Howard Marks on risk

People want to be able to take the concept of risk and use it in a formula to do computations.  The only number that’s available to use as a proxy for risk is volatility, or the standard deviation of prices or returns.  That’s not what risk is.  Risk is the probability of losing money, [but] there is no number you can use for that because there’s no place you can look to find out what the probability of a bad outcome is today or what it was six months ago when you made the investment.  So, you can be quantitative but not accurate, or accurate but not quantitative.  You can’t do both.

~ Howard Marks, "Howard Marks on Trump, Risk, Inflation, and Tariffs," Barron's, November 9, 2024

Angelo Katsoras on Trump's deregulatory agenda

One of Trump's first actions after being sworn in on Jan. 20, 2025, will be to begin unilaterally rolling back certain environmental policies through executive orders.  These include initiating withdrawal from the Paris Climate Accord, streamlining the permitting process for drilling on federal lands, expediting approval of natural-gas pipelines and liquified-natural-gas export facilities, and removing emissions and clean energy targets.  He will seek also to lighten the regulatory footprint in the financial, IT, energy, and mining sectors.

It is important to note that repealing, implementing, or rescinding new executive orders can be a lengthy process.  It often takes months or even years to review and respond to potential legal challenges.  Typically, these challenges are first heard in federal district courts.  The more these cases are heard by judges appointed by Republicans, the better the chances that these executive orders will not be overturned.

~ Angelo Katsoras, Geopolitical Briefing, National Bank of Canada, November 6, 2024

Patrick Barron on Trump's tariffs

I also believe that as president, the Donald will succeed in implementing more widespread and higher tariffs, although I wish it were not so.  The president-elect has admired using trade as a weapon for a long, long time, even before he considered running for political office...  Unfortunately for this free market/free trade economist, the country seems to side with him.  So, just as the US and the world slide into recession, the US will repeat the disastrous Smoot-Hawley tariffs of 1930 that triggered worldwide reciprocal tariffs.  Depression, tyranny, and war followed.  So, the Donald may get his tariffs only to go down in history as the twenty-first century’s Herbert Hoover. 

Notice that it is the electorate that will get its way, perhaps not fully but at least partially...  [T]he electorate supports higher tariffs.  Despite both theoretical and empirical evidence that enacting tariffs is like shooting oneself in the foot, I think the Donald and the electorate will get them.

~ Patrick Barron, "Will the Donald, Elon and Vivek Succeed?," Going Postal, December 30, 2024

Kevin Duffy on left- and right-wing delusions

The latest bull run was kicked off by the release of ChatGPT just over two years ago.  From trough to all-time high, the S&P 500 vaulted from 3,840 to 6,090, good for a gain of 59%.  The previous high was set on January 3, 2021, with the S&P perched at 4,797.  I believe we are seeing all of the classic signs of another significant peak in U.S. stocks. 

The symmetry of this second major market top is hard to miss.  The broad market actually crested in early 2021, coinciding with the Biden victory and inauguration.  Speculative excesses were quite obvious in meme stocks and Cathie Wood’s “growth at any price” moonshots.  Left wing delusions included Covid vaccine rollouts, DEI, ESG and male athletes competing with women.  Today’s speculative excesses include bitcoin, generative AI and Big Tech.  Right wing delusions include trade wars, hot wars, deportations and American exceptionalism. 

The Trump victory was the cherry on the speculative sundae, the catalyst for a euphoric blowoff rally.

~ Kevin Duffy, "Portfolio Review," p. 17, The Coffee Can Portfolio, December 20, 2024

Kevin Duffy on Trump, trade and tariffs

Outside of Trump’s inner circle, nearly everyone seems to understand the destructive nature of tariffs, even Keynesian economists and Trump voters.  After the election, the stocks of dollar stores immediately sold off on concerns the industry would face higher costs in a trade war with China, no doubt passed on to their lower- and middle-income customers.  Investors, at least for now, are downplaying these risks.

The problem is that the very essence of Trump is that of a pragmatic, businesslike interventionist who thinks trade is “negotiable” and “reciprocal.”  In a sense, he is right: trade is mutually beneficial, but to the parties involved, its terms are negotiated by the parties involved and each gives up something to get something in return.  However, when a third party, in this case the government, interferes, it can only interject its own wants and needs.  It does so through violence, i.e. it gives up nothing and benefits at the expense of those who would otherwise trade with each other.  While the state gains power, both parties to the trade are made poorer. 

Protectionism prevents a nation’s consumers from securing the best products at the lowest prices around the world.  It also denies producers and distributors the cheapest inputs and best deals.  Trade and peace go hand in hand.  A healthy global economy and rising living standards require expanding trade, specialization and the division of labor.  Protectionism moves in the opposite direction, towards self-sufficiency, nationalism and ultimately impoverishment. 

When Trump threatens 100% tariffs on anyone who refuses to trade in U.S. dollars, he is playing with fire.  In response to the Smoot-Hawley tariff of 1930, global trade plummeted 65%, plunging the world into depression and laying the groundwork for nationalism, authoritarianism and world war.

~ Kevin Duffy, "Great Expectations: Handicapping Trump 2.0," The Coffee Can Portfolio, December 20, 2024

Kevin Duffy compares the present U.S.-China cold war with U.S. vs. Japan in the late 1980s

The present U.S.-China cold war rhymes with the U.S.-Japan clash of the late 1980s, except that in many ways the roles are reversed.  Today it is the U.S. who smacks of hubris while China lacks confidence.  Ironically, the U.S. adopted many of the pillars of the flawed Japanese model, including protectionism, industrial policy (CHIPS Act), stimulus, bailouts, zero interest rates and trusting of authority.  In the battle of ideas, Japan won.

~ Kevin Duffy, "Bull in the China Shop," The Coffee Can Portfolio, December 20, 2024

Kevin Duffy makes the bull case for Chinese equities

The bull case for China is simple: it’s cheap, hated and on course to become the dominant economy on the planet.  Even the bears will concede the first two points.  But China’s economic future, contrary to a cacophony of negative narratives, makes the 2021-24 equity bear market the mother of all fat pitches, a generational buying opportunity.

~ Kevin Duffy, "Bull in the China Shop," The Coffee Can Portfolio, December 20, 2024

Torsten Sløk on policy inflation

We know there has been more deglobalization since 2019, which means more onshoring, friend-shoring, near-shoring, and home-shoring.  That means more production is coming home to the U.S. and Europe, in particular, which means the cost of production is likely to go up.  Generally, deglobalization is inflationary.

Next, the energy transition is a significant investment theme and implies significant costs.  It, too, is broadly inflationary.

Third, we are likely to see more military spending, which is also inflationary.  Spending more on missiles and tanks takes investment away from other productive uses like capital spending.

Fourth, and finally, we could see more restrictions on immigration in both the U.S. and Europe, which is inflationary.

If there is one major economic theme in the next three to five years, it’s the risk that we will see permanent upside pressure on inflation.

~ Torsten Sløk, "The Economy Is Fine. The Market Will Be, Too," Barron's, August 10, 2024

Grant's is bearish on Walmart

A quarter-century ago, Walmart could almost be said to deserve the valuation that Mr. Market is assigning it today.  In the high-cotton fiscal year ended Jan. 31, 2000, the retailer expanded its top line by 20% and earnings per share by 26% in the context of 8% same-store sales growth and 11% store-base growth.  A growth stock, WMT might have been mistaken for a bubble stock...  At a then peak split-adjusted price of $23.15 on Dec. 27, 1999, Walmart commanded a 57.9 times trailing earnings multiple.

[...]

[Today] Wall Street is virtually 100% bullish on the shares (out of 45 recorded analyst opinions, there's just one "sell")...  Certainly, the good news has registered on the share price.  Up 51.7% in the year to date, WMT trades at 33.5 times trailing earnings, a generational high.  "To meet expectations," [Evan] Lorenz observes, "management must somehow compound EPS growth at an 11.1% rate between fiscal 2025 and 2028, an acceleration from 9.8% posted in the second quarter this year."

[...]

No need to preach to the choir of the Walmart insider: Since the start of the year, top executives and the Walton family have sold a whopping 63.9 million shares for proceeds of $4.2 billion.  Save money, live better - as they perhaps understand as well as anyone.

~ Grant's Interest Rate Observer, "Tale of two decades," October 11, 2024

The Economist on China's success in emerging markets

Since the end of the cold war the rich world’s corporate giants have been the dominant force in global commerce.  Today consumers and workers in almost every country are touched in some way by the world-spanning operations of multinational firms from America, Europe and, to a lesser extent, Japan.  These leviathans are now under threat, as Chinese firms in industries from cars to clothing expand abroad with startling speed.  A new commercial contest has begun.  Its battleground is neither China nor the rich world, but the fast-growing economies of the global south.

~ The Economist, "Chinese companies are winning the global south," August 3, 2024

August 3, 2024

Scott Bessent: "If anything, defense spending needs to rise"

In the history of the world, there have been six reserve currencies.  Tell me what all the former reserve currencies have in common: Portugal, Spain, Holland, France, UK.  They were also security zones.  How did they lose currency reserve status?  Especially Spain, they got highly leveraged and could no longer support their military...  If anything, defense spending [in the U.S.] needs to rise.  You can't keep your reserve currency status if you lose the defense umbrella.

~ Scott Bessent, "The Fallacy of Bidenomics: A Return to Central Planning," Manhattan Institute, 30:30 mark, June 13, 2024

Scott Bessent compares Donald Trump to Ronald Reagan

Both immediately went for tax cuts.  They both focused on the biggest external threat.  Reagan spent the Soviet Union into oblivion.  I think Trump had a different idea for how to deal with China and make up for a lot of bad historical trade agreements...  Even "Make America Great Again" was a Reaganesque saying.  It's an optimistic vision of America instead of managed decline which I think Biden 2.0 would be.

~ Scott Bessent, "The Fallacy of Bidenomics: A Return to Central Planning," Manhattan Institute, 22:10 mark, June 13, 2024

Robert Murphy on free trade and the fallacy of reciprocating trade

In general, the case for free trade does not assume the other trading partners are reciprocating...  Just like, you're the coach of a basketball team who says, "Hey guys, I want to pass a lot.  That's how we're going to improve our competitiveness.  And we're going to be more successful on the court if we pass a lot rather than always just giving the ball to our star player and him trying to drive all by himself and just go shoot."  And you wouldn't say, "I don't know, coach, what if we're playing against some other team and they just always give it to their star players?  Does that mean we should reciprocate?"...  No, there are lots of situations where, if something makes sense to do, it doesn't matter if the other team's being stupid.  The smart thing for you to do is still the smart thing for you to do.  That's what the standard case for free trade is.  You're not making your people richer by imposing an extra tax in between them and potential sources of supply.

~ Robert Murphy, "Correcting Vivek Ramaswamy & Charlie Kirk on Tariffs," infineo, November 8, 2024

Wall Street Journal: "Do Republicans want to rein in the regulatory state or unleash it?"

Do Republicans want to rein in the regulatory state or unleash it?  It’s hard to tell these days, and the contradiction comes into sharp focus in J.D. Vance’s embrace of Lina Khan, Elizabeth Warren’s favorite regulator who runs the Federal Trade Commission.  At a Bloomberg technology forum in February, Mr. Vance called Ms. Khan “one of the few people in the Biden administration that I think is doing a pretty good job.”

~ WSJ editorial board, "J.D. Vance, Lina Khan and the GOP’s Economic Contradictions," The Wall Street Journal, July 18, 2024

Michael Lewitt on this week's expected Fed rate cut

The Fed is almost certain to commit another policy error this week by cutting interest rates by another 25 basis points with stock, housing & other financial asset prices at or near all-time highs.  Financial conditions are already loose so lowering rates will only further loosen them & feed the speculation pushing stock & other financial asset prices beyond reasonable valuations.  Gold & Bitcoin are also flashing warning signs that inflation is not contained (confirmed by recent data).  Nonetheless the Fed seems hellbent on its current easing path. 

As I’ve written all year, there is one compelling reason to cut rates - the cost of servicing the rising federal deficit.  If that is the reason the Fed is cutting, however, the plan is backfiring. Treasury yields have risen by roughly the same amount that the Fed has cut the Federal Funds rate since cutting began a few months ago.  As such, the market is telling the Fed it will demand higher compensation to fund the government under a lower rate regime.  This is entirely logical because lower rates enable higher spending & higher, not lower, deficits (as well as unproductive government spending & speculative private sector activity).  In short, the market thinks interest rate cuts are unnecessary.  The only market players seeking lower rates are private equity & private credit players who have little interest in what’s best for the economy.

~ Michael Lewitt, The Credit Strategist, December 16, 2024

Marc Faber on tariffs and onshoring

Now they have this brilliant idea to impose tariffs.  It's an absurd idea because the tariffs will increase the prices of just about everything.  And the employment gains will be very minimal because companies will pay the tariffs rather than move production into the U.S. where there is not sufficient technological skills, nor are there enough people to do the jobs that the Chinese or the Indians or the Vietnamese do.

~ Marc Faber, "High Risk of Market Crash as Smart Investors Sell with Marc Faber," WTFinance, 5:45 mark, December 11, 2024

Cyrus Janssen on the real China vs. conception of most Americans

This summer we went back to China, we traveled two months throughout China.  We were sharing videos on Instagram with our friends back in America and no one could believe.

This is China?  This is what China looks like?  The roads are this clean?  The cities this good?  The malls are this well?  The meals are this great?  The food is this fresh?  The people are this friendly?

This is the sad thing.  I think for most Americans their conception of China is still stuck in 1970.  It's still Chairman Mao suits, bicycles, poor country, underdeveloped, communism, no freedom, totalitarian society.  This is what the stereotypes about China are.  I lived in China for 10 years.  There's not really many freedoms that I didn't have.  There's not really a huge difference between the United States and China.

~ Cyrus Janssen, "Shocking Truth About China Told by an American," Max Chernov, 1:05 mark, October 14, 2024

Hans Hermann-Hoppe on idolizing politicians

Idolizing a politician is like believing that the stripper actually loves you.

~ Hans Hermann-Hoppe

Cyrus Janssen: "I don't believe that China is the biggest threat to the United States"

One fundamental belief that has really guided me a lot is be the change you want to see in the world.  It's very simple...  So I want to see a change between the U.S. and China.  Maybe I'm too small.  Maybe I'm just one person.  Maybe I can't really influence this, but I'm going to go try.  I'm going to try to be that change that I want to see in the world.

I don't believe that China is the biggest threat to the United States.  That is something that I'm going to die on.  It's a fundamental belief of mine that's something that I'm going to continue to preach on.  So when I talk to people, when I speak in conferences around the world, when I speak to anybody, from the side of the street to...  I went to a local pharmacy and there were two guys talking about China.  "Oh, China's taking all our jobs, there's no manufacturing anymore in America because of China.  China's the problem!"  And I thought, "What's interesting is that, what phone do you have?"  

"Oh, I have an iPhone."  

"Okay, well, if we bring that factory back to America, we're going to have to hire Americans for about $50 to $60 an hour because they won't work for less than that in a factory.  They don't want to do that job.  So are you willing to pay $5,000 to $6,000 for an iPhone?"  

"$5,000 to $6,000?  That's insane."

"Exactly, that's why we need China, because there's also a fundamental reason why Apple's gone to China, is because they're able to produce the best quality phones, at the best prices and they do so because it's China...  And as a result, Apple's become one of the most valuable companies in the world.  So if anything, just go buy some Apple stock and enjoy the tangible benefits that come from dealing with China,"

~ Cyrus Janssen, "Shocking Truth About China Told by an American," Max Chernov, 38:15 mark, October 14, 2024

Cyrus Janssen on the possibility of a hot war between the US and China

Many people don't realize how important China is to the United States economy and just to how Americans live their average life.  Without China we couldn't function.  And so the trade still goes on, though the tensions have ramped up significantly since [2008].

[...]

As for tensions, unfortunately, if I had to make a prediction, I think that they're going to increase.  I think that we're going to see more tensions between the United States and China, but we're going to see this increase because there is a fundamental problem happening in the United States where we are experiencing a very difficult time politically...  The U.S. democracy has never been weaker than at this moment right now.  So our government has a tremendous amount of internal problems.  And the problem right now is that we're distracted by other countries.  For example, you often hear many U.S. politicians say, "the greatest threat to the future of the United States is China."  But in reality, it has nothing to do with China.  Everything is by looking in the mirror.  The biggest threat to the United States is the United States itself...  How do we fix our own house?

[...]

So I think that what you're going to see between the United States and China is China continuing its influence around the world, for example when we look at Africa, we look at other countries in Asia, many of them are shifting towards China.  I think that the United States is going to continue wanting to sanction China, wanting to impose trade tariffs, wanting to limit Chinese technology.  And we're going to see this continuous battle for the next few years.

[...]

I'm an optimist, I'm always an optimist, so I will always say that I'm positive about the future of the world.  And I always say this, I don't believe that the United States and China will get involved in a confrontation.  I don't believe that they will go to war because I don't think many people understand this, is that if the United States and China get involved in a hot war, that is the end of the economy.  That is the end of the world.  That literally will wreck every stock market, all of the industries.  We're talking absolute chaos for the entire globe.  No country will be unscathed from that wrath if the United States and China get into a hot war.  I do think that both sides understand that...  I do believe in humanity.  I do believe that at the end of the day that cooler heads will prevail and that peace will happen.

~ Cyrus Janssen, "Shocking Truth About China Told by an American," Max Chernov, 18:00 mark, October 14, 2024

Jeffrey Sachs on China's success in electric vehicles

Q: One of the underlying themes or conclusions that I'm reading from the various media reports criticizing the health of the Chinese economy it that the China model, which worked for the past few decades, is not working anymore.  And the Chinese leadership, by sticking to that model, is stifling the Chinese economy.  What exactly are they trying to get at?  And what exactly is the Chinese model that they believe is not working anymore?

A: I think if I could interpret it, maybe the claim is that there's too much government intervention in the economy or China's stifling entrepreneurship.  Again, I think that this is Western rhetoric, not reality.  Let me take a very pertinent and quantitatively important example.  China is now the world's leader in electric vehicles.  During the past 10 years, there were around 400 electric vehicle companies in China.  They were competing like crazy.  Of course, there's now kind of a shaking-out process where a few companies are becoming dominant.  But the competition and the entrepreneurship has been absolutely intense.  And the result is that China is taking the leadership in worldwide sales of electric vehicles.  Also, China's domestic market now is remarkable in that more than 40 percent, I believe, of new car sales, are electric vehicles.  And when I recently visited Beijing, you see them everywhere with the green license plates and you see a tremendous change in a short period of time.

Since this is the direction that the entire world is moving towards because of the need for zero-emission vehicles, China's in a very strong position.  What is happening?  The U.S. is putting on tariffs.  Europe is putting on tariffs.  Is that a sign of failure of China?  No, quite the contrary, it's a sign of remarkable success.

~ Jeffrey Sachs, "Jeffrey Sachs on 'China collapse' theory," CGTN, December 8, 2024

William Pesek on possible retaliation by China to Trump's trade war

All this means Team Trump might not grasp the numerous ways Xi could choose retaliation over the art of the deal. 

One of Xi’s options is to weaken the yuan before Trump can devalue the dollar.  China’s economy has had a rocky 2024, as dueling crises in property, local-government finances, and weak consumer demand fuel deflation.  Nothing would hasten growth faster than weaker exchange rates.  Or, it follows, offset the 60% tariffs Trump threatens to slap on Chinese goods. 

Xi could restrict exports of key inputs Trumponomics will need to thrive.  Surely, Elon Musk and his Silicon Valley bros can explain to Trump the risks of depriving the U.S. of rare earths and other materials.  Less access to gallium, germanium, graphite, and other ingredients would rock the semiconductor, telecommunications, and electric-vehicle industries. 

Chinese leaders could sell large blocks of Beijing’s $730 billion of U.S. Treasuries.  They could target companies most on the frontlines of decoupling tensions.  What’s to stop Xi from taxing or even seizing assets of Apple, Microsoft, Tesla, and others?  Or slapping taxes on Amazon, Walmart and others.

Finally, Trump is allowing China to position itself as the protector of free trade and globalization in 2025, while MAGA tries to drag markets back to 1985.  Ironically, that will only lead to stepped up efforts by the BRICS nations—Brazil, Russia, India, China, South Africa—and the “Global South” to replace the dollar in trade and finance.

~ William Pesek, "A Trade War May Not Go Trump’s Way. China Has His Number.," Barron's.com, December 3, 2024

Winston Churchill on diplomacy

Diplomacy is the art of telling people to go to hell in such a way that they ask for directions.

~ Winston S. Churchill