Why Invest in China?

I was recently asked about China. People talk about the debt problem, the demographic problem, the manipulated data problem, the investor-rights problem, the human-rights problem, etc. After all these problems, why invest?

Because China is the biggest thing happening in the world economy. It’s impossible to ignore. It would be like ignoring the US economy from 1800-2000. As flawed as China is, we must engage, gather data, define frameworks, code algorithms. China will not be our largest position for as far as the eye can currently see. Too many problems. But we must engage.

One can currently engage through SGX (Singapore) and HKSE (Hong Kong) futures, while avoiding much of the specific problems of being a stock owner.

Public vs private valuation

There is an interesting imbalance in the public and private markets. Private capital will pay substantially more for an inferior company—and hold it longer. Cathie Wood at Ark Invest has pointed this out repeatedly. Listen to her interview with Azeem Azhar. Analysts have become very backward looking in their search to understand valuation. Because, perceiving a different reality in the present (versus the past) is tantamount to saying “it’s different this time.” Let’s postulate a few truths:

  • Innovation is happening across more platforms than anytime in history
  • Platform level changes (i.e. electricity, transportation) change everything they touch
  • We live in a world of excess capital and surging numbers of knowledge workers (more money and more minds to solve problems than ever)
  • The vast majority of public money is trapped in capitalistic dead-ends (i.e. funding zombie governments)
  • Valuation is always understood backwards, while capital must be invested forwards
  • Private markets are closed to the non-wealthy. Public market become the only option for most people.
  • But the wealthy are just as vulnerable to herd-behavior is anyone.

How do we profit from the herd-behavior in private equity (that is rightly seeing the stunning changes coming across broad technology platforms and therefore paying wild valuations for inferior companies) while remaining agile and liquid?

We here at ThinkGlobalMacro are doing it by focusing on the indexes that capture that change (Nasdaq and similar) while avoiding or hedging with the indexes that reflect the past (DJIA). Then, we create health monitoring algorithms (that look back) to define the health-zones of the index, the economy is which it is placed, and the government structures that regulate it.

Google Cofounder Sergey Brin Warns of AI’s Dark Side | WIRED

It is my current belief that AI is the next great capital cycle, similar to steam, electrical power, railroads, etc. It will play out over decades. But this is the play. Additionally, it may be the last great human invention.

Google cofounder calls advances in artificial intelligence “the most significant development in computing in my lifetime,” but warns of ethical concerns.
— Read on www.wired.com/story/google-cofounder-sergey-brin-warns-of-ais-dark-side/

Systems update…

Currently trading the Nasdaq, the Sp500, the Nikkei, the Euro, and Oil. Although you would think that the first three assets are highly correlated (they are), all three have systems that go long/short; it is quite common to be long 1 or 2 and short 1 or 2 markets. This provides necessary hedge function.

Have no opinion about the market that I’m will to trade upon. I know it is expensive and probably will get more so. I suspect next year will be at least one 10%+ decline. I’m ready to surf…

9/23/17

We live in interesting times.

Bovespa and China a50 have been the futures markets with best momentum. I have missed this trade due to excess caution and the fact that my best models require data I cannot get for these markets. I’ve adjusted this and will trade these markets more in future.

http://stockcharts.com/freecharts/perf.php?$SPX,$NDX,GLD,$INDU,IEF,$TBSP,$NIFTY,$NIKK,$FXT&n=200&O=011000

 

Gold and bonds are having a tough time of it, responding to the end of QE by the Fed. However, the Fed is the fourth largest central bank. China, ECB, and Japan are larger by assets. They are still printing money. I will not pretend to understand all of this. I follow markets like a remora shadowing a shark. I do not predict where the shark is going.

My current worries:

  1. Don the Con and Rocket-boy
  2. Market structure (vix and skew)
  3. October

 

Have a great weekend.

AEI wishes upon a productivity star…

As much as I love this article, it is just an interesting way of saying maybe cool things will happen in the future.

Fresh off their failure to repeal Obamacare, Republicans are eager to pivot to tax reform. Of course they are. Tax reform is what they do. It’s been their policy safe space for 40 years. Targaryens ride dragons, Lannisters pay their debts, and Republicans cut taxes. 

But Republicans’ tax reform effort may collapse, too. The GOP has reached agreement on only broad goals. And the tax code is arguably just as complicated at the health-care system, if not more so. Both are full of economically thorny and politically unpalatable trade-offs. Republicans might have to settle for a temporary corporate tax cut, which might have little long-term impact on economic growth. Or maybe nothing.
And that might be okay — not optimal, but tolerable. After all, the U.S. is not in economic crisis. The current expansion is the third-longest ever, the economy grew at a solid-if-unspectacular 2.6 percent last quarter, and job gains continue to average nearly 200,000 a month. Policymakers don’t need to scramble to juice growth through quickie tax cuts that reduce marginal rates but also revenues.
Actually, Washington might not need to do much of anything for the economy to grow at 3 percent annually on a sustained basis — a stated GOP goal — versus the 2 percent average of the 2000s. One reason growth pessimists think the economy is stuck permanently in a low-gear New Normal is that productivity has been historically weak, both since the Great Recession and just before. If workers fail to become more productive, the economy and living standards will stagnate. And if America isn’t technologically innovative, workers won’t become more productive.
Yet America sure looks pretty innovative, at least if you pay attention to what’s happening in places like Silicon Valley, Seattle, and New York. Indeed, there’s reason to believe official stats are underestimating tech-driven innovation. As my AEI colleague Stephen Oliner, the Federal Reserve’s David Byrne, and Daniel Sichel of Wellesley College write in their new paper, “Prices of high-tech products, mismeasurement, and pace of innovation”: “We believe that these faster rates of growth in high-tech could presage a second wave of higher productivity growth spurred by the digital revolution.”
Here’s the problem: The IT revolution seems confined to a narrow group of superstar tech firms and isn’t spreading throughout corporate America. For innovation to lift productivity and the broader economy, new technologies must be broadly and efficiently used. We must spread the innovation wealth.
Of course, that still might happen. Economic history suggests such “diffusion” typically takes time. It took decades for factories to figure out how to use electric dynamos rather than steam. Likewise, economists in the 1980s wondered why the arrival of PCs wasn’t transforming firms — until that 1990s productivity boom happened.
And in the same way, “the rapid innovation and robust investment of recent years will eventually have an impact, but it could take some time for the next wave of productivity growth to become visible at the aggregate level,” concludes a new Peterson Institute paper, “The Case for an American Productivity Revival.” A similar argument is made in “The Coming Productivity Boom” by the Progressive Policy Institute’s Michael Mandel and AEI Fellow Bret Swanson: “The 10-year productivity drought is almost over. The next waves of the information revolution — where we connect the physical world and infuse it with intelligence — are beginning to emerge.”
Some researchers think the widespread and innovative use of big data, AI, and robotics in areas such as health care, education, and the service sector could eventually boost productivity growth high enough that overall 3 percent growth is doable. And this tech wave may be unstoppable as long as government doesn’t do something profoundly dumb such as banning or taxing new technologies. Instead, policymakers should be trying to hasten, enhance, and spread this transformation through a variety of public policies, such as making it easier for global tech talent to work in America, reducing regulatory barriers to the adoption of new technologies, boosting competition, and more generously funding science research.
More here

Future of jobs… it’s more complicated than you think…

https://youtu.be/7Pq-S557XQU
This video is the best argument I have seen in a easily understood context about the coming challenges of employability and future jobs with the rise of automation. Although I have a problem with the use of horses as a metaphor to understand future human jobs. Particularly in that the horses were never the creator of their own jobs where as we humans are the creator of our jobs. I do believe there will be tremendous deflation in the future that currently is expressing itself in some type of technological deflation which is hard to measure using the tools of an industrial time such as GDP. This deflation will make so many of our living expenses smaller. This will probably first be seen in the tremendous lowering of the cost of transportation. And has already been seen as mentioned above in the decreasing cost of technological gadgets and services. This will leave our largest cost as housing and healthcare. It is possible that a universal basic income will become increasingly likely. Indeed we live in interesting times.