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.

This rally has legs

“Bought a lot Japanese stocks today” is what I wrote to my global macro investment class in the days after Japanese stock markets experienced the big one day drop last week. The Japanese officials seem a bit confused intellectually though now the markets have gone their way for a while. I usually do not make too short term a bet. But I still believe those guys will smart up in the end and keep doing what they are doing.

The rest of my money are still in US small cap or small cap value, and I bought as much as I can. As I said last September, this rally will have a long leg and lots of returns. I confirmed and advocate more buying in February. I hope you have enjoyed the ride. If you are trying to sell in May and go away this year, you will be the sore loser.

Going forward, the rally still has a couple of months to go. After that, it will stall and turnover around the end of this year. As I have discussed in February, China will have another round of slowdown, Europe will suffocate itself a bit more by then again (but will relax before and after that), US austerity drive will have more visible impact on the economy. However, if you believe the long term predictions of mine, that will be a good time to buy more U.S.

Rotation and Divergence

This is the title of an email that I sent to myself on March 24 that only has the title. It reminds to write a blog about the divergence between the group of relative losers, e.g., China, Australia, Brazil, Russia, et al. vs. the relative gainer, the U.S. But I never got time to write it till now. So going forward, it will make a difference when I talk about risk on and off using Hang Seng Index or S&P 500 Index. HSI will be relatively flat or get worse in the next few years, whereas S&P will likely go up (still volatile). I have already discussed this issue a long time ago. But we won’t have as many back and forth going from here.

Last Calls

Last winter, when I met Qi Bin, the direct of the research center under CSRC, I said that Chinese stock market index will go up but then end up closer to 1500 around the end of this year, unless the government takes some drastic actions. So the next few months will be the last call to sell you Chinese stocks unless huge policy events happen. There could be. China is planning to make more financial reforms, speed up more urbanization, give farmers money through land reform. But we have to tell after we actually see the specific policies. The SOE reforms might be at back burner for a long while, until China’s enterprises, private and public, all crumble, a prediction from a macro theory paper that I wrote with two colleagues in HKUST. BTW, the paper has been presented at U.S. Treasury and State Department and IMF and will be presented at NBER this summer. The intro may be accessible to normal people like me.

Another last call is to sell Chinese real estate. This year is likely to be the last year that one can sell at the current price in a long time.

If you do not believe, we shall let time to tell.