David R. Kotok is the Chairman and Chief Investment Officer of Cumberland Advisors. He cofounded the firm in 1973 and has guided its investment strategy from inception. Mr. Kotok holds a B.S. degree in economics from The Wharton School as well as dual master’s degrees from the University of Pennsylvania.
- We’ve spent two weeks traveling almost 20,000 miles and visiting three cities: Tokyo, Hanoi & Singapore. Meetings included quality time spent with central bankers, investors, pension fund managers, academics, commercial bankers, and others. It has been a whirlwind and well worth the fatigue. We will summarize the observations with some key points.
- Our trip confirms that the Asian emerging-market story is real
, and folks who view it that way are making a mistake. China is the largest player in the region, but the others need respect. This conclusion is true for newly emerging economies and markets like Vietnam (devaluation of currency notwithstanding) and for seasoned and established ones like Singapore. There are many in the region and they need to be examined separately.
and is likely to accelerate. This is not just a China story
- We will be going back to Shanghai and Hong Kong in January for another look at the region and to examine how US policy is playing out there. Or should I say, how US policy is failing miserably to play out there.
Japan (Mark's note: this is very interesting section because I've argued that DEflation is necessary to re-align cost of living in America with the global forces on wage pressure, yet our leadership believes the most regressive tax on a people, INflation, is a not only preferred but necessary... I believe this is dogmatic academic thinking, and simply destroying people in the lower third of the country)
- We are still not ready to take the Japan weight to a bullishly overweighted position. That may come after next summer’s Japanese elections, and if the new government is strong enough and determined enough to change policy. Both the electoral outcome and the willingness to change policy are open questions.
- It is the present policy that keeps the yen very strong and keeps deflationary forces at work in Japan. Government officials know it but are not yet compelled to change. Many there believe that a stable price level or a slightly falling price level is a better choice than an inflation-prone policy. Many reject the Bernanke approach of massive monetization. (an interesting takeaway considering the emergency steps taken not 36 hours ago)
- They heard his lecture many years ago and have taken a different view. (I assume this references the now infamous Ben Bernanke 'helicopter' speech) We shall see what unfolds now that those in Japan have the opportunity to watch Bernanke apply the policy that they rejected. In sum, the final chapters of this book on Japan and deflation and on QE and inflation are not yet written.
Regional Views - Geithner / US Dollar / GSEs
- Now to the regional takeaway from our trip.
- We believe that few trust the United States. This is obvious in private conversation. And it is clear to all that confidence in the dollar is low. This is mostly mentioned only in private. In public there is quiet response when the Treasury Secretary of the United States utters words about a strong dollar. Asians have heard that for years and with the many different accents of the various Treasury Secretaries. Geithner would serve the country better by ceasing to mouth the same words that his predecessor Snow and others used. He is not believed.
- Frankly, in some circles he is actually seen as an incompetent political hack. He is blamed by some for the insufficiency of the New York Fed under his presidency to supervise the primary dealers that failed -- Countrywide, Bear Stearns, and Lehman. And the ethics issues surrounding the NY Fed under his tenure are viewed as appalling; this continues to surface in private conversations. Some folks are puzzled about why Obama maintains his support for Geithner. Some just attribute it to the President’s inexperience as a leader. [Nov 19, 2009: Tim Geithner Under Fire Videos]
- My takeaway is that our present Secretary of the Treasury is seriously and sustainably injuring the image of the United States. He has lost credibility. His actions are real and they impact markets.
- My conversations with those who are attempting to market GSE securities to Asians and getting rebuffed are validation enough for me on this point. When the Fed stops buying GSE mortgage backed securities, this reality will hit the markets in a re-pricing of that asset class. Spreads are going to widen. [if you are unfamiliar with the acronym, GSE is government sponsored entities, i.e. Fannie, Freddie]
Regional Views - Deficits / Reputation / Politics
- The American federal budget deficits are worrisome everywhere. Policy promises from Washington to reduce them are greeted with great skepticism. Often they are privately described as American arrogance.
- Publicly, Asians are very polite and do not often subject their guests to embarrassing criticism. Privately they are quite candid. In my view they are correct: America is arrogant and seems to pretend that it is still the best and most trustworthy financial and capital market in the world. There is no basis for the US to have such a view of itself. We have squandered our reputational capital as a financial center leader.
- This recent financial crisis is quite different from its predecessors. In 1997-1998, the Asian currency crisis and Russian ruble collapse wasn’t viewed as America’s responsibility. We didn’t cause it. We didn’t cause the 1994 Mexican peso crisis either. And while we contributed to the tech-stock bubble, we weren’t the only ones to do so.
- But the last two years of Madoff scandal, federal agency failure, rating agency restatement, bond insurer demise, Fed primary dealer (Lehman) bankruptcy, and mortgage securitization deception (CDOs) are all Made in the USA. We led the world into crisis. We caused it. And we haven’t fixed it. (everyone tells me we are fixing it with all this paper printing ? Stock market surging is a signal everything is ok!)
- To Asian eyes it appears that this American-made tragedy continues to this day. (I too, must have Asian eyes then) Proposals for reforms in America are greeted abroad with skepticism and doubt. The political structure of America is seen as a weakness. (Amen) And confidence abroad is falling, just as it is at home.
- Some will view our conclusions as harsh. Maybe so. But the lists of American-made errors that have cost the world billions are factually correct. Say what you want, but Madoff WAS regulated by the SEC, Fannie IS a federal agency, and AAA used to be a respected rating that that has turned out to mean nothing.
- This is not just a Democrat or Republican critique. Both political parties have failed the country miserably and both are seen as contributing to the mess, from the Asian perspective. Personally I agree. (I've stated as much since day 1 of blog) Our Washington leadership under this president and under the last one has proven to be impoverished. The money influence in politics seems to have overwhelmed any sense of centering ethics. (I'm glad all the world sees this now; crony capitalism now fully exposed)
- We come back from this trip more determined than ever that investors must protect themselves. The starting point for that defense is an old principle: diversification of risk. To do that they must take a global view. And Americans need to be very critical of US policy and distrusting of their politicians. Cumberland’s recommendations include worldwide diversification of security risk and worldwide diversification of currency exposure.
- We are often asked if we are optimistic about the future. For the world as a whole the answer is yes. Most of the world is seeking growth and peaceful economic outcomes that enhance the quality of life. We are less optimistic for the US. Our longer-term trends are working against us. We have squandered our political capital and are neglecting the education of our youth. We practice polices of subsidy and deceit instead of self-determination and transparency. (very sad, but frankly words that could of been ripped from the virtual pages of FMMF through the years... even more sad, there we are still in denial stage as a country; hence no chance to fix a problem when so few admit a problem even exists)
- No, we are not about to abandon our country; we have deep respect for our entrenched American traditions of freedom. But we are directing the harshest of criticism against our politicians of both parties. They are equally accountable and responsible for the mess we have. If only we could limit them – but the citizens are not yet angry enough to do that.
- When we Americans have had enough, the voters will throw many of the bums out and start over. That will be a great day of celebration in America. We expect that others in the world will join the celebration. I hope that day arrives sooner, not later. (unfortunately as each year passes of the current status quo, our future is impaired that much more by the damage being wrought, which is why sooner can't come soon enough ....with all apologies to those in Oklahoma for copyright infringement.)