Hit By A Busload Of Animal Spirits

Standing in the cool winter breeze of Perth, a light feathery rain falls. That was the unreal state I felt, whisked off from 1 June markets into the bizarrely tranquil and unhurried world of Australia. Fresh produce and easy traffic that made me feel strange and transplanted, crisp clean air and blue skies made me uneasy as if I had stepped off the Star Trek teleport machine.

After a Friday of being hit by a runaway  bus market piloted by wild animal spirits in Singapore, Perth was the antithesis to the global meltdown. No screaming headlines on CNBC to hound us constantly of the impending doom in 2012. (Why do we need the movie when we are living the nightmare ?) Peace and quiet as the real black swans (indigenous to Perth) swim leisurely in Swan River.

Singapore : Interest rates crashing 13 to 23 bp in a day, fixings collapsing, government bonds becoming the new pariah and traders turning into jelly brained bundles of nerves. I was tested to my limit and more, zombie-fied still as I write now. What an adventure !

There is nothing safe left. Bernanke this, Lagarde that, Roubini again. Genocide in Syria and Tibet. Spain in the headlines. Same old repertoire.

Lets round assets up for a short term perspective.

1. Forex – USD strength still prevailing, debt ceiling and QE3 aside. USDJPY still my friend.

All the rest looking precariously crappy. USD/Asian. EUR/USD to hit 1.28 just for shock effect, which is not too hard to imagine 2 months ago at 1.33 ?

2. Commodities looking precarious but not for long at the rate China is consuming food.

Oil is integral to the food cycle. Or is it? Yes. With Oil, we have Corn*; with Corn, we have Meat**; and middle class China is consuming MEAT !

More than a quarter of meat produced worldwide is now eaten in China. In 1978, China’s annual consumption of meat was 7.25 million tonnes. It is now 64.5 million tonnes and more than twice that of the US.

Hopefully their sewage stays onshore but methane is a gas, so tough luck folks.

* Corn receives more synthetic fertilizer than any other crop, and that fertilizer is made from fossil fuels — mostly natural gas. Corn also receives more pesticide than any other crop, and most of that pesticide is made from petroleum. (http://pollan.blogs.nytimes.com/2006/05/24/the-great-yellow-hope/)

** 70-90% of the cow’s diet is composed of corn.(http://www.pbs.org/independentlens/kingcorn/cows.html)

Corn, soya beans, pork bellies … the Chinese are eating up everything. I am not worried about agriculture from the demand side, I am worried about the weather and hedge fund exposure. And given 2 unknowns, I am neutral.

Gold. So much to say about Gold.

What is Gold ? A currency more than anything. An inflation hedge. A safe haven asset. A precious metal. But more recently, a RISK ON play vs the USD.

Sounds like a Contradiction. Safe Haven vs RISK ON ?

My bet is there. A Safe Haven asset IS NOT a RISK ON one. There is not enough Gold to go around the world but the money supply is growing like anything. Emerging middle classes will still tend towards the investment of generations. No fancy derivatives, thank you.

I can imagine the rural Chinese all flocking to Gold once their confidence in real estate wanes and I will not question their wisdom, all gleaned from unquestionable history.

I am still long.

3. Equities

Do you think you know what you are buying ? Especially banks ?  I lost the equity plot sometime when AAPL hit 600 and the Facebook hype. Bread and butter valuations are a thing of the past and the black box valuation machine of today increasingly holds me hostage to the equity analysts who are attaining demigod statuses.

Can’t do single stocks anyway, without approval, so not looking too hard.

4. Bonds

More debt ? And record low yields for some, record highs for others. But when Philipines and Indonesia is safer than most of Europe, with their Abu Sayafs and JI networks, not to mention their real Gini coefficients, I start to shudder. ( data shows Singapore at 47.8, highest in SE Asia and only second to Hong Kong in Asia – now how did that come to be ? ).

I have a radical view of global rate convergence, inflation is now a thing of the past. Only thing that drives US and AAA interest rates is  RISK ON or RISK OFF and the only thing that drives interest rates in the rest of the world is RISK.

Corporate credits trading tighter than sovereigns. Corporates penalized by the countries they are domiciled in. Nothing makes much sense while Chinese real asset HY issues are looking like a tipping point.

Given the inter-border exposures and the inter-corporate exposures with banks, and banks getting by on government guarantees, should we have much faith in anything these days ?

5. Real estate

Just read that Ireland needs 43 years to clear their stock of unoccupied homes. Is it time to send in the marauding Chinese horde ?

FT : Is Chinese real estate nearing a tipping point ? Yet WSJ : Wages in Chinese Cities Rise by Double Digits. Safe for now.

I have not come across many optimistic reports on real estate lately. Foreign buyers are always welcomed yet we always feel a little cheated when they invade.

If anything, I still feel that real estate prices will be tempered and returns on the decline as AAPL and Facebook gives life to the virtual world.

Anyway I am not the real estate expert. Bought share in Charlotte land bank 2 months back. But have to admit that real estate is the easiest way to leverage money supply these days yet I will not have the exposure to the underlying risk. Why can’t banks lend money for us to buy Gold instead ? (just found out that they do !)


After 10 days, nothing seems to have changed much to avert the current course set for a major correction and slowdown. (Best read of the week :

The ‘Big Reset’ Is Coming: Here Is What To Do

Animal spirits are lurking and the runaway train approaches.