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George Dorgan

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  • The Great Recession Is Over: Time To Back Up The Truck [View article]
    Like every year in the last quarter, analysts proudly present the end of the great recession:


    1) Housing:
    You didn't realize that even Australian home prices are falling in nominal terms, Chinese ones in real terms.
    The European housing crisis has just begun. Some European housing markets are even collapsing.
    At the same time, money is leaving China and other emerging markets and this helps to push up US home prices. Robert Shiller is not sure if this is just a temporary movement.
    Higher house prices will amplify the recent rise in rents, which will increase inflation.

    2) Energy independence. The IEA has regularly published very positive longer-term reports, which in the end were not true.

    3) Manufacturing Insourcing: With rising Chinese wages and inflation, the Renmimbi is not overvalued any more. This helps to insource US production.
    American workers become a bit "Chinese", in the sense that American hourly real wages do not increase, but Chinese ones rise strongly. Lower real wages help to boost US margins and stock prices.

    4) Spending
    The question is, however, who will spend during this recovery. Higher house prices do not mean that consumers will spend, most probably they prefer to reduce debt.
    Europeans continue to have severe austerity, euro zone GDP is expected to shrink in 2013. The lower-class in China and other emerging markets do not have the means yet to spend enough. A large part of the 3000$ average Chinese salary goes into strongly rising rents and food, with 20% becoming savings. A middle-class does not exist yet.
    Thanks to reduced global spending and slowing emerging markets, gas and oil prices have not risen yet as much as they should have in a recovery or like they did between February and April last year.

    5) The Federal Reserve:
    With falling real wages and low consumer spending, the Fed is in a comfortable position as for inflation pressures. In August and September, central bankers did the most desperate measures ever, QE-indefinite and implicit state financing via ECB's OMT, for now with success even if most global purchasing manager indices are still contracting.
    However, economic models like the IS-LM suggest that over the medium term, these measures lead to higher inflation.

    6) Education:
    Differences in education have created a split American society. Stock owners , employers, well-educated people take the profit. Ordinary workers work more and earn less in real terms, with a third group being those who are out of the labor force completely.
    Last but not least, foodstamps and health care spending put a drag on the US economy.

    In summary:
    This recovery is not the usual recovery when construction helps to kickstart the economy. Despite rising home prices, jobs in construction will be limited. Thanks to the smaller differences in growth rate between the US and emerging markets, I consider global growth to be healthy over the next 2-5 years, unlike as in 2010 and 2011.

    But it is same recovery Japan did between 1992 and 2007, just with some higher inflation and more people out of the labor force than in Japan. Good for stocks, bad for consumers, bad for those out of the labor force

    After that period, a middle-class in China and other Asian emerging markets will finally emerge and consume. This will push up gas prices to levels of 5 or 6 dollars, push inflation and potentially trigger the next big drop in stock prices.
    Jan 2 04:25 AM | 11 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
  • Gold pushes SNB to $10B loss in 2013 [View news story]
    Remember that the SNB had 40 billion CHF gains on gold between 2000 and 2012.
    A 15 bln. CHF loss may happen after this long winning streak.
    Jan 6 10:58 AM | 4 Likes Like |Link to Comment
  • Losses On Gold Positions And Other Economic Data The Swiss National Bank Will Not Like [View article]
    You are right, gold is one of the most difficult assets to price and to predict. Therefore its price movements seem to be completely arbitrary sometimes.

    I am working on a paper with a far longer list of influence factors than in this post here. I will publish it on Seeking Alpha.
    Dec 26 05:55 AM | 3 Likes Like |Link to Comment
  • The Euro Is Poised For A Steady Rise, Expect 1.50 In 2 To 4 Years [View article]
    Both the American and the British economy are currently advancing based on higher spending, this partially helps to improve investment and manufacturing. But at the end, this higher spending ends up on the plates of German and Chinese producers. But those are reluctant to invest the funds back again in USD or GBP, but prefer the local economy.

    Still in 2011 Europe and emerging markets were spending and the US and the UK were doing austerity. Bloomberg and the whole financial establishment was bearish on the US and UK. Now Europe is doing austerity and everybody is bearish on the euro. But once Germans start to spend and the PIIGS have deflated their excessive wage increases, Europe will come back.

    There is no way to increase the trade deficit, create a new housing market bubble and to expect that USD or GBP improve substantially. The only chance for higher USD or GBP is to hike rates rates considerably, e.g. to 1% or 2%, but this will destroy the housing market again. Hence higher rates will not happen in the next 8-10 years.
    Dec 15 07:49 PM | 2 Likes Like |Link to Comment
  • Play The Spread: Short Gold And Long Silver [View article]
    As you see in every day movements, silver reacts more strongly to weaker Chinese and global growth than gold. Instead some people pile in gold as safe-haven against a recession but not in silver.
    Therefore silver long, gold short is a good trade when global/EmergMarkets growth picks up, but not when EM are slowing.

    If, however, the U.S. will be able to deliver big parts of global growth like it did in 1998-2000 or after 1982 then gold will collapse. But this is far behind us.
    Apr 23 03:30 AM | 2 Likes Like |Link to Comment
  • Comparing Bank Of Japan's Old And New Monetary Easing Efforts [View article]
    The Japanese private wealth and international investment position is very high, household debt is low.
    Tax increases or a Cyprus-style tax on household deposits could quickly erase most public debt.

    With deflation debt gets relatively higher, hence the government wants inflation. Still the currency depreciation has only a temporary influence if wages do not rise. Thanks to the weak yen and higher margins for Japanese exporters, wages should follow under the condition that sold quantities are high enough (were the slowing and hostility in China are issues).
    Then you must get asset prices up which is the most difficult thing in an ageing and relatively closed society. But there are positive signs.
    Apr 6 01:32 AM | 2 Likes Like |Link to Comment
  • Can The SNB Make A Profit On Currency Reserves? [View article]
    I did not see the question in time:
    "And that is why do countries with stronger and appreciating currencies and that also have larger foreign currency reserves not actively attempt to use the stronger currencies and foreign currency reserves more to their advantage? Could be Japan, Switzerland, Hong Kong, Australia, Canada, or whomever. Why would these countries not use these relative advantages to go out and buy the best of the world's assets whether it is hard assets, resources, great equities, gold, or whatever?"

    Here my answer:
    You can see the more and more positive Swiss Net International Investment Position (NIIP) at the end of our FX theory page

    What the Swiss but also the Japanese did was the following:
    When the yen or the franc were weak they had very high current account surpluses. The NIIP improved.

    When the yen or the franc became strong, this gave Swiss and Japanese the chance to buy more companies and assets. Take the recent Julius Bär acquisition of Merrill Lynch Wealth Management. This also increases the NIIP, often production is abroad, just the profits go to Switzerland or the shareholders of Swiss companies.

    At the end it is always a win-win situation for these countries (take also Singapore), they win because they have low taxes, a small deficit, highly qualified personnel (also thanks to immigration), no huge food stamps to pay. See more:

    The Americans are the ones that must consume, but these countries take the profit on it. The Chinese will become similar, because the Yuan has appreciated despite higher Chinese inflation.

    Things were different for the US between 1982 and 2000, when the dollar was strong and oil consequently weak. Then emerging markets started their rise, imported products helped to keep US inflation low. The last chance for the US to reach comparable growth was to create a big bubble with the Fed's help. This pushed oil prices and the US deficit even further upwards.
    A weak currency never helps, a currency must be strong.

    The franc is currently not overvalued any more according to our analysis. because production costs fall quickly with cheaper imports and deflation. The same applies for the yen: See our latest analysis on seeking alpha: "Time to be long the yen"

    I am not an insider for Australia, but thanks to the commodity boom, Australia has got a positive NIIP but it was negative before 2000.

    As humble62 said, the central banks are conservative in their investment policy and will not invest too much in equities.
    The SNB is ready to take a loss, provided that the Swiss economy goes well and inflation starts again.
    They will take a loss, even if it is 10% of GDP. Most of this losses will directly come back to the Swiss companies, because they are hoarding cash in francs, when they do not use it to make an acquisition.

    Last but least, a central bank loss of 10% of GDP is not a lot compared to the rise of the NIIP of 8% in Q2/2012
    Nov 4 04:33 AM | 2 Likes Like |Link to Comment
  • Can The SNB Make A Profit On Currency Reserves? [View article]
    "Most of the 400 billion francs were bought by entities that do not need the currency."
    Yes, they hold them similarly as many people hold gold. Who does need gold ? Can I eat it ?

    And so many investors hold the francs outside of Switzerland, so forget the capital controls (more details

    One example: There is currently a big debate in Germany about the future of the state pension system caused by low returns and rising inflation. Wealthy Germans buy gold and by (especially German) tradition, the gold-correlated franc and hold it in a German bank far out of the reach of Swiss capital controls. They know that gold, the franc or the yen are protected from inflation, for them the euro is now a Lira or a Peseta.

    You are wrong: these foreign investors need francs and gold to preserve the value of their pension !

    Give them high returns in Germany and low inflation ! They will not hesitate to convert the francs into euros and sell the stupid indigestible gold. Otherwise they will hold the gold and the francs until they reach their pension age, with nice capital gains.

    And this inflation-protection is exactly what my paper is about (precondition 2).

    It is a mass-pychosis (I call it risk averseness), because all investors do the same stupid thing (precondition 1) and if they are well-informed, they know that all the masses of reserves will break the bank sooner or later when inflation shows up. The SNB will stick to the constitutionally guaranteed principle of price stability and realize the losses as she did already twice (end 2009 and May 2010).

    The SNB will use whatever method possible to get investors on their side. Some people even speak of conspiracy theories like giving wrong economic data but I do not believe that. (for example last GDP data was awkward compared to other data like KOF, retail sales, current account),
    Sep 19 01:18 PM | 2 Likes Like |Link to Comment
  • Can The SNB Make A Profit On Currency Reserves? [View article]
    The system did give me the time to explain what "stomach feeling" means. Some economists like Goldman's O'Neill think: "what strongly falls must come back to mean again". This is perfectly valid for stocks, they must come back to average Shiller P/E (or maybe a little bit rising over time). But it is not valid for currencies: currencies with low inflation must appreciate with the time.

    We portfolio managers are able to experience every day what wealthy client think and it is not so easy to change their minds just based on what some economists say. This is why I am saying that risk averseness will lead for another 8 or 10 years.
    Sep 19 02:15 AM | 2 Likes Like |Link to Comment
  • Euro Vs. Deutsche Mark: Watch What Germans Do, Not What They Say [View article]
    As German, I would like to add another decision showing the power of the constitutional court: it judged the asylum seekers benefits law as against the constitution.

    The ESM & Fiscal Compact Law would be the third law which need be modified. And I am sure that the court will require modifications. They are extremely picky. This does not mean that the ESM will be dead, just some adjustments.

    Remember that this court, the Bundesbank and the German people are against any money printing or Eurobonds.
    Aug 2 12:41 PM | 2 Likes Like |Link to Comment
  • 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 | 1 Like 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
  • 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
  • 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