Month: November 2015

Renewing the CNY short

Tomorrow my CNH short option will expire – worthless.

I bought it two years ago when implied vols were around 5 percent. Three weeks ago I already renewed my commitment and had to pay 10 percent. Thus, my greed for not paying up for one more year has cost me money. I should have known that the Chinese will try very, very hard to save face and only devalue when the cost of that will be unbearable. I had been told many times that this is an important element of Chinese culture.

Lesson learned!

I still think that the CNH puts are cheap :

  • the Renmimbi spot is way overvalued
  • 10 percent is still a low vol compared to what is typical for EM.

The absence of historical volatility doesn’t mean there is no uncertainty. On the contrary, history tells us that there might be a negative relationship between historic vol and future vol. This is the forest fire analogy Mark Spitznagel uses and which I find enlightening.

Because of that, I am also looking for ways to short the Saudi Rial…

Surprising Jobs Data from Down under

Since I have been short the AUD for the past 2.5 years I have been watching the news from China/Australia every morning (here for instance) with great interest. Given my bearish view on China and seeing it slowly being accepted by the consensus, I think the AUD has further to fall – nothing has really happened yet!  Thus I was surprised when I switched on my computer this morning to learn that the jobs number down under came in way better than expected. Here is the FT for more color:

(…) Thursday’s data, which showed 58,600 jobs were created in October, beating expectations of 15,000, looked to quash any further talk of a rate cut and pointed to resilience in the economy in the face of the slowdown in China, Australia’s biggest trading partner. It took the unemployment rate to 5.9 per cent, a shade under the RBA’s forecast range of 6 per cent to 6.35 per cent that was issued just last week  (…)

How can this be, especially given the recent news about collapsing exports in South Korea and the Philippines as a result of the China slowdown? If anything, the commodity bear market has gained traction over the past months.

I was immediately reminded of the events in April when a similarly good jobs report resulted in a 6 percent gain in the AUD and caused great losses for Crispin Odey, the famous macro manager. Here is what I wrote back then,

(…) To be honest: I have no clue why the job data for February came in much better than expected. Macro data are backward looking anyway and do not help much in assessing future outcomes. Interestingly, the RBA also doesn’t believe that this is sustainable, since they did cut the benchmark rate further (…)

Yeah, right: single point “real-time” Macro data are should not be relied upon too much, especially when the outcome is completely counterintuitive.

Now I learn on Zerohedge (here), that there have been serious questions about the data quality of the seasonally adjusted jobs number in the past,

(…) The ABS is itself cautions against placing too much credence on the monthly figures, which are based on a changing sample, particularly the seasonally adjusted data. The statistician encourages people to focus on the trend estimate (which had the unemployment rate unchanged).

And, after a series of stuff ups, revisions and methodological changes over the past year, there is even more room for caution.

Last year, the ABS was forced to abandon seasonally adjusted labour force numbers for a period after conceding they were unreliable. The former chief statistician recently said the data was not worth the paper it was written on (…)

Lesson: it is probably not just China massaging the numbers that are most watched…

 

Disclosure: short CNY, short AUD

Stan Druckenmiller Interview

Stan Druckenmiller is one of my favourite managers. I always listen to what he has to say and I usually agree with most of his views (I disagreed with his bullish China call a few months back, obviously). This week he gave an interview at the NYT Deal Book Conference and I recommend it to everyone. Here is the link,

http://www.valuewalk.com/2015/11/stan-druckenmiller-dealbook/

The interview is worth listening to in full, but I just want to share my spontaneous thoughts on two of the topics he touches in the interview: Larry Summers and Amazon.

Larry Summers and what’s wrong with modern macroeconomics

Druckenmiller is of the opinion that the Fed has been overdoing it with ultra-low rates and QE and thereby encouraged investors, governments and corporates to engage in risky and irrational activities such as stock buybacks near record highs instead of business investment. Andrew Ross Sorkin, the host, notices that in a recent WSJ article, Nobel laureate Michael Spence has echoed a similar view.

The Spence article is interesting because it has triggered an angered response by Larry Summers, the outspoken former Treasury Secretary to whom it is completely inconceivable that lower interest rates can be responsible for reduced business investment on the margin. Therefore he calls Spence’s claims nonsense. When asked about his opinion on the dispute, Druckenmiller states that the real world differs from Summers`s classroom models and that in the real world “short terminism” coupled with low interest rates leads to gambling, rather than investment.

How to make sense of that?

Without knowing for sure, it is likely that Lawrence Summers bases his view on some macro model (given that he is a macroeconomist) that looks at the world in terms of aggregates. In these models there is usually only one “price-level” – the aggregate price level – that matters and the dynamic effect of changes in variables is analyzed evoking the famous “ceteris paribus” assumption. In these models a lower interest rate always leads to higher investment “ceteris paribus” – all else equal. Macroeconomists are so convinced of their models that when they see falling business investment and falling interest rates at the same time, it must be because the interest rate is not low enough. Hence the “liquidity trap” chatter and the call for negative interest rates.

Needless to say: this is utter rubbish!

The interest rate is not equally important for all industries. It depends on whether the industry is early stage or late stage (see the famous Hayekian triangle). An economy that is dominated by early stage industries such as Australia and Canada will show more interest sensitivity in aggregate investment spending than those that are dominated by late stage industries. For a complex economy such as the US it is difficult to say what dominates, but the evidence could mean that later stage industries (services!) dominate. Those industries that are early stage, such as shale gas and real estate, have experienced a boom in the US, it just was not big enough to raise aggregate investment which is what Keynesians and Monetarists are obsessed with.

Given that Stocks are long-term assets, stock buybacks decisions too are very sensitive to interest rates. By lowering interest rates the relative attractiveness of stock buyback vs. capex in early stage industry increases. It can be argued that buybacks “crowd out” business spending.

What’s more, in the real world, it is never “ceteris paribus”. When the fed lowers the interest rate or engages in large scale bond buying, it is changing the expectations and relative prices of individuals SIMULTANEOUSLY and not sequentially – which is precisely why economics does not lend itself well to mathematical modelling. In other words it might well be that the benefit from lower rates is offset by some other factor that matters for the investment decision. The aggregate price level does not matter to corporates – just ask the oil industry.

Conclusion: Lawrence Summers is a man with a hammer and Michael Spence is right.

Amazon

Druckenmiller likes Amazon and thinks that Jeff Bezos is a great entrepreneur who is not focused on the short-term. He notes that Amazon has much more misses in quarterly earnings than for instance IBM (a heavy buyer of its own stock) which he sees as evidence that Bezos does not care at all about meeting short-term targets. I like his way of reasoning and will try to incorporate that metric into my stock screener.

When confronted with the fact that Amazon is barely profitable, Druckenmiller retorts that Amazon has pricing power and could show positive margins whenever it so desires. This is similar to an argument I made recently (here), but I still would like to see some numbers behind Amazon’s pricing potential. Would be interesting to know his detailled thoughts on that.

However whereas I agree that Amazon has pricing power, I do not think that is true for a lot of the “unicorns” who are often priced off traded tech companies like Amazon and Facebook. So what is a justifiable triple digit PE for Amazon might be sheer fantasy in most cases….