The Investing Climate


“If You’re Not Confused, You Don’t Understand Things Very Well”

January 22, 2016
by Vitaliy Katsenelson via ContrarianEdge.com,

(Some random tidbits.)

… Tops and bottoms are only obvious in the rearview mirror. You may feel you can time the market, but I honestly don’t know anyone who has done it more than once and turned it into a process. …

A lot of growth that happened since 2000 has taken place at the expense of government balance sheets. It is borrowed, unsustainable growth that will have to be repaid through higher interest rates and rising tax rates, which in turn will work as growth decelerators. …

Economic instability will likely lead to political instability. …

When China eventually blows up, companies (and) countries (Australia, Brazil and Canada) that export a lot of hard commodities to China will feel the aftershock … However, if China takes oil prices down with it, then Russia and the Middle East petroleum-exporting mono-economies that have little to offer but oil will suffer. …

Japan is the most indebted first-world nation, but it borrows at rates that would make you think it was the least indebted country. (Japanese government) debt servicing requires a quarter of Japan’s tax receipts, while its interest rates are likely a small fraction of what they are going to be in the future; thus Japan is on the brink of massive inflation. … As this party ends, we’ll probably see skyrocketing interest rates in Japan, a depreciating yen, significant Japanese inflation and, most likely, higher interest rates globally. Japan may end up being a wake-up call for debt investors. … The depreciating yen will further stress the Japan-China relationship as it undermines the Chinese low-cost advantage. …

(On stocks:) Inflation and higher interest rates are two different risks, but both cause eventual deflation of P/Es. … High-P/E growth stocks are trading on expectations of future earnings that are years and years away. Think of high-P/E stocks as long-duration bonds: They get slaughtered when interest rates rise. …

(On MLPs and REITS:) Higher interest rates will have a significant linear impact on stocks that became bond substitutes. … Real estate investment trusts (REITs) and master limited partnerships (MLPs) are inflated because of an insatiable thirst for yield, and their earnings were inflated by low borrowing costs. These companies’ balance sheets consume a lot of debt, and though many of them were able to lock in low borrowing costs for a while, they can’t do so forever. Their earnings will be at risk. …

In case of either inflation or deflation, you want to own companies that have pricing power — it will protect their earnings. Those companies will be able to pass higher costs to their customers during a time of inflation and maintain their prices during deflation.

On the one hand, inflation benefits companies with leveraged balance sheets because they’ll be paying off debt with inflated (cheaper) dollars. However, that benefit is offset by the likely higher interest rates these companies will have to pay on newly issued debt. Leverage is extremely dangerous during deflation because debt creates another fixed cost. Costs don’t shrink as fast as nominal revenues, so earnings decline. …

Advertisements

About icliks

Biding my time in central ms ... yours too, if ur reading this.
This entry was posted in Uncategorized. Bookmark the permalink.