At Valor Private Wealth, we have been positioned for the last 18 months expecting a lost decade in Europe, a slowing China and a recovering US.
As Warren Buffett describes in his latest interview on CNBC, our predictions are beginning to transpire as expected.
Whilst we have macro views on the economy, we prefer to invest in wonderful businesses that have the ability to create their own economics. Our strategy is paying off, with well above average returns over the last few years.
Value Investing, macroeconomics and views on the wealth management world from Rob Shears and the team at Valor Private Wealth
Thursday, 25 October 2012
Demographics in China
There is still a belief that the current slowdown in China is temporary and after this short hiccup, most believe that China will continue onto over taking the US as the dominant economy at some stage in the next few decades. Looking at the demographic trends and I am not so sure.
Whist Harry S Dent makes some absurd predictions and I dont follow his tea leaf forecasts, his work on demographics and the effect on the economy has some merit. China has some potentially disastrous demographic trends due to the one child policy which will likely detract from future growth more than many predict.
The property bubble over the last few years has been compounded by the fact that for a young male you have had great difficulty in wooing a wife without owning an apartment. Looking at the one child policy which started in 1979 (one year after I was born) and mirroring that to the average age for males to marry (approximately age 32) and it is obvious we are at a junction point. The number of single child males that are to marry in the future will be fewer and so there is likely to be less pressure for buying apartments to marry.
With an aging population in a society with virtually no safety net and fewer children and grandchildren to look after the elderly, it becomes apparent that there are some very challenging demographic trends.
The worlds factory has had an abundance of young workers to chose from over the last decade, however as that workforce ages, will the older workers demand higher wages and better conditions? Will this make the marginal returns of many Chinese exporters uneconomic? What industries will China have to develop as the wages rise to counteract the more marginal operations of the manufacturing enterprises? Can they overcome these issues?
When I was in Guangzhou earlier this year I noticed a disproportionate number of younger people on the trains and wandering around the city. My Chinese friend explained to me that many of these migrant workers come from the countryside to work in the factories. What happens in the future when this flow of migrant workers slows?
Economic forecasting using demographics is no where near an accurate science, but for those investing in Australia in companies which rely on China's miracle economy, I would suggest that they look further into the risks they are taking over the medium term. The potential downside for these investments is larger than most would acknowledge. As Buffett always says:
Rule Number 1: Dont lose money
Rule Number 2: Dont forget rule number one.
When making investments in cyclical companies based on China's endless economic growth, I do not believe you are ensuring you meet these two simple rules.
Whist Harry S Dent makes some absurd predictions and I dont follow his tea leaf forecasts, his work on demographics and the effect on the economy has some merit. China has some potentially disastrous demographic trends due to the one child policy which will likely detract from future growth more than many predict.
The property bubble over the last few years has been compounded by the fact that for a young male you have had great difficulty in wooing a wife without owning an apartment. Looking at the one child policy which started in 1979 (one year after I was born) and mirroring that to the average age for males to marry (approximately age 32) and it is obvious we are at a junction point. The number of single child males that are to marry in the future will be fewer and so there is likely to be less pressure for buying apartments to marry.
With an aging population in a society with virtually no safety net and fewer children and grandchildren to look after the elderly, it becomes apparent that there are some very challenging demographic trends.
The worlds factory has had an abundance of young workers to chose from over the last decade, however as that workforce ages, will the older workers demand higher wages and better conditions? Will this make the marginal returns of many Chinese exporters uneconomic? What industries will China have to develop as the wages rise to counteract the more marginal operations of the manufacturing enterprises? Can they overcome these issues?
When I was in Guangzhou earlier this year I noticed a disproportionate number of younger people on the trains and wandering around the city. My Chinese friend explained to me that many of these migrant workers come from the countryside to work in the factories. What happens in the future when this flow of migrant workers slows?
Economic forecasting using demographics is no where near an accurate science, but for those investing in Australia in companies which rely on China's miracle economy, I would suggest that they look further into the risks they are taking over the medium term. The potential downside for these investments is larger than most would acknowledge. As Buffett always says:
Rule Number 1: Dont lose money
Rule Number 2: Dont forget rule number one.
When making investments in cyclical companies based on China's endless economic growth, I do not believe you are ensuring you meet these two simple rules.
Chinese Accounting
Jim Chanos aptly described the collective group of Hong Kong listed Chinese Shares as a "roach motel", suggesting that almost all of theses shares had accounting irregularities.
My good friend John Hempton has also demonstrated in extreme detail how Focus Media just cant be taken seriously with their fairy-tale accounting along with numerous other Chinese companies listed on foreign exchanges.
And now Paul Gillis has produced a powerful work on the VIE's (Variable Interest Entities) for Asianomics that politely argues how the structure just doesnt work any more. (Did it ever work?)
For those that believe in the China miracle, I would suggest you take a long hard look into the accounting of Chinese companies. The prolific number of frauds and accounting irregularities that are in the Chinese foreign listed companies is creating a trust gap.
The world economic system is built on trust. If there is a failure of trust in the economic systems, then capital flows can break down. Whilst China just recently overtook US as the highest country for FDI (foreign direct investment), I would suggest that further accounting scandals and frauds could turn this capital flow on its head very quickly.
What happens in this space over the next few months and years could be very interesting. So far very little has been done by the Chinese to attempt to fix these issues. Any further deterioration in trust does not bode well for the Aussies betting on the permanent China growth story.
My good friend John Hempton has also demonstrated in extreme detail how Focus Media just cant be taken seriously with their fairy-tale accounting along with numerous other Chinese companies listed on foreign exchanges.
And now Paul Gillis has produced a powerful work on the VIE's (Variable Interest Entities) for Asianomics that politely argues how the structure just doesnt work any more. (Did it ever work?)
For those that believe in the China miracle, I would suggest you take a long hard look into the accounting of Chinese companies. The prolific number of frauds and accounting irregularities that are in the Chinese foreign listed companies is creating a trust gap.
The world economic system is built on trust. If there is a failure of trust in the economic systems, then capital flows can break down. Whilst China just recently overtook US as the highest country for FDI (foreign direct investment), I would suggest that further accounting scandals and frauds could turn this capital flow on its head very quickly.
What happens in this space over the next few months and years could be very interesting. So far very little has been done by the Chinese to attempt to fix these issues. Any further deterioration in trust does not bode well for the Aussies betting on the permanent China growth story.
Monday, 22 October 2012
Our second largest trading partner is not in great shape either...
If there wasnt enough to worry about with the Chinese slowdown, then a debt crisis in Japan should be enough to keep the Aussie bulls at bay. As our second largest trading partner, Japan still pays a significant part in Australia's economy.
Whilst Japan shouldering the largest government debt in the world may be nothing to worry about, when it is combined with slowing exports to China, you have a recipe for potential pain ahead.
Nothing may come in a military sense of the territorial spat between China and Japan over a small group of islands, but the silent economic patriotism is definitely having a marked affect.
But yet there appears to be some greedy souls pouring back into Aussie banks and miners leading to a run on the All Ords over the last few months.
I think we are in the eye of the storm. Perhaps the storm hasn't even started yet.. Caveat Emptor!!!
Whilst Japan shouldering the largest government debt in the world may be nothing to worry about, when it is combined with slowing exports to China, you have a recipe for potential pain ahead.
Nothing may come in a military sense of the territorial spat between China and Japan over a small group of islands, but the silent economic patriotism is definitely having a marked affect.
But yet there appears to be some greedy souls pouring back into Aussie banks and miners leading to a run on the All Ords over the last few months.
I think we are in the eye of the storm. Perhaps the storm hasn't even started yet.. Caveat Emptor!!!
Has China Bottomed
There are numerous theories around that are suggesting that China has managed this slowdown extremely well and that their economy is bottoming now and in the fourth quarter. It is quite amazing how 9 guys (about to go to 7 guys) can get together and control a $7.5 Trillion economy with such precision.
Is that all there is to the China slowdown? Or are the numbers being massaged to make it look pretty for the handover of power?
I am not so sure this is the bottoming of the Chinese slowdown
The bigger the party, the bigger the hangover. (I should know this because I had my bucks party last weekend!!!)
China's fixed asset boom has no parallels. I would highly doubt that a country that is so "unbalanced, uncoordinated and unstable" as stated by its leader is able to have a such a short period of lower growth and all of a sudden start building empty buildings, empty apartments, empty offices, empty bridges, empty airports and empty trains at the rate it was during the 2009 to 2011 period. With the capital outflows out of China, it would seem that investors are not so convinced in the China economic miracle story anymore.
As BHP boldly stated last week that China has reached peak steel consumption, this suggests that there is going to be slower growth ahead.
Only time will tell, however I would suggest that those with their finger on the pulse like Michael Pettis, Jim Chanos and Patrick Chovanec have a higher probability of being right than those who didnt even see any slowdown coming.
Is that all there is to the China slowdown? Or are the numbers being massaged to make it look pretty for the handover of power?
I am not so sure this is the bottoming of the Chinese slowdown
The bigger the party, the bigger the hangover. (I should know this because I had my bucks party last weekend!!!)
China's fixed asset boom has no parallels. I would highly doubt that a country that is so "unbalanced, uncoordinated and unstable" as stated by its leader is able to have a such a short period of lower growth and all of a sudden start building empty buildings, empty apartments, empty offices, empty bridges, empty airports and empty trains at the rate it was during the 2009 to 2011 period. With the capital outflows out of China, it would seem that investors are not so convinced in the China economic miracle story anymore.
As BHP boldly stated last week that China has reached peak steel consumption, this suggests that there is going to be slower growth ahead.
Only time will tell, however I would suggest that those with their finger on the pulse like Michael Pettis, Jim Chanos and Patrick Chovanec have a higher probability of being right than those who didnt even see any slowdown coming.
A Tribute to Al Ueltschi
I had the pleasure of meeting Al Uultschi through Bob Miles at one of the many Value Investors Conference's that I have attended.
Al has been an inspiration to me over the years in the way that he was also an international pilot and business owner at the same time.
He gave me some very encouraging words of advice and I will always remember him fondly.
His contributions to sight impaired through his founding of Orbis is a testament to his nature.
Today is the passing of a wonderful human being.
Al has been an inspiration to me over the years in the way that he was also an international pilot and business owner at the same time.
He gave me some very encouraging words of advice and I will always remember him fondly.
His contributions to sight impaired through his founding of Orbis is a testament to his nature.
Today is the passing of a wonderful human being.
Sunday, 7 October 2012
Having a Command Economy does not solve all issues
Many people still believe that because China is a command economy, that they can fix any problem they face due to stricter policy control.
It all comes down to incentives and unfortunately the incentives in the Chinese economy are leading to very poor investment decisions.
The government have lured numerous industries into running at a loss because of the failed policies. Whilst the industries have grown, they have grown unprofitably. Much of the infrastructure that has been built in the 4 Trillion Yuan stimulus is expected to not return enough to pay the debt load leading to the enormous roll over of local government debt.
I think the latest reports of the solar industry illustrate how backward the Chinese economy is and why we believe that there is still a way to go on the downside in the rebalancing of their economy.
We continue to fear significant downside in the Chinese economy and the flow on effects for Australia could lead to an extended period of less than acceptable returns.
It all comes down to incentives and unfortunately the incentives in the Chinese economy are leading to very poor investment decisions.
The government have lured numerous industries into running at a loss because of the failed policies. Whilst the industries have grown, they have grown unprofitably. Much of the infrastructure that has been built in the 4 Trillion Yuan stimulus is expected to not return enough to pay the debt load leading to the enormous roll over of local government debt.
I think the latest reports of the solar industry illustrate how backward the Chinese economy is and why we believe that there is still a way to go on the downside in the rebalancing of their economy.
We continue to fear significant downside in the Chinese economy and the flow on effects for Australia could lead to an extended period of less than acceptable returns.
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