A little summary of the last couple of years

Here is a list of macro predictions that I made two years ago with a five year horizon. I posted them in Sept 2011 but I have told many already early that year, and also stated in my very first class in UST (a HKD 8 million student investment fund class). http://xlpartners.blogspot.com/2011/09/on-money-so-far-and-longer-term-5-year.html

n  China will face sharp slow down in growth for years within five years (could drop from 10% to as low as 3%)

n  Related emerging markets and commodity producers will suffer as well.

n  HK’s housing price will drop substantially, but China much more

n  Chinese people may not suffer that much and the world will not end when China slows down

n  Eurozone will not survive in the current form

n  The U.S. will become stronger in relative terms if it can get the political act together

Please see more detailed description here.

http://xlpartners.blogspot.com/2012/01/review-and-preview.html

Short term timing is harder. But I have been lucky so far in the last two years. Please see the risk on and off timing marked at the titles of my blog entries with the level of Hang Seng (have switched to SP500 as I stated recently in March).

n  April 10, 2011: Predict deflation scare later in the year;

q  Risk Off; HSI = 24K

n  August 4, 2011: Deflation scare is in full force;

q  Risk Off; HSI =  22K

n  October 12, 2011: Bear rally;

q  Risk On; HIS = 18K

n  November 9, 2011: Italian job;

q  Risk Off; HSI = 20K

n  January 2, 2012: The rally is on;

q  Risk On; HSI = 18.5K

n  March 2, 2012: It is time to lighten up risk;

q  Risk Off; HSI = 21.2K

n  June 15, 2012: Like always, if all the central banks are about to take out the big gun, follow the flow of the crowd

q  Risk On, HIS = 19.0K

n  September 15, 2012: The first milestones in turning the tide around; still underappreciated by markets

q  Risk Keeps On, HSI = 20.8K

n  February 22, 2013: Hold on to your stocks

q  Risk Keeps On, HSI = 22.8K

n  May 29, 2013: This rally has legs

q  Risk Keeps On, S&P500= 1648

      Now S&P500= 1792; I hope you have listened and have not missed boat.

China’s Past and Future

When I was in China as a kid, I was always told that Charles Gordon is a villain and Taiping rebellion are led mostly by good people. As I grew older, I realize Taiping rebellion is one of the worst plagues in Chinese history. Most of China’s troubles are due to own ignorance, not complying international law, and closing itself to outside world, which lasts until today. But I did not realize what a saint Charles Gordon is to China until I watch https://www.youtube.com/watch?v=6lF-iPyRSJw. Watch the whole video or at least this particular one. The gap between Chinese and Western civilization is so wide… The only way to grow China further is to open it up further and let the Chinese people expose to outside work. This will release an unimaginable amount of productivity.

中国的过去和未来

当我在中国作为一个孩子，我总是被教育查尔斯·戈登是一个恶棍,太平天国领导大多是好人。随着我逐渐长大，我认识到太平天国起义是中国历史上最严重的瘟疫之一。大多数近代史中国的麻烦是由于自己的无知，不遵守国际法，并本身关闭外面的世界。这种情况一直持续到今天。但直到我看https://www.youtube.com/watch?v=6lF-iPyRSJw, 我没有意识到查尔斯戈登对中国是什么一位圣人，。观看整个视频，或者至少这个特殊的一个。中国与西方文明之间的差距是如此之广，进一步壮大中国的唯一办法是打开中国，让中国人完全接触到外面的世界。这将释放难以想象的生产力。

Australia as I predicted: 2

Here is my email to my friend this May. My students for the global macro investment class were pretty good this semester but they did not figure out the key geographic implication about Australia. Live and learn about everything every day. That is the way to successful global macro strategy part. Execution is still a separate set of challenge.

“The key is that China will slow down dramatically; another round is coming this winter. Aussie $ has been pushed up by mining sector, which has suffocated manufacturing, tourism, other exports, and retails. It has pushed housing price much higher, due to both Aussie $ appreciation and price appreciation in Aussie $. This is the classic Dutch disease (http://en.wikipedia.org/wiki/Dutch_disease). When China slows down more, the mining sector will be hurt most. But what will help OZ is the inevitable currency depreciation. Unlikely Spain and Ireland, OZ has its currency. When depreciation happens, it will help the mining sector a bit. But the reality is that the mining sector will be squeezed by both China’s slowdown and the large supply brought on stream from the large investments made by mining companies since mid 2000s. The profits of those sectors will be hurt. But the depreciation will clearly help the other sectors that were originally hurt by the Dutch disease, especially the tourism sector.

What’s interesting in OZ is the clear geographic separation of mining and the sectors that have been hurt by mining boom. Mining is mostly at Queensland (Brisbane) and West Australia (Perth), whereas those hurt sectors are in New South Wales (Sydney). So if you can shift Aussie $ to USD for the short term until Aussie $ drops to about USD .8 to .85 and then start to shift back (it could drop more, but this would already make you 10-15%), you can then use the money to buy, for example, commercial real estate related to those hurt sectors in Sydney. Since OZ  personal debt level has been already high, and housing prices are already high, people probably won’t buy new houses right away. But the relative boom in NSW will help the job opportunity there and the rental property market will become or keep being warm if not hot.

In HK, one can easily open foreign currency accounts and shift between accounts. I would imagine OZ banks do that too. So it may be easier to move Aussie $ to USD and then back than you imagine.

We have bought quite a few properties in the US since 2011. It has worked out well and will appreciate a lot in the long term. But in the short term, the rental yield is also very high... It would be still a good deal to buy properties in the US. In OZ in comparison, one lacks one of the two legs of the US deals at least, long term fixed rate mortgage with very low rate right now.

These are just executable ideas. To invest in real estate, there are still a lot of details to deal with. You might need to delegate to some property management companies. However, it is not impossible to do the same through stock markets. There will be quite a few liquid stocks that have max exposure to those hurt sectors and NSW and little, if any, exposure to mining and Queensland and West Australia. Long those stocks (and maybe short the mining one opportunistically) should get you quicker one time return. Less hassles than real estate but not sustainable cash flows.”

Note that I have told this to a few friends already since last year. 

Australia as I predicted: 1

I have predicted Australia trouble here A and here B. Here is part of an email that I wrote to a friend in Australia last year when I attached what I said in here B.

“I love Australia and trust that you are very experienced in investing your own money... The first one is probably the most relevant to you. The real challenge for China, and also Australia, will probably happen the next year and after.”

I will soon post some specific opportunities to avoid loss and make money when I wrote him again this May.  I have mentioned these opportunities to other friends since last fall. But some students in my global macro class are presenting a report about Australia on June 8. So to be fair, I cannot post the predictions on my blog right now. I will post the opportunities after their presentation. Stay tuned.

I remember a presentation that I have sit through in Sydney in early February 2012. A so called keynote speaker (well respected in Australia finance circle) was blasting Spain, Ireland, and other Eurozone peripheral countries, all as moral midgets, and then uses Australia to illustrate how morally superior Australia is over those countries. It was suffocating. The world is full of silly people who may have lots of connections and money (The same happens in academic world where many academicians only know the nitty-gritty of their narrow field but know really little about how the world really works but still boldly being consulted on TV or media as talking heads). Sometimes I just walk out, like in a conference I went to in HK where the only person who made some sense was Oliver Blanchard, whereas people like Robert Mundell and Ronald McKinnon are talking total BS.  But I was stuck among the seats in the Sydney dinner. So at the end for revenge of torturing my mind, I raised my hand and told him that although Spain and Ireland look so bad now, they looked similarly good as Australia now just before the Great Financial Crisis; Australia will end up somewhat in similar situation in the next few years, where the main difference, and it is a major difference, is that Australia has its own currency.