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George Dorgan

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  • The Swensen 6 Portfolio: How To Reduce Risk And Trounce The Market [View article]
    Bill Gross was the star until summer 2013 with his bond portfolios. The Swenson 6 is also made for a low-inflation environment with 50% interest-rate sensitive instruments.
    So just a historic coincidence that it outpaced the VTSMX. Call it luck or a good macroeconomic insight that the bubble of 2006 could not continue.

    Hence it makes sense to simulate its return in a rising interest rate environment like between 1993 and 1999.

    The idea to throw out non-performing equity ETF and replace them with SHY (notes) turns the portfolio even into a Fixed Income portfolio.

    The question is you are investing for the past or for the future?
    Aug 21 12:16 AM | Likes Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    @smalinovski Thanks, I interpret it as follows:
    Similar to China still today, until 2008 new money to Russia, e.g. via current account surpluses, was directly consumed through new investments.

    Money was a scare good, hence the balance sheets were driven by foreign money. See more on the "money multiplier confusion".
    With slower growth since 2011, this has stopped. As opposed to previously Russian companies and households do not obtain cheap funding in Europe (rates < 2%), but must tap the expensive funding via the CBRU (rates > 8%) or fund themselves with Russian money

    As said above, this changed funding patterns prevents overspending and overinvestment, it is good for the Russian economy over the long-term.
    Aug 18 12:58 AM | Likes Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    Rates can only rise when countries like Europe, China and other emerging markets do NOT implement austerity.
    Europe does pure austerity, China, other EM and - as we have seen here - Russia do all austerity or near-austerity. EM do this in order to maintain the "Bretton Woods 2" system.

    No wonder that stock markets collapse.

    In the late 1970s and 1980s, at the end of Bretton Woods 1, however, Germany and others were in a consumption boom.

    Austerity in EM and Europe already now exercises pressure on wages in the US and will so in the future.

    And without pay rises, I would forget the idea about higher rates.
    Aug 13 01:33 AM | 1 Like Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    Transportation is a "quasi-physiological" need.
    What happened in the 1970s when suddenly oil prices jumped?
    Deprieving Americans or others from driving or owning a car, is nearly the same as removing food as physiological need.

    That the second in the hierarchy, "security of body and property" is in danger in Russia was true in the 1990s. And therefore Russians are happy with Putin, because all this is fixed now. Yes, there is some remaining corruption and some limited risks when you do business in Russia (by the way, I did).

    I would call the other point you are making the discrepancy between two regimes:
    1) Russia or China with high corruption, but low taxes and high opportunities.
    2) The Western economies with lower corruption, but high taxes and no opportunities.

    Which form of government confiscation is better for the economy? 1 or 2?
    I say 1)
    Aug 13 01:20 AM | Likes Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    I know that borrowing is currently expensive in Russia, but you got to elaborate more on why they are "excluded"?

    As I said, Russia is currently investing less. Same as China, Russia has the discrepancy between rich investors and many opportunities that all those investors cannot assume themselves. This often results in lending outside of the banking sectors.

    The current climate gives the possibility to re-evaluate business opportunities incorporating more risk into business calculations than previously. The mean of incorporating more risk is called higher rate costs.

    In particular when the rich Russian prefer to put the money on a bank account for high rates or to export money, instead of lending it.

    The avoidance of over-investment is beneficial for Russia, in the short-term it has bad consequences, in the long-term it is good.
    Aug 13 12:59 AM | Likes Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    Sperbank is part of sanctions, but not state bonds. Would be a pretty escalation if gov. bonds were part of sanctions (with well-known counter-sanctions).

    There is no need for ETFs. You can buy directly from Russian Fed., the min lot size is often low, lying at 50000 RUB, 1000 €.

    A list of bond issues here on German

    or on London stock exchange

    We generally trade ETFs&stocks on Interact.Brokers (on USD basis) and bonds on Austrian (on EUR basis).
    I cannot talk about Fidelity or other US brokers.
    Aug 11 11:40 PM | Likes Like |Link to Comment
  • FX Rates, Contrarian Investment And The Misleading Concept Called GDP [View article]
    As for the question if the purpose of economic activity is consumption or production, I will base my answer on religion and philosophy:

    Puritans were the ones that founded the United States and those were clearly on the side of production and were against consumption.
    With the immigration of British and Northern Europeans with protestant and Calvin-based religions in the 19th century the US became the world leader: Production was favored against consumption. Some of Calvin's principles were eagerness to work and diligence. To become rich meant that God has elected you.

    But for some decades already most US immigrants have Hispanic origins, while many Americans do not practice their religion any more. As opposed to Calvin-based confessions, the catholic view is rather on the consumption side.

    From this point of view, the future for the United States is the consumption side, because the part of Hispanics is rapidly increasing.
    Jul 26 02:20 AM | 1 Like Like |Link to Comment
  • A Little History Of Wages, Inflation, Treasuries And The Fed - And What We Learn From It [View article]
    Hi Paul,
    I would like to point to the gross savings rates of the world bank

    Gross savings is gross national income minus consumption (+ transfers, which is not so important). Accumulated savings over years = wealth.

    Hence wealth contains assets, either in the form of fixed (machines, homes, state investments, infrastructure) or financial investments.

    China has a gross savings rate of 51% of GDP, the U.S. has one of 17%.
    We assume that China GDP = US GDP

    Chinese wealth increases each year by 33% of US GDP more than US wealth. These 33% of GDP are about 40% of US disposable income. Disposable income is typically a bit less than GDP due to depreciation/tax.

    Currently US private wealth is about 400% or 500% of disposable income.
    (This number does not include the wealth in form of state investments and infrastructure, but as Piketty shows the net wealth = (investments,infrastru... minus debt) of Western states is around zero

    Hence it appears that in ten years time, China will have overtaken the US not only as for GDP but also as for wealth.

    Side remark:
    US GDP = China GDP is only as for GDP[PPP], but the depreciation costs of old US investments might be higher the ones in China the US. This depreciation cost is one important difference between gross and net savings rate.
    Jul 8 03:46 PM | Likes Like |Link to Comment
  • The Most Important Questions For The Swiss National Bank Meeting [View article]

    As for U.S. oil consumption, I forgot to mention: gasoline (or aviation fuel) is taxed less in the U.S.
    With lower oil prices, the remaining part for consumption of e.g. US goods rises.
    Jul 6 01:13 PM | Likes Like |Link to Comment
  • The Most Important Questions For The Swiss National Bank Meeting [View article]
    Thank you for this good point.
    I mentioned it partially in "smaller distances and low spending on energy".
    Wikipedia is always a good help.
    List of countries by energy consumption per capita (2003)
    in kilogrammes of oil equivalent
    United States 7164.5
    Germany 4000
    Switzerland 3348.8
    UK 3248
    With falling oil prices, the dollar often improves, with rising oil prices it weakens and so does the US economy.
    Jun 18 01:06 AM | Likes Like |Link to Comment
  • New ECB Measures: How To Reduce German Competitiveness And Talk Down The Euro [View article]
    Sorry to respond late. History tells us that a currency in deflationary environment appreciates provided the country is able to achieve current account surpluses. The yen appreciated against USD from 160 to 90 between 1989 and 1995, despite all economic problems Japan had during that time.
    Then from 1995 until 2001, in two phases the USD long /JPY short carry trade started. From 2001 to 2004 once again the JPY appreciated, before the next carry trade phase took from 2005 to 2007. Like always the carry trade collapsed. This time till the USD/JPY lows of 2011.

    Full details here:

    Japan has now a current account and a trade deficit. The EUR has taken over the position of the yen. EUR will always appreciate in particular when the US goes for phases of negative real interest rates.
    In carry trade phases, when the Fed really hikes rates, then the USD will go up. But do you see the Fed hiking rates and destroying the housing market, in a phase when Europe and the world have slow growth?
    Jun 17 12:15 AM | Likes Like |Link to Comment
  • New ECB Measures: How To Reduce German Competitiveness And Talk Down The Euro [View article]
    Thanks Paul,
    As said: Often asset purchases intensify current account surpluses. In the European case, it might strengthen the euro, because real QE is missing.

    During the asset purchases of QE1 and QE2, the U.S. had current account deficits.
    The newly "printed" money left the U.S. and was invested in the emerging markets. In particular QE2 did not help the U.S. but worsened the situation.

    QE3 was different, to my mind, because Europeans implemented austerity and EM were slowing due to high rates, high wage increases and weak European demand.
    Jun 11 02:39 AM | Likes Like |Link to Comment
  • Italy: The New 'Powder Keg' Of Europe [View article]
    Thank you for the collection of good information and charts.
    However, your analysis that Italian government bonds and stocks would be overvalued is DEEPLY FLAWED.
    You are missing some basic understanding of global macro and mentalities.

    Some reasons are:
    1) Shorting Italian government bonds, as you might suggest, could be another widow-maker trade, similar to shorting JGBs. Both Japan in the early 2000 and Italy or Spain today have in common that they have current account surpluses and very low (Italy) or negative (Spain) wage increases.
    The main driver for government bonds is local demand from risk-averse investors, e.g. banks, insurances or pension funds. The main driver of bond yields is and remains inflation that those conservative investors have to account for. European austerity and slow growth has destroyed the expectation that wages or inflation rise in the mid-term future, similarly as the bust of the Japanese bubble did.
    Investors remember that Italian workers wanted wages increases that were higher than inflation (so-called "Scala Mobile")

    Why have U.S. treasuries fallen in price? The main reason is that investors expect U.S. wages and inflation to rise again.
    More about inflation expectation as main driver of bond yields:

    You claim to be a contrarian. For a real contrarian like we are, Italian bonds are still cheap.

    2) Similarly as JGBs, the risk for Italian government bonds is very limited. The reason is that Italians, similarly as Japanese, have relatively high private wealth. I suggest this graph or our chapter on the ECB wealth reports, "Why median Italians are richer than Germans".
    Your graph of 1980-2011 GDP growth, where Italy is weak: How much is this GDP data reliable in the case of Italy. How much black wealth have Italians accumulated which is not reflected in your GDP figures? Similarly as one of the ministers, many Italians have one home which is declared to tax authorities, one other not declared.

    3) Coming to stocks, you will not deny that Italian stocks are still historically undervalued;
    The FTSE.MIB has risen from 14000 to 20000, but it is still under the low of 2002 with 21700 and far lower than in 1997, when it was at 24000

    4) Coming to P/E ratios: You are saying that the Italian PE ratio is 29. You probably know why Shiller uses the 10 years average and not a single year. Due to the austerity measures, households savings rate has rapidly risen from 4% to over 10%. Italian companies are quite focused on local and European consumers. Austerity in 2012/2013 has severely hit, the 29 is hence an out layer that over the years will get better.
    For the U.S. it is different: Given that the Fed forced Americans to spend via QE, the American P/E ratio of 18 is relatively high. I would rather short U.S. stocks than Italian ones.

    5) You may remarked that Germans started spending and investing recently. As opposed to Italians, Germans do not need to do austerity. Italian exports to Germany are increasing now. But in 2012/2013 Germans did neither invest or spend, the Italian P/E ratio was 29.

    6) Wage expectations are far more important for stock valuations than P/E ratios. For years Emerg. Markets stocks have not risen for years. They have low P/E ratios and seem to be interesting, but high pay rises and the expectation of further pay rises destroys their future profits and their share prices.
    More here:

    7) Another point are Italian banks. With the LTRO they were able to buy Italian gov. bonds at yields of 5-6%. They have made an enormous profit on it. On their balance sheets, bonds are probably not valued MTM, but held to maturity and valued at purchasing price. This weakens (declared) earnings of banks. One of the biggest banks, Unicredit, has huge income from its German subsidiary. For banks the real P/E should be much better.

    8) Another flaw: Saying German house prices are in a bubble. Please compare price to income ratios since the 1990s, e.g. in the Economist and you will understand that rather the U.S. and the UK have overvalued house prices, but not Germany.

    I admit that everything depends if Italian employees are ready to renounce on wage increases. The Scala Mobile will not come back that soon.

    A second condition is that the Italian housing market does not contract too much. But as opposed to other countries (e.g. Spain), there was no big housing bubble in Italy.
    Feb 20 07:32 AM | 5 Likes Like |Link to Comment
  • Yes To A Swiss Referendum Against Mass Immigration Is A Yes To Higher Salaries And Inflation [View article]
    The article is about FXF, the Swiss Franc and monetary policy of the central bank, partially about EWL and FSZ, the ETFs for the Swiss market.
    Macro data is often far more important for stock valuations.
    Feb 16 02:26 AM | 1 Like Like |Link to Comment
  • Yes To A Swiss Referendum Against Mass Immigration Is A Yes To Higher Salaries And Inflation [View article]
    True that services and goods that sold locally and potentially subject to tariffs, are more expensive, e.g. the famous Big Mac Index.
    As soon as you compare tradable goods, Swiss profit of lower taxes, innovation and investments. Suddently CHF is not really overvalued. Read more on Purchasing Power Parity
    Remember that unit labor costs are only a part of production costs.
    Feb 16 02:21 AM | 1 Like Like |Link to Comment