Under The Weather

Wednesday, July 22, 2009

When the early hope of a long, hot summer in the UK gives way to the annual monsoon of April-temperature rains, it's not uncommon to pick up a bug. So it's proven for Macro Man, who's completely wiped out at the moment.

It looks like he's got company; the fabled sky dog failed to turn the dragon into a cyclops today, or in any other fashion impede the progress of the Shanghai Comp, which roared to new highs for the year.
Sigh. Perhaps we'll have to rely on the more prosaic "monetary tightening and explosion of NPLs" rationale for an end to the China bubble, mk. II, after all.

While Macro Man's under the weather, he looks forward to reading a recent report from Nomura on real asset-market returns. Among the conclusions is that all global equity returns in excess of cash over the past forty years can be explained by a very small window in the middle (1985-1987.)

Provocative stuff, and hardly supportive of the "of course equities are cheap on a long-term basis" view that seems to be common amongst long-only equity investors. One wonders what sort of bug lies in store for them....

Posted by Macro Man at 8:52 AM  


Shanghai may be up but HK took a low grade pasting. Nothing quite like buying puts before a 12pm gym session to find out you're up 40% by the close on them. Now, lets see if we can get Spoos to roll over...

Nemo Incognito said...
9:17 AM  

Nice one Nemo, any thoughts on the reason for the dump after lunch? The S&Ps are starting to respond... :)

Anonymous said...
9:34 AM  

Glad someone gets to go to the gym. I have been waiting for the risk off day to leave the monitor.


Anonymous said...
9:35 AM  

Anon nine three four.. it's the dog pie in the sky.


Anonymous said...
9:37 AM  

The list of explanations are as follows in no order of ridiculousness....

1) Solar eclipse, dog eating dragon yada yada. No, I'm not religious and I don't care about this stuff - I just know that retail does.
2) Number 4 Uncle's target for the market was 20k. No 4 uncle is Lee Shau-kee, a Hong Kong tycoon who people think is a kind of hybrid of Warren Buffett and George Soros. I have noted that his bull calls tend to correlate much more with stock placements in Henderson Land than anything else.
3) Lets face it, none of this stuff is cheap and the "China as an ugly hybrid of Japan and Brazil" meme is gaining some traction outside of the Minsky/Macro Man/Pettis underworld of Austrian economics.

Nemo Incognito said...
9:38 AM  

Thanks Nemo and MM,

On China, perhaps another historical template to consider is Korea? Following the initial bull market in the late 1980s, Korean equities were in a (wide) range until 2005. China has followed Korea's export-led economic development model to a large extent. With some (unhealthy) government moral-suasion in the heavy industry and banking sectors for nationalistic reasons. As we know, that ended badly in the mid-1990s with a host of NPLs. There are also some differences and I admit that I have not fully thought this through, but the similarities are interesting. Any thoughts anyone?

Anonymous said...
10:32 AM  

Re: Nomura on equities...
Same applies to real wages in the US since the 1990s. Flat. All covered up under a duvet of debt and plastic. Keynesians love to argue about the stickiness of wages. Well, in America they seem to be stuck in concrete. Can't be good. A rich brew for political mayhem.

Donlast said...
10:39 AM  

..and, alas, a rationale for St. Barry's "oh, let the rich pay for it all" funding of health care reform, regardless of whether they are a) actually rich, or b) physically resident in the US, or indeed have been for the last fifteen years. Not that I'm bitter...

Macro Man said...
10:45 AM  

Macro Man, you need an Australian passport stat. Email me, I know people who know people etc.

Nemo Incognito said...
10:54 AM  

Macro Man has swine flu

Anonymous said...
11:02 AM  

Ah, Nemo, I'm in the queue for a UK one...eventualy. In any case, given the IRS audits the bejeezus out of you if you give up the passport, and you're technically not allowed back in the US if you do....it's a case of damned if you keep the passport, damned if you give it up.

Macro Man said...
11:05 AM  

There's always Singapore too. HK air is f-ing awful. I won't be here for another 2 years, alive or dead.

Nemo Incognito said...
11:27 AM  

Oh and this in from the China rumor mill: PBOC expected to do some more tightening / talk tough / beat chest following national day holiday on August 1st. So some folks probably positioning for that one.

Nemo Incognito said...
11:51 AM  

Giving up US citizenship is moot point because of a law Big Brother passed in 2008 that basically taxes ALL of your assets at onerous capital gains rates based on their current market values, not whether you have actually cashed out yet. Besides, wouldn't hitting the bid for US citizenship now be akin to Temasek hitting the bid for its Financials holdings? The time to do it was 1999. US is a land of dynamism and reinvention, Barry be damned. We'll take our medicine quickly and adjust, which is more than I can say for China's plutocrats/princelings and the EU's bureaucrats.

Anonymous said...
12:01 PM  

Isn't this Nomura thing a bit silly? What is it trying to say - that you could have been in cash outside of 85-87 and done just as well? The only reason this seems appealing is that after the '87 crash, the real market eventually recovered to its '87 highs (after losing 33% nominal in between). One could just as easily say that you could have made great real gains by staying in the market only from 1995-2000 (or from 2003-07). This only seems wrong because the market has not yet recovered to the (real) 2000 high. One day this will happen and then in 2030, Nomura could publish a report saying that all the real gains over the previous 40 years (from 1990) could have been captured by being in the market from 95-00 only. Ditto for any other period when the market gains strongly in real terms - depending on the start and finish dates, it is possible to make a case to only be in the market for a tiny fraction of the time.

Anonymous said...
1:20 PM  

re nomura study - does it account for dividends reinvested?

Also, given historical performance and unless you think the world is going to end, odds favour developed market equities going higher on a longer term basis.

Worth a PA allocation definitely, can always start small and add to it as it moves your way...

Anonymous said...
2:28 PM  

Off-topic in re the IRS: nothing personal, but you kids are high. US tax burden is not high. Australia's, for example is around three full GDP points higher. And if you want to leave, you can. The Treasury just presumes that rich kids dropping off their passports are Walton Heir manques, so you have to jump through a hoop or two if you are not, say, actually Australian when you "move" to Sydney.

Now, this is not to say you shouldn't do whatever you like to maximize your after-tax take. Just quit whining about how hard it is to have a lot of income. A Red Tory with a longer memory than the stock market can probably clue you in why.

On-topic, hey, how about that fabulous WFC loan book? The US market, naturally, is attempting to rally now off the gap lower. Because, I guess, $3B in let-them-earn-their-way-out bailout income makes up for $18B in loan impairments any day.

Sigh. I'm up nicely on the AM, but still, it doesn't feel right.

wcw said...
2:42 PM  

wcw, the difference is that a) Australia doesn't charge AMT, so that you owe them something after you've paid Gordon, and most importantly, b) Australia (or any other half-civilized country) doesn't charge its citizens income tax when they live and work abroad. SO my US tax burden here in the UK is infinitely higher than my Australian colleague's Aussie tax burden...and that's what galls.

Macro Man said...
3:00 PM  

re: Nomura; yes, the study does include dividends. While the 1985-87 line is obviously cherry-picked, think of it another way; the compounded excess returns of equities over cash for the past 40 years has been 2%. Not much compensation for the 12-15% annual vol, is it?

Macro Man said...
3:08 PM  

Off-topic, I have filled out those forms. The rules are what they are. Whining about them is a popular endeavor in which you are far from alone, as indeed we witness in this thread. I similarly may have company in my response to said whining.

On-topic, 2% real returns are nothing at which to turn up your nose. Yes, long-dated TIPS will give you slightly more right now, but to my mind the market (still) underprices their risk-free real returns. Though I miss the tech bubble and its 4% TIPS coupons. Wow, that was sweet.

Even aside from the question of what real returns should be, 1969-2009 starts and ends in bear markets. That smells like a multiple-endpoint result to me. If you're doing a historical analysis, there is no excuse for throwing away data. What is the rationale for starting in 1969?

If you're doing a prospective analysis, of course, there is no excuse for going beyond realized history. Which gives me even more pause. I am anything but a permabull, but to assert the market does not compensate investors for taking on equity risk is a very aggressive position for which I would like more logic and reasoning.

wcw said...
3:49 PM  

Well, to paraphrase Leslie Gore, "It's my blog and I'll whine if I want to." Just because the rules are what they are doesn't mean they aren't unfair and don't suck.

And as for 1969 as the start date, the answer is the oh-so-prosaic that that's when data begins for MSCI World.

Macro Man said...
4:06 PM  

This blog is good for info on taxes etc. http://nestmannblog.sovereignsociety.com/

On the US exit tax: http://nestmannblog.sovereignsociety.com/2008/06/exit-tax-become.html

On Australian expats: http://nestmannblog.sovereignsociety.com/2009/07/australia-is-cracking-down-on-expats-too.html

I have no affiliation with the guy or his company, just find it a useful source of info.

Anonymous said...
4:43 PM  

Further to that last post, I would note that the US exit tax also applies to permanent residents (greencard holders) after 8y of residency.

Way to go to encourage brain drain, capital flight etc; really great policy-making.

Anonymous said...
4:46 PM  

On the nomura study - it would be interesting to know what beats equities for real returns? Do they compare with other asset classes?

Anonymous said...
4:49 PM  

And another day of nothing...... anyone read any good books lately?

Nemo Incognito said...
12:59 AM  

Australia changed the tax law in the May budget. Australian "residents" who work offshore (e.g. a mining executive working for Rio Tinto in China for 6 months) will have to pay the Australian tax rate. "Non-residents" are ok for now (but you can see where the government policy is heading). The problem is that Australia now has a red-rag PM and a deputy PM who used to be a member of the communist party (no joke). What Ohbummber and other government leaders do not understand is that government doesn't have money it receives money by taxing its citizens. Government spending has to be paid (eventually) by taxation now, or in the future. Australia is a fantastic country, but the future tax burden is going to be very large, even if China continues to hoover up commodities...

Skippy said...
1:17 AM  

PBOC reserve rate hike - get yer shorts on kids.... China's going to try to get credit under control.

Nemo Incognito said...
2:12 AM  

" the compounded excess returns of equities over cash for the past 40 years has been 2%. Not much compensation for the 12-15% annual vol, is it?"

especially if one considers that a lot of this excess return is eaten by fees !

But frankly MM, at your age, do you still believe in the fairy tale that risk "ought to" be compensated ? There is no such thing than a risk-less asset, only numeraire illusion. CAPM is based on sand.

Charles said...
5:37 AM  

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