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Martin Vlcek
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Martin Vlcek is a full-time investor and analyst who has been actively investing and managing money for more than 15 years. Martin has an Economics degree and he is currently a CFA program Level II candidate. His primary investment focus is on undervalued small-cap stocks with favorable... More
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  • Why The Current Low Or Even Negative Interest Rates Make Perfect Sense

    There are at least 5 use cases that drive the current demand for negative yielding assets and don't make the investment a lock in loss.

    Nobody has a crystal ball and that's why the willingness to lend money at zero or negative *nominal* rates actually makes sense. If prolonged deflation (Japan style scenario in the U.S. and around the world) has a 10% probability of happening (just my guesstimate, you can use your own value), then it makes sense to allocate 10% of your assets to investments that will benefit from deflation to stay diversified and hedged at least a little. In deflation, even the low or negative *nominal* interest rates will make you money because the nominal inflation rate will be even lower (even more negative). So you will have positive *real* interest returns even while buying Treasuries at negative nominal interest rate levels.

    Second, there is huge demand for *future* spending and as a result severe lack of financial capacity for *current* spending. People are willing to get zero interest or even pay for the ability to transform current wealth into future spending (most retirees need exactly this). You can withdraw small sums into cash, earning zero nominal interest rate. But pension funds can't just withdraw all the money into cash, so negative nominal interest rates are possible. The low rates exacerbate the need to transform even more of current savings into future spending because retirees want to live off of yield (or dividend). With lower yields, they need to put aside higher nest egg to generate the same income. So the aim of lowering interest rates by central banks is exacerbating the problem.

    Third, the world, incl. the U.S. has some of the highest Gini coefficient rates compared to historical levels. This means inequality is very high. Inequality means more money is free, available for investing or playing around because you only need so much every month to spend on sensible things. Most people simply don't buy 100 cars even if they could afford it so the money goes to stock market, bonds, real estate and other investment assets. Rising average age and people living longer exacerbates the inequality problem (compounding by time)

    Fourth, as the debt bubble keeps growing, more and more future demand is consumed today, pulled from the future. This means there will be even lower demand in the future and that will keep inflation lower or negative and keeps inflation expectations low.

    There are many other reasons why low rates make sense at the moment. I didn't even begin describing the huge displacement of people by technology in the workforce (IT, software, apps, robots, drones, etc.) (exacerbated by low interest rates and cheap money). This means nominal (and real) wages are stagnant at best (real wages today are probably lower than 30 years ago in the U.S. and future expectations are not better). Real wages growth is one of the main factors that determines future inflation rates and interest rates.

    In summary, there are plenty of reasons why interest rates are low at the moment and why in nominal terms, they can easily be negative. It's the real interest rate that matters (nominal interest rate minus the nominal inflation rate).

    Tags: TLT
    May 11 6:14 PM | Link | 4 Comments
  • My Thoughts On China And The World Going Forward

    Let me add some of my quick thoughts on the topic. Hope nobody is offended, I am just trying to analyze the situation and guess what the future will look like. China's centralized system shows its advantages. It can realize huge projects in a short time and with little resistance from people. (such as the 3 Gorges dam, displacing some 3M people). Ironically, China is becoming more capitalist than most European economies or the U.S.

    I believe the ultimate hurdle for China will be that the cheap labor and capital will no longer be important. Western central banks are flooding the world with cheap credit and keeping the dollar strong (pegged to Chinese Yuan) precisely because they see China buying tons of valuable assets and companies across the world for their intellectual property and/or strategic importance, and their pure hard asset nature in the face of abundant fiat currency. This is an all-out financial world war 3 that is already under way. The QE induced market bubbles are making the Chinese purchases at least a bit more expensive and harder. Cheap oil/strong dollar is making Russian and Iranian revenues lower.

    In the new era of abundant labor where capital/technology can replace almost any person in the workforce, the U.S and other countries can very easily transfer production from abroad back home because the cost differences will be marginal. Capital is cheap everywhere and labor cost differences will not matter much in the future because they will be low in absolute terms.

    So access to natural resources, intellectual property, technology and know-how will matter. Production will be shifted back to the consuming countries. This could lead to a huge GDP growth acceleration in the countries such as the U.S. that are big overall consumer goods importers, and a huge GDP growth slump in main manufacturing exporters, such as China. This is how the equation will be balanced again and the mercantilist beggar thy neighbor undervalued currency policies will not matter any longer because they will be inefficient

    Tags: ASHR, FXI
    May 06 7:59 AM | Link | Comment!
  • The Next Market Crash? I Think Stocks, Real Estate And Gold Will Have A Panic Buying Rally First

    I don't waste time predicting the timing or the exact method of the next crash. But if I had to make a guess, markets can stay irrational much longer that we can stay solvent. Almost by definition, markets have to crash when most people are bullish and not expecting the crash.

    There are still plenty of bearish crash articles, so the bull has no other choice but to run higher. I also think there will be one last massive panic buying squeeze when truly every mom and pop investor realizes that the states around the world through coordinated central bank policies of negative interest rates, try to redistribute wealth and savings.

    Because other ways have failed or are impossible: raising taxes is a political suicide, so no party will propose that really. Trying to inflate the debts and inequality away stealthily every year through reasonable inflation has failed, precisely because when people sense someone is trying to instill inflation and have low future visibility about jobs prospects and retirement benefits level, people naturally get cautious and defensive, causing deflation and more cash hoarding.

    When this cash hoard truly starts to move from fixed income investments due to even more negative interest rates, that will be the time to sell bonds (or perhaps too late:)) but keep stocks as some of the money will move to higher yielding assets such as stocks, some to real estate, some to physical gold and most just to cash, depending on whether there will be a risk-on or risk-off environment.

    I am trying to position my portfolio in a more or less market neutral way, combining independent long and short equity positions as well as trying to hedge other factors, such as inflation and risk on/off). However, I am keeping an overall long market exposure and even own some U.S. Treasury (NYSEARCA:TLT) as they are some of the best paying government debt in the world when adjusted for risk. I even own the high yielding, relatively short duration but high risk junk bonds (NYSEARCA:JNK) as I believe this is one area where the final rush for yield may be directed. I keep buying tiny physical gold exposure as an insurance.

    Tags: tlt, jnk, gld
    Apr 27 7:22 PM | Link | Comment!
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  • Also some liquidation of long $TLT U.S. Treasuries, partly flowing into U.S. stocks, mostly Russel 2000 $IWM but also S&P 500 $SPY.
    Jan 26, 2015
  • I see liquidations of short $EUR and GBP positions but the money seems to be flowing to short YEN and CHF, so no end to long $USD trade
    Jan 26, 2015
  • Futures up almost 1% after a surprise rate cut by India CB. China surprise rate cut came last year at the same level of S&P dipping below 2k
    Jan 15, 2015
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