I have no inside information on what is going on with the China trade deal. I only know what I read on the screen. Here's a personal story that may be relevant.
When I was younger I sold my first house. The buyer was antsy, and it was hard to come up with a price both sides could live with. We finally did, and met to sign the deal. At the signing, the buyer came up with another demand. He told me that after relooking at the house, he wanted a discount for some issue (forgot what it was). Since he had previously had an engineer go over it, this seemed pretty fishy.
My father said that this was a typical although somewhat sleezy negotiating tactic. One side figures the other has become psychologically invested in the deal, and will be willing to give a little more to get it done. He recommended I say no. I did. A couple of days later we signed the deal. I gave him a very small discount (I think about 0.1%) to sooth his ego. In return part of his down payment was made non-refundable, to sooth mine. The deal went through smoothly.
Sound familiar?
Thursday, May 9, 2019
Tuesday, May 7, 2019
China deal off? What comes next.
Well. I guess I was wrong. I had thought the US-China trade deal was going to happen. It was always in the interest of the US, and I thought it was likely in China's interest as well. But I suppose asking China to change what had been a successful economic strategy for 40 years is asking too much.
There's of course still a chance that a deal can be reached. But if not, here's what I see will happen...
- Over the short term, the increased tariffs will largely be paid by the Chinese private sector. These factories really have no where else to sell their output, so their prices will go down. Some of it will be paid by US consumers, but not much. US companies (and other multinationals) that have established worldwide supply chains in China will suffer, as these factories are now stranded assets. There is a lot of this, so it is negative for the stock prices of these companies and thus the market as a whole.
- Longer term, supply chains will be relocated to other emerging Asia. So it's actually bullish for some assets in these countries, like real estate. Banks in places like Indonesia, Vietnam etc. would also benefit. I want to stress that this is longer term stuff. Shorter term, assets in EM will suffer, with the risk of a blowup in highly stressed ones like Turkey or Argentina.
- The next trade domino will be the EU. Since that area is already in secular stagnation, this could have serious consequences. A lot of the EU stock market is auto-based, and this would be the main target. If the Germans allow a fiscal stimulus, this could be managed. Don't bet on it.
The most important trading advice I can give is not to trade on stuff you don't have a strong view about. I felt that the deal was going to go through, but I knew I didn't have any insight that the market didn't already know. So I did not trade it. If I had shorted bonds, like I was thinking about a few posts ago https://thecommoditystrategist.blogspot.com/2019/04/long-time-no-post.html, I would already be out of pocket.
There's of course still a chance that a deal can be reached. But if not, here's what I see will happen...
- Over the short term, the increased tariffs will largely be paid by the Chinese private sector. These factories really have no where else to sell their output, so their prices will go down. Some of it will be paid by US consumers, but not much. US companies (and other multinationals) that have established worldwide supply chains in China will suffer, as these factories are now stranded assets. There is a lot of this, so it is negative for the stock prices of these companies and thus the market as a whole.
- Longer term, supply chains will be relocated to other emerging Asia. So it's actually bullish for some assets in these countries, like real estate. Banks in places like Indonesia, Vietnam etc. would also benefit. I want to stress that this is longer term stuff. Shorter term, assets in EM will suffer, with the risk of a blowup in highly stressed ones like Turkey or Argentina.
- The next trade domino will be the EU. Since that area is already in secular stagnation, this could have serious consequences. A lot of the EU stock market is auto-based, and this would be the main target. If the Germans allow a fiscal stimulus, this could be managed. Don't bet on it.
The most important trading advice I can give is not to trade on stuff you don't have a strong view about. I felt that the deal was going to go through, but I knew I didn't have any insight that the market didn't already know. So I did not trade it. If I had shorted bonds, like I was thinking about a few posts ago https://thecommoditystrategist.blogspot.com/2019/04/long-time-no-post.html, I would already be out of pocket.
Monday, May 6, 2019
More on Tesla Bonds
Here's a link to a good article on TSLA bonds: https://seekingalpha.com/article/4244261-tesla-netflix-bonds-likely-smarter-bet-shares This will be a paywall for some of you. The article is about the capital structure of high yield companies: basically junk bonds do better than junk equity. I believe that this is widely studied and agreed with by academics.
The latest TSLA refinancing round went well, but I do not believe that is the end. Tesla has two problems:
1. Subsidies for electric cars have/are ending in several important markets.
2. Tesla's European competitors are launching similar products. They are doing this without a need for profitability. Germany is much like China. If the elite want something done, it gets done without regard to economics. Look at what happened to their electricity prices after they decided to invest in wind. This is bad for Mercedes/BMW/VW stockholders, but they don't count for much.
So the bonds are risky. I still believe that Tesla has technology worth the value of the bonds. The 8/25 bonds have rallied a point or so. I took a small position, and am going to watch for a place to add more.
The latest TSLA refinancing round went well, but I do not believe that is the end. Tesla has two problems:
1. Subsidies for electric cars have/are ending in several important markets.
2. Tesla's European competitors are launching similar products. They are doing this without a need for profitability. Germany is much like China. If the elite want something done, it gets done without regard to economics. Look at what happened to their electricity prices after they decided to invest in wind. This is bad for Mercedes/BMW/VW stockholders, but they don't count for much.
So the bonds are risky. I still believe that Tesla has technology worth the value of the bonds. The 8/25 bonds have rallied a point or so. I took a small position, and am going to watch for a place to add more.
Thursday, May 2, 2019
US Agriculture
The US ag markets will probably get a big kick up when (if?) a US - China deal is struck. How much depends on the type of deal. If it looks like a realistic deal that both sides can enforce, it will be major, not just for the ags but for all risk markets. OTOH, if it looks like something where the Chinese are biding for time until a Democrat takes office, not so much. I think it will be bullish.
Longer-term tho, US agriculture will have problems. Here's my list...
- The US is no longer the low cost producer. US farming methods are now widely disbursed, and labor and land costs are lower in much of the world.
- The bull case for ags was always that developing countries will transition to a high-protein, high-fat diet like the US. I am beginning to think this will not happen. The US diet is basically a northern European diet. That was OK when people lives were pretty much farming and warfare. No one should eat that kind of diet now, but at least the northern Europeans have genetic association with it. It's especially bad for everyone else. The diabetes rate in China is higher than in the US. So I do not think that the animal-intensive diet will go worldwide.
- Climate change!!!!! I have explicitly avoided mentioning the CC phrase in this blog. I'm averse to conflict, LOL. But here it matters. The increase in CO2 is contributing to a "greening" of the planet which is increasing ag yields worldwide. Maybe good for humanity, but bad for the markets.
Here's NASA's take: https://www.nasa.gov/feature/goddard/2016/carbon-dioxide-fertilization-greening-earth
How to play this. This is not a commodity market story. The real play will be in farmland. There are several farmland REITs that I am looking to short, the most obvious being FPI. But we have to wait till the China story resolves.
Longer-term tho, US agriculture will have problems. Here's my list...
- The US is no longer the low cost producer. US farming methods are now widely disbursed, and labor and land costs are lower in much of the world.
- The bull case for ags was always that developing countries will transition to a high-protein, high-fat diet like the US. I am beginning to think this will not happen. The US diet is basically a northern European diet. That was OK when people lives were pretty much farming and warfare. No one should eat that kind of diet now, but at least the northern Europeans have genetic association with it. It's especially bad for everyone else. The diabetes rate in China is higher than in the US. So I do not think that the animal-intensive diet will go worldwide.
- Climate change!!!!! I have explicitly avoided mentioning the CC phrase in this blog. I'm averse to conflict, LOL. But here it matters. The increase in CO2 is contributing to a "greening" of the planet which is increasing ag yields worldwide. Maybe good for humanity, but bad for the markets.
Here's NASA's take: https://www.nasa.gov/feature/goddard/2016/carbon-dioxide-fertilization-greening-earth
How to play this. This is not a commodity market story. The real play will be in farmland. There are several farmland REITs that I am looking to short, the most obvious being FPI. But we have to wait till the China story resolves.
Monday, April 29, 2019
Why is Inflation so Low?
The Phillips curve tradeoff of inflation vs. unemployment is a triumph of narrative over data. Here's a graph annually from 1960. If the Phillips curve had any validity, this would be an upward sloping series of dots, more or less.
Well it obviously is not. In fact there is a very low statistical significance here, certainly not enough to make policy on. For those years with less than 6% unemployment, there's no relationship at all. So why does everyone believe it?
Because the narrative is compelling. Common sense tells you that if labor is tight, workers will be able to demand higher wages. The problem with this argument is typical of economics; there are a lot of confounding variables that interact in unknown ways. They screw up the relationship.
If an economist asked a data scientist to look at the above chart, he would roll his eyes. Data people are used to looking at relationships that have actual power. Now I know that it is possible to construct models using lags and intermediate relationships that have greater explanatory power.
I call this "theory mining." The space of possible models is essentially infinite. So if you try enough things, you will come up with a theory that explains the past. The future; not so much.
My view is that demographics and social factors are all in the mix. There's not enough variation in the history to tease this out of the data, but it's my narrative. It's no coincidence that the one episode we had of actual high inflation since WWII was in the 70s, when the boomers were starting families and jobs. Now it's the opposite. We are going to have a continually aging population for several decades. Now I love old people, but they don't buy much stuff. Either they already have it, they are on fixed incomes, or they have moved on to other facets of their lives. There's a reason advertisers go after the 18 to 44 age bracket.
Of course this is not just happening in the US. The whole developed world and much of the emerging markets are in the same situation. So I expect the world central banks are going to have keep interest rates lowish for longerish.
That doesn't mean commodities prices will stay low. The world economy is still expanding, and there's not enough investment going into basic materials. One of these days that is going to matter.
Because the narrative is compelling. Common sense tells you that if labor is tight, workers will be able to demand higher wages. The problem with this argument is typical of economics; there are a lot of confounding variables that interact in unknown ways. They screw up the relationship.
If an economist asked a data scientist to look at the above chart, he would roll his eyes. Data people are used to looking at relationships that have actual power. Now I know that it is possible to construct models using lags and intermediate relationships that have greater explanatory power.
I call this "theory mining." The space of possible models is essentially infinite. So if you try enough things, you will come up with a theory that explains the past. The future; not so much.
My view is that demographics and social factors are all in the mix. There's not enough variation in the history to tease this out of the data, but it's my narrative. It's no coincidence that the one episode we had of actual high inflation since WWII was in the 70s, when the boomers were starting families and jobs. Now it's the opposite. We are going to have a continually aging population for several decades. Now I love old people, but they don't buy much stuff. Either they already have it, they are on fixed incomes, or they have moved on to other facets of their lives. There's a reason advertisers go after the 18 to 44 age bracket.
Of course this is not just happening in the US. The whole developed world and much of the emerging markets are in the same situation. So I expect the world central banks are going to have keep interest rates lowish for longerish.
That doesn't mean commodities prices will stay low. The world economy is still expanding, and there's not enough investment going into basic materials. One of these days that is going to matter.
Friday, April 26, 2019
Westinghouse Air Brake
I bought some Westinghouse Air Brake yesterday (WAB). It's a stock I l have been trading for awhile. Here's a link to a post I wrote on Seeking Alpha on it. LINK Note: this may have a paywall to some of you.
I like the US railroad story, particularly the two eastern RRs, CSX and NSC. The key part of the story is that many highways in this region are at full capacity. No more highways will be built. So RRs, which have extra capacity, should benefit. This is already happening as RR intermodal booms from the port of New York and on Florida east coast. This same story is true to a lesser extent on the west coast.
Wabtec recently bought GE's locomotive business. Wabtec and Caterpillar now produce a large majority of the world's diesel-electric motive power.
That market has been down for some time (why GE sold it). But I think the long run is great, not just in the US, but in EM as well. So I like Wabtec.
Risks:
- Company is now highly levered.
- New CEO is from GE. GE was a terrible company for many years.
- Precision railroading may reduce the number of locomotives needed.
For now this is a trading long. There's still enough skepticism about the situation, particularly the GE connection, to prevent a runaway market.
I like the US railroad story, particularly the two eastern RRs, CSX and NSC. The key part of the story is that many highways in this region are at full capacity. No more highways will be built. So RRs, which have extra capacity, should benefit. This is already happening as RR intermodal booms from the port of New York and on Florida east coast. This same story is true to a lesser extent on the west coast.
Wabtec recently bought GE's locomotive business. Wabtec and Caterpillar now produce a large majority of the world's diesel-electric motive power.
That market has been down for some time (why GE sold it). But I think the long run is great, not just in the US, but in EM as well. So I like Wabtec.
Risks:
- Company is now highly levered.
- New CEO is from GE. GE was a terrible company for many years.
- Precision railroading may reduce the number of locomotives needed.
For now this is a trading long. There's still enough skepticism about the situation, particularly the GE connection, to prevent a runaway market.
Wednesday, April 24, 2019
Tesla Bonds
It shows what people want to talk about. I write maybe 20 posts on commodities and get x page views. I write a post on Tesla and get 10x....
One reader mentioned that if I believe the situation in yesterday's post I should be buying Tesla bonds. My thesis was that Tesla has a lot of intellectual capital that is not counted on its books. So even if Tesla has to issue more equity to survive, the bonds should be money good. In fact, if Tesla was to go Chapter 11, it might be great for the bonds. You would get control of an undervalued asset. Just think of what Germany Inc. or China would be willing to pay for Tesla.
The bonds are yielding about 8.5%. Normally I only buy junk bonds when there is a scare catalyst, like a default. But I may start a position here.
One reader mentioned that if I believe the situation in yesterday's post I should be buying Tesla bonds. My thesis was that Tesla has a lot of intellectual capital that is not counted on its books. So even if Tesla has to issue more equity to survive, the bonds should be money good. In fact, if Tesla was to go Chapter 11, it might be great for the bonds. You would get control of an undervalued asset. Just think of what Germany Inc. or China would be willing to pay for Tesla.
The bonds are yielding about 8.5%. Normally I only buy junk bonds when there is a scare catalyst, like a default. But I may start a position here.
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