhat long), which means that it also shows how thoroughly Glazyev knows what he is talking about. This is after all his main field of expertise.
His study also reveals that the overall Russian debt (both public and private) is actually extensive--$ 650 billion (versus the foreign exchange reserves of $420 billion).
The neoliberal Central Bank is basically working as a conduit for extracting wealth, resources, money, and savings from Russia abroad, while strangling credit and investment inside Russia.
Moreover, this extraction of wealth is mainly financing and subsidizing Russia's sworn enemies who are conducting not only a "financial war" against Russia, but now also a proxy war through Ukraine
--Vladimir Suchan
http://bit.ly/1HU2XIj
Google Translate is struggling.My Russian is not good enough for the full article, anybody can help?
Sorry, I used the words "collapse of the real estate market" in exagerated manner. I rather meant falling RUB prices.
The collapse of the real estate market on RUB terms is exactly where the difference between "somewhat harder" and "hard landing" lies. But I do not expect it.
The hard landing will happen when interest rates in the United States rise strongly, e.g. like 2% or 3% but Europe and China still struggle.
For me there is no such scenario. Either rates rise together in the US and Europe or they do not rise anywhere. When they increae together China will grow and oil demand will go up.
The somewhat harder landing, includes for me more unemployment which will lead to falling (but not collapsing) real estate prices in RUB.
Despite high central bank rates, I still desperately miss more Russian unemployment!!
Yes I said "unfortunately" not yet a GDP recession and I meant so. Only a recession is able to considerably reduce inflation in the longer term.
Quite logically, Dubai sees falling real GDP per capita
http://bit.ly/10XT5fp
For people who want to hedge their Russia investments:
Dubai (http://bit.ly/1ry5IWt) and Quatar are similarly as Russia dependent on oil. Their stock markets are going from high to high, on a big consumption and housing bubble.
But, as opposed to Russia, they got a pegged currency and somewhat more currency reserves and positive migration effects.
Quite logically falling real GDP per capita
http://bit.ly/10XT5fp
For people who want to hedge their Russia investments:
Dubai (http://bit.ly/1ry5IWt) and Quatar are similarly as Russia dependent on oil. Their stock markets are going from high to high, on a big consumption and housing bubble.
But, as opposed to Russia, they got a pegged currency and somewhat more currency reserves.
The last update on my article:
Things got worse since I wrote this paper. Russia is driving into what I called the "somewhat harder landing" and I said
"Bear in mind the base principle for contrarian investments: Do not expect quick gains."
I recommended government bonds because that harder landing will strongly reduce wage and price inflation. The falling oil price combined with still rising wages, is not good for stocks either. However, obtaining 10% yield per year while inflation at 4% - as the central banks predicts - is a great deal. We have to see when exactly the 4% target will be achieved. We will need to go first into a GDP recession. This is unfortunately not yet the case.
The risk for investments in Russian bonds is solely the currency and the rapid depreciation of the ruble but long-term inflation. Timing is key here. Stranglely for many analysts (and for us), the oil price has fallen further and this had negative effects on the currency.
We expect a collapse of the Russian housing market, the first (and typical) reaction to inflation has been a continued strengthening of housing market (ex Moscow) in ruble terms. - But not in USD terms.
The last update on my article:
The Best Contrarian Investment: Russia?
http://bit.ly/1G4T9uh
Things got worse since I wrote this paper. Russia is driving into what I called the "somewhat harder landing" and I said
"Bear in mind the base principle for contrarian investments: Do not expect quick gains."
I recommended government bonds because that harder landing will strongly reduce wage and price inflation. The falling oil price combined with still rising wages, is not good for stocks either. However, obtaining 10% yield per year while inflation at 4% - as the central banks predicts - is a great deal. We have to see when exactly the 4% target will be achieved. We will need to go first into a GDP recession. This is unfortunately not yet the case.
The risk for investments in Russian bonds is solely the currency and the rapid depreciation of the ruble but long-term inflation. Timing is key here. Stranglely for many analysts (and for us), the oil price has fallen further and this had negative effects on the currency.
We expect a collapse of the Russian housing market, the first (and typical) reaction to inflation has been a continued strengthening of housing market (ex Moscow) in ruble terms. - But not in USD terms.
From my August article
"The Best Contrarian Macro Investment: Russia?"
"Russia has maybe the world's best central banker that fights high pay rises with tight monetary policy and potentially with higher unemployment. "
http://bit.ly/1G4T9uh
What do u mean with "ruin financially": Higher rates means more savings and less private debt.
Sure, massive inflows into Russia until 2007, must be mirrored now with quick outflows, given that the oil price is so low.
But will this always remain like that?