I took a day off to attend the New York Times Global Forum at San Francisco?s Sony Metreon Center. Their goal was to put together 400 of the most forward thinking and influential minds in the Bay Area, stand back, and see what happened.
It was organized by my old friend, fellow traveler, and veteran journalist, Tom Friedman. Tom and I date back to the old days in Beirut, during their vicious civil war in the early eighties, when working as a journalist meant not knowing if you would wake up the next morning.
Tom worked for the old United Press International, and I for the still prospering Economist. Our mutual friend, the Associated Press?s Terry Anderson, was kidnapped out of his apartment and held hostage by Shiite Hezbollah militants for five years, an ordeal he described in chilling detail in his book, Den of Lions.
You know Tom as the controversial and kibitzing resident of the Times Op-Ed page. He popularized the concepts of globalization and a flat world in a series of groundbreaking, best selling books, including The Lexus and the Olive Tree, Hot, Flat, and Crowded, and That Used To Be Us.
I managed to speak to dozens of guests and gained a fascinating read from many different viewpoints of our long-term future. I shall try to distill what I learned in a few lines without any particular attribution. I am always shopping for a new framework with which to view our rapidly evolving planet, and I was not disappointed.
The merger of globalization and information technology has been the most important development this century. The new hyper connectivity is changing the world at a breakneck speed that few understand.
In the days of old, you needed an entire country to impact the global economy. Then, only a corporation was required, starting with the Dutch East India Company. Now, all it takes is a laptop computer or smart phone with a broadband connection.
Several disparate trends came together during the nineties to enable this revolution. The PC made possible the authoring of content in digital form. The Internet distributed it globally for free. Work flow software allowed the residents of this a potential Tower of Babel to seamlessly talk to other. Google gave us unlimited free search, permitting us to all find each other.
A dozen years ago, 4G was a parking space, Skype was a typo, the cloud was in the sky, Twitter was a sound, Facebook didn?t exist, and big data was a rap group. Today, the collapse of storage costs has ushered in big data and super empowered innovators. High speed Internet is even available at the summit of Mount Everest. If the entire world were a math class, the grading curve has just risen for everyone. ?Average? is officially dead.
When Tom?s predecessor, James Reston, went to the office 30 years ago, he wondered what his seven competitors at the major national newspapers would write that day. Now Tom wonders what his 70 million competitors will write. He is writing for the readers in Chengdu as much as he is writing for the ones in Chicago.
Employment prospects for kids these days are particularly challenging. They have to be innovation ready and not job ready. In fact, the whole concept of a ?job? is rapidly dying out. People have to think like newly landed immigrants: unconnected, hungry, and paranoid, but still optimists.
We need to always be in ?beta? mode, endlessly improving your value added to the global economy. The moment you think you?re finished, you are really finished. A lot of people will tell you how to invest your 401k, but no one will tell you how to invest in yourself. The Diary of a Mad Hedge Fund Trader is one of the few resources that does this, teaching readers how to prosper in the financial markets independent of the establishment.
The US will not cut or spend its way out of the current economic malaise. It will invent its way out. An accelerating rate of innovation will eventually soak up our current excess workers. America is now the place where everyone around the world comes to launch their moonshot. That is great for business, and explains the tidal wave of new capital pouring into this country. In the meantime, we need to bolster our safety nets, like Medicare and Social Security, as they will be in much greater demand in this independent world.
I will write more about the conference in coming days, with carve outs on specific topics. The outlook for technology is truly unbelievable.
Two Old Warhorses
Global Market Comments
June 21, 2013
Fiat Lux
Featured Trade:
(UPDATED 2013 STRATEGY LUNCHEON SCHEDULE),
(THE PROBLEM WITH GM), (GM)
(WHY I LOVE/HATE THE OIL COMPANIES), (XOM), (USO),
(THE WORST TRADE IN HISTORY), (AAPL)
General Motors Company (GM)
Exxon Mobil Corporation (XOM)
United States Oil (USO)
Apple Inc. (AAPL)
Come join me for lunch for the Mad Hedge Fund Trader?s Global Strategy Updates, which I will be conducting throughout Europe during the summer of 2013. A three-course lunch will be followed by a PowerPoint presentation and an extended question and answer period.
I?ll be giving you my up to date view on stocks, bonds, currencies commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store at http://madhedgefundradio.com/ and click on ?LUNCHEONS?.
New York City - July 2
London, England - July 8
Amsterdam, Netherlands - July 12
Berlin, Germany - July 16
Frankfurt, Germany - July 19
Portofino, Italy - July 25
Mykonos, Greece - August 1
Zermatt, Switzerland - August 9
Like a heroin addict who just can?t wean himself off of the good stuff, General Motors is going back into subprime lending to finance new auto sales. Although the much-diminished company has made great strides at reforming its errant ways, they still do not understand their fundamental problem.
My dad was a lifetime GM customer, religiously buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize all the way home to California.
Thirty years ago, I told him he was doing GM no favors buying their cars, and the only way to force them to improve a tragically deteriorating product was to buy better-made German and Japanese vehicles. This was right after the State of California forced automakers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, ?I didn?t fight the Japanese for four years so I could buy their cars? (He was a Marine at Guadalcanal).
GM?s problem is that my Dad passed away 11 years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are less than million left. The majority of those don?t drive anymore.
All of them loved Detroit because it built great Jeeps, Sherman tanks, and halftracks that brought them home from harm?s way. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese and Indian vehicles. It is no coincidence that GM?s problems really accelerated with the passing of the ?Greatest Generation.?
During the last 35 years, when Japan?s share of the US car market climbed from 1% to 40%, I begged GM to mend their ways and build a quality, price competitive product that Americans wanted to buy. They answer was always the same: ?Nobody can tell GM how to build cars.? A more inbred culture you could not imagine. Whenever you see management constantly agreeing with each other on everything, run a mile. Maybe someone should have told them.
Today, the company?s only real hope is that young, upwardly mobile Chinese continue to buy their low end cars in large numbers. Over the last decade, GM has boosted the number of dealerships in the capital city from seven to 27, while closing hundreds of rural dealerships in the US. The problem is that the next time you need a tune up for you Caddy, you may have to drive to Beijing to get it, and the owners manual will be in Mandarin.
The first thing I do when I get up every morning is to curse the oil companies as the blood sucking scourges of modern civilization. I then fall down on my knees and thank God that we have oil companies.
This is why petroleum engineers are getting $100,000 straight out of college, while English and political science major are going straight on to food stamps.
I recommend (XOM) and other oil majors as part of any long-term portfolio. In my lifetime, the price of oil has gone up from $3 a barrel up to $149. The reasons for the ascent keep growing, from the entry of China into the global trading system, to the rapid growth of the middle class in emerging nations. They?re just not making the stuff anymore, and we can?t wait around for more dinosaurs to get squashed.
Oil companies aren?t in the oil speculation business. As soon as a new supply comes on stream, they hedge off their risk through the futures markets or through long-term supply contracts. You can find the prices they hedge at in the back of any annual report.
When oil made its big run a few years ago, I discovered to my amazement that that (XOM) had already sold most of their supplies in the $20 range. However, oil companies do make huge killings on what is already in the pipeline.
Working in the oil patch a decade ago pioneering the ?fracking? process for natural gas, I got to know many people in the industry. I found them to be insular, God fearing people not afraid of hard work. Perhaps this is because the black gold they are pursuing can blow up and kill them at any time. They are also great with numbers, which is why the oil majors are the best-managed companies in the world.
They are also huge gamblers. I swallow hard when I see the way these guys through around billions in capital, keeping in mind past disasters, like Dome Petroleum, the Alaskan oil spill, Piper Alpha, and more recently, the ill-fated Macondo well in the Gulf of Mexico. But one failure does not slow them down an iota. The ?wildcatting? origins made this a faith-based industry from day one, when praying was the principal determinant of where wells were sunk.
Unfortunately, the oil companies are too good at their job of supplying us with a steady and reliable source of energy. They have one of the oldest and most powerful lobbies in Washington, and as a result, the tax code is riddled with favorite treatment of the oil industry. While Social Security and Medicare are on the chopping block, the industry basks in the glow of $53 billion a year in tax subsidies.
When I first got into the oil business and sat down with a Houston CPA, the tax breaks were so legion that I couldn?t understand why anyone was not in the oil racket. Every wonder why we have had three presidents from Texas over the last 50 years, and are possibly looking at a fourth (Jeb Bush)?
Three words explain it all: the oil depletion allowance, whereby investors can write off the entire cost of a new well in the first year, while the income is spread over the life of the well. This also explains why deep-water exploration in the Gulf is far less regulated than California hairdressers.
No surprise then that that the industry has emerged in the cross hairs of the debt ceiling negotiations, under the ?loopholes? category. Not only do the country?s most profitable companies pay almost nothing in taxes, they are one of the largest users of private jets.
It is an old Washington nostrum that when things start heading south on the domestic front, you beat up the oil companies. It?s the industry that everyone loves to hate. Cut off the gasoline supply to an environmentalist, and he will be the one who screams the loudest. This has generated recurring cycles of accusatory congressional investigations, windfall profits taxes, and punitive regulations, the most recent flavor we are now seeing.
But imagine what the world would look like if Exxon and its cohorts were German, Saudi, or heaven forbid, Chinese. I bet we wouldn?t have as much oil as we do today, and it wouldn?t be as cheap. Hate them if you will, but at least these are our oil companies. Try jamming a lump of coal into the gas tank of your Prius and tell me what happens.
Love Them, Hate Them or Both?
Say you owned 10% of Apple (AAPL) and you sold it for $800 in 1976. What would that stake be worth today?
Try $22 billion. That is the harsh reality that Ron Wayne, 76, faces every morning when he wakes up, one of the three original founders of the consumer electronics giant. Ron first met Steve Jobs when he was a spritely 21-year-old marketing guy at Atari, the inventor of the hugely successful ?Pong? video arcade game.
Ron dumped his shares when he became convinced that Steve Jobs? reckless spending was going to drive the nascent start up into the ground, and he wanted to protect his assets in a future bankruptcy. Co-founders Jobs and Steve Wozniak each kept their original 45% ownership. Today Job?s window?s 0.5% ownership is worth $1.5 billion, while the Woz?s share remains undisclosed. Ron designed the company?s original logo and wrote the manual for the Apple 1 computer, which boasted all of 8,000 bytes of RAM (which is 0.008 megabytes to you non-techies).
Today, Ron is living off of a meager monthly Social Security check in remote Pahrump, Nevada, about as far out in the middle of nowhere you can get, where he can occasionally be seen playing the penny slots.
Global Market Comments
June 20, 2013
Fiat Lux
Featured Trade:
(JULY 25 PORTOFINO, ITALY STRATEGY LUNCHEON),
(MORE OF THE SAME FROM UNCLE BEN),
(SPY), (FXY), (YCS), (GLD), (TLT), (TBT),
(THE NEW COLD WAR)
SPDR S&P 500 (SPY)
CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
SPDR Gold Shares (GLD)
iShares Barclays 20+ Year Treas Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
You may have noticed that our website has been down for the past day. We are undertaking a major upgrade to our infrastructure, and I thought completing this while you are all on vacation would be timely.
This means that our store is down as well, so you may need to wait until the weekend to renew your subscription, or buy tickets to my upcoming strategy luncheons. Just to be safe, we are delaying the launch of the Mad Day Trader by a week to July 1.
Thank you for your patience
John Thomas
The Mad Hedge Fund Trader
Come join John Thomas for lunch at the Mad Hedge Fund Trader's Global Strategy Update, which I will be conducting near Portofino, Italy on the Italian Riviera, on Thursday, July 25, 2013. A three-course lunch will be followed by a PowerPoint presentation and an extended question and answer period.
I'll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I'll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $205.
The lunch will be held at major hotel on the beach in the village of Santa Margherita Ligure, the details of which will be emailed with your purchase confirmation. The town is easily accessible by train from Genoa, and the hotel is about a ten-minute walk from the train station.
Bring your broad brimmed hat, sunglasses, and suntan lotion. You will need them. The dress is casual. Accompanying spouses will be free to use the beach below and bill drinks to the luncheon. Together we will plot the future of western civilization.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.
Ben Bernanke delivered exactly what I expected today, continuing his massively simulative monetary policy as is. The taper went missing in action, and search parties have been already sent out by the bears.
In the past this move would have triggered a massive move up in risk assets, and a collapse of the bond market, but not this time. Bernanke's news is not exactly new, and leaving things unchanged doesn't exactly prompt frenetic bouts of volatility. We are also in the summer doldrums, with much of the market liquidity now competing in company golf tournaments, gorging at clambakes, or topping up tans at the beach.
What this sets up is a rather dreary season of trading inside narrow ranges. The S&P 500 (SPY) will bounce along like a ping pong ball between 1,580 and $1,680, the ten year Treasury bond (TLT), (TBT) within 1.90%-2.40%, the yen (FXY), (YCS) inside ?98-?104, and gold (GLD) trapped inside $1,250-$1,480.
You can trade outside of these ranges with alternating call and put spreads and take in some modest returns. Or you can conclude that the risk/reward is mediocre at best, and join you friends on vacation. You don't fool me. When I send out my newsletter these days, those "Out of Office" messages are breaking out like sunburns at Coney Island, Navy Pier, and the Santa Cruz Boardwalk.
I think the markets are reserving their real fireworks for us in the coming fall. If the Federal Reserve's economic forecast is correct, we are headed towards a 2015 GDP growth rate of 2.9%-3.6%, an unemployment rate of 5.2%, and an inflation rate on only 1.6%-2.0%. That is a best case, "golden age" type scenario for the financial markets which leaves the Great Recession well in the dust of the rear view mirror.
The "Big Tell" here is the Fed's inflationary expectations rate. They are close to nil. The august government agency thinks that even a return to the long term average US economic growth rate above 3% won't ignite a wildfire of price hikes. That greenlights a continued pedal to the metal on monetary stimulus, and highlights the unemployment rate as the top priority.
These predictions would give us the launching pad for risk assets to commence a nice yearend rally. That would take the S&P 500 to $1,750, bond yield to $2.50%, the yen to ?110, and gold down to $1,100, much to the chagrin of gold bugs everywhere.
What was the biggest move today? My short position in the Japanese yen, which plunged a full 2% as Bernanke spoke. Sometimes fairy tales come true after all.
