Macro

Trump May Equal Volatility, but Volatiliy Doesn’t Equal Risk

Trump May Equal Volatility, but Volatiliy Doesn’t Equal Risk

in Macro

It is a new year, and my crystal ball was supposed to have become magically unfogged by the turn of the calendar. Well, I hate to disappoint you, but it hasn't. Unlike our new president, I lack certitude about the brightness of our future. My thinking is caught between two quotations from Mark Twain. The first is, "Whenever you find yourself on the side of the majority, it is time to pause and reflect." And the second: "I've lived through some terrible things in my life, some of which actually happened." On one side I am in agreement with the majority who expect Trump's policies to benefit the economy: lower corporate taxes, foreign corporate cash repatriation, deregulation, and so on. This inclines me to pause and reflect, not just because I find myself in the innately uncomfortable position of agreeing with the majority but because these in-your-face positives are only part of the new president's package. Trump's ascendancy also brings a lot of uncertainty – something the market is ignoring, for now. The business-oriented pragmatism that it loves today comes with nationalistic and protectionist "job creation" rhetoric that may result in trade (or even conventional) wars. U.S. foreign policy, trade, and military alliances...

The Persistent Problems of Presidential Elections

in Macro

The election is over. I am left with two very contradictory feelings. First is one of appreciation — every four years we peacefully replace our government. I remember my parents in the late 1970s discussing Soviet politics at our house with their close friend. Their friend said something anti-Soviet. I vividly recall the fear in my mother’s eyes when she realized I had overheard that part of the conversation. Views that were contrary to “politics of the party” were not tolerated. If I repeated in kindergarten what I had just heard, my teacher could report it to authorities and my parents (not me) would get in trouble. A six-year-old kid could have only heard this sort of anti-Soviet talk at home: TV, radio, and newspapers were a pro-Soviet propaganda machine. My parents would not have been sent to the gulag, but they could have lost their jobs. If this sounds farfetched, my father’s best friend, a colleague and professor at Murmansk Marine Academy, was fired for possession of anti-Soviet propaganda — a copy of Solzhenitsyn’s Gulag Archipelago. It took him years to get another job, and it was almost two decades later, when the Soviet Union fell apart, that he was finally able to...

Whatever Happened to the Invisible Hand of Capitalism?

in Macro

When I was growing up in the Soviet Union, our local grocery store had two types of sugar: The cheap one was priced at 96 kopecks (Russian cents) a kilo and the expensive one at 104 kopecks. I vividly remember these prices because they didn’t change for a decade. The prices were not set by sugar supply and demand but were determined by a well-meaning bureaucrat (who may even have been an economist) a thousand miles away. If all Russian housewives (and househusbands) had decided to go on an apple pie diet and started baking pies for breakfast, lunch and dinner, sugar demand would have increased but the prices still would have been 96 and 104 kopecks. As a result, we would have had a shortage of sugar — a very common occurrence in the Soviet era. In a capitalist economy, the invisible hand serves a very important but underappreciated role: It is a signaling mechanism that helps balance supply and demand. High demand leads to higher prices, telegraphing suppliers that they’ll make more money if they produce extra goods. Additional supply lowers prices, bringing them to a new equilibrium. I am slightly embarrassed as I write this, because you may...

Unraveling the Mystery of Oil and the Swiss Franc

in Macro

Has the DNA of the global economy been gradually altered by endless injections of quantitative easing, morphing it into a freakish mutant? Are things that are not supposed to happen for centuries on end going to become common occurrences? The collapse of oil prices and jump in the Swiss franc have forced me to puzzle over these weighty questions. In isolation, these events and the direction of their moves did not worry me, but their magnitude, velocity and proximity to each other sent me on an intellectual quest. Let’s start with oil. Supply has been increasing due to growth in shale oil production in the U.S., and that increase along with a stronger dollar drove oil prices lower (since oil is priced in dollars). Additionally, demand for oil has weakened in the developed markets as vehicles have become more fuel-efficient. However, none of these things are new. You can also blame the fall in oil prices on OPEC and its unwillingness to lower production, but what is now an obvious decline was not obvious six months ago. Oil prices have sunk more than 50 percent in less than five months, and this happened not during a financial crisis but in a...

Putin’s World: Why Russia’s Showdown with the West Will Worsen

in Macro

I grew up hating America. I lived in the Soviet Union and was a child of the cold war. That hate went away in 1989, though, when the Berlin Wall fell and the cold war ended. By the time I left Russia in 1991, the year the Soviet Union collapsed, America was a country that Russians looked up to and wanted to emulate. Twenty-three years later, a new version of cold war is back, though we Americans haven’t realized it yet. But I am getting ahead of myself. After Russia invaded Crimea and staged its referendum, I thought Vladimir Putin’s foreign excursions were over. Taking back Crimea violated plenty of international laws, but let’s be honest. Though major powers like the U.S. and Russia write the international laws, they are not really expected to abide by those laws if they find them not to be in their best interests. Those laws are for everyone else. I am not condoning such behavior, but I can clearly see how Russians could justify taking Crimea back — after all, it used to belong to Russia. I was perplexed by how the Russian people could possibly support and not be outraged by Russia’s invasion of Ukraine. But...

To Infinity and Beyond? Don’t Be Surprised If the U.S. Stock Market Cracks

in Macro

In 1986 Jeremy Grantham — an investment legend and co-founder of Boston-based asset manager GMO — started to warn his firm’s clients about, and even created an investment product to protect them from what he believed would be, the eventual bursting of the Japanese stock bubble. We all know how that story ended: In 1990 the Japanese market crashed, stocks declined more than 70 percent from their peak, and the Japanese economy slipped into a 25-year coma. However, before all these bad things happened, from 1986 to 1990 the Nikkei more than doubled. Grantham was right, but it took four years for the risk that he identified to play out. From today’s perch, four years in the ’80s are just four years in the ’80s, but I am sure that to Grantham they seemed like dog years. In the eyes of his clients and the market, Grantham’s credibility became inversely correlated with the Nikkei. Every time the Nikkei set a new high, Grantham’s reputation set a new low. I used to think that bull markets end when every bear is mugged, skinned and reincarnated into a bull. Now I realize that is only partially true. A lot of bears stop growling because they get exhausted or simply...

Ben Bernanke: Buy One Suit, Get Three Free

in Macro

Linear thinking is dangerous. It is the easiest form of reasoning, lying on the path of least resistance. The simpler the path, the more readily people will march along it. Linear arguments are easy to make, as they require the least amount of evidence — past data points with a straight line drawn through them. However, the larger the crowd that follows the wrong line of reasoning, the more people pile in, and the greater the consequences if they are proved wrong. A lot of things in nature, and thus in investing, are not linear. A past trend may or may not persist into the future. Events don’t happen in a vacuum; they are observed, studied and capitalized on — which in the case of investing may preclude a company’s future from resembling its past. As I write this, I think of successful companies whose achievements attracted competition, which then marginalized them. Some things are inherently nonlinear, their behavior reminiscent of a pendulum’s: The further they swing in one direction, the harder they’ll go in the opposite direction. It is very dangerous to default to linearity with such nonlinear phenomena, as the more confident we become in the swing (the more linearity...

Are We There Yet?

in Macro

I’ve written this article for Institutional Investor Magazine.  I feel very passionate about the topic and thus could not compress all my thoughts into 800 words.  I expanded it and it was published in John Mauldin’s Outside the Box newsletter.  “Expand” is an understatement as it is  four times the original article.  I suggest you skip John’s very kind intro (he is too kind) and go right into “Are We There Yet”?  It is very long.  Kill a small forest, print it ( link to PDF version).   Also, leave me your comments, would love to hear your thoughts. Vitaliy Katsenelson is a modern-day American success story, the kind we need more of. He grew up in Murmansk, in the extreme northwest corner of Russia, north of the Arctic Circle and close to the Finnish border. He says he barely escaped a career in the engine rooms of Russian Navy vessels when his family wrangled a visa to emigrate to the US in 1991. He finished high school here, knocked out a BA in finance at the University of Colorado at Denver, and followed up with an MS in finance and his CFA.  At that point, a local Denver firm, Investment Management Associates, snapped...

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How buying a cow is like investing in stocks
Tevye from Fiddler on the Roof explains

(Chapter 4 from Vitaliy Katsenelson`s 
Little Book of Sideways Markets)

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