What would an alien say

Some years ago, I wrote that if an alien were to visit Earth - and that sets the stage for how we should see things - they would say that English was invented in the US.

And now it occurred to me that if they were told that there was a global financial crisis in 2008-9, they would say - - ah, it started in Europe and Japan. No wonder they are doing so poorly.
That's quite something - somehow the originator of the crisis is faring rather well right now, and geniuses, and capital following them are still flocking to the US.

What would they say about India?
- may be, why are people leading such sorry lives, especially in very some sorry state of being.

An alien was at Sanjay Bakshi's seminar a few days ago, and she told me that - this is a very large number of people who seemingly dont want to find the next best investment idea... but want to learn about psychology and human fallacies. Pissed off biases and such.

Seeing the forest

As I try to make sense of why my portfolio has done so well, I realise that my concentrated portfolio has done well because of luck, and a very strong tide.

It's easy to say that my chosen X company has done well, performed well, and is building a foundation for future growth; but when I see the forest, I notice (almost all of a sudden and rather scarily) that too many companies have grown manifold.

It reminds me of the 2010-2012 time frame when people looked back at the 2004-2008 boom and said that you could throw darts to choose your companies and you would have doubled and tripled your money in quite a few names.
Pharma, housing finance, finance, textiles, chemicals, consumer products (but not FMCG), some auto, agrochemicals - a ridiculously large number of companies have been priced very strongly - and at times those prices seem to reflect true value, and in other cases they have gone way beyond their optimistic values.


And yet, infrastructure, telecom, hospitality, some auto, public sector banks, have performed rather poorly - - here, the prices seem to reflect the capital destroying capabilities of these companies.



The question is: Will today be a day when I will look back and say - man, this was never sustainable, and I was being too rosy about my own companies and it was all luck
Or
yeah, sure, there was a big correction but quite a few companies became stronger through the ensuing period even though I was lucky to have made returns up until this period.


The tide is bound to go out.
I have to focus on keeping my focus on the facts.

We are only human

How much will our world change?
Will Brexit mean that the UK actually wins against a disintegrating european Union? Already, German current account surpluses are ridiculously high, and the euro only keeps aiding it; history shows that when the tide turns, the impact of one strong parameter can really unsettle an economy.

The number of stories about China's shadow banking and shadow investing - - investing using apps, debtors not being able to pay money to P2P lenders, who then cant pay the gullible small guy who gave money away using an app chasing a yield 3x that what a bank offers;
Chinese companies using devious ways of routing money using LCs and collateral to invest in foreign assets that dont make any strategic sense - - why would the largest jewellery company want to buy an Australian utility?

Why would Tencent buy a stake in Tesla after Tesla buys out the sister solar company, and trades at an absurb valuation?

Meanwhile, in India, there is a sense of complacency creeping in... 'this company will grow because it has the most superior distribution model, and the CEO is fantastic... yes, it deserves a 35x PE multiple because it is a good quality company'
'this guy is a star investor, and as head of a diversified conglomerate he has made some very shrewd moves... the company is going to be one of the biggest in India.'

Odd global investors have started putting money directly into Indian companies/ projects
And quite a few companies are raising foreign debt at super low rates, low covenants, and extended maturities...


And on the technology front - - driverless, VR, crazy amounts of data, an increasing reliance on consuming data, an extremely interconnected and public life, new materials, 3d printing, drones, new terrorism tactics, new ways of routing money and raising money... all these things vs just 12-15 years ago of a very nascent internet, and no google just shows that the world is going to be starkly different by 2030.
And hopefully, the humans and the planet is safe then - that will make for interesting times.


On a personal front, returns have been too high, and I will be punished.
March 2017 - - just a little less than three in 60 or so... luck has to run out.

How do you feel?

It seems to me that its not the world thats so bad.... sorry...
It seems to me that people are beginning to believe the India story, and that housing finance will be availed by multitudes soon
And that farm incomes will rise, and govt will spend and enable infrastructure investments.

It seems that nobody is worried about an acquisition going wrong
Or the Eurozone breaking up
Or China's consumption sharply dropping, or them devaluing the currency aggressively
Or the effects of bad climate

It seems to me that I have been wrong for more than 6 years now - perpetually worried that something bad is around the corner.

But history has proven that these are fertile grounds for new villains, accounting scheming, and promoters enriching themselves.

That said, I do what Howard Marks says, staying cognizant of potentially bad stuff but moving ahead with caution.

Coming to valuations, future upside is getting based on business performance, and highly dependent on something not going bad... But things have a way of going bad.


I predict that some of the foreign borrowings, and M&A activities will soon haunt companies, not to mention the unsustainability of very rich valuations...

I keep telling myself what my friend AR says: All money made from the stock market is often just a short term loan from Mr. Market.

The pendulum is towards optimism for India, but very far from euphoria.

We wait

Climate change is happening, and yet we wait... lack of political will to suffer I believe.

Similarly, what do we know?

1. That central banks the world over are beginning to nationalize. I think it is simply that - - it's a matter of one pocket instead of the other. Rather, the developed world is nationalizing its assets - - debt, and in Japan's case - equity of companies.

Truth?
I dont think its more complex than that - - I have reached this opinion based on the last 5 odd years of reading and thinking.

2. There is a crazy bubble in China. People are incentivized to invest either in trusts, WMPs or real estate. How do they have the money to invest in real estate? (Oddly this is one topic I dont read much of... who is financing the home buyers?)

Do housing bubble always pop? or do they at times, gradually deflate?
Gradual deflation of bubbles dont create juicy stories or mania - - I believe they tend to be under-reported. A gradual deflation could easily happen, where people begin to realise that other assets make more sense.

That said Chinese equities also seem quite expensive - - not on the main indices, since they tend to be SOEs; but rather the more privately owned companies.

This is unlike companies in Korea or Japan - which are still relatively cheap.


Another odd facet of China is that - there are some spirits in the economy at work. Chinese goods can be very good quality, services too - and consumption does not seem to be trivial.

Truth?
All in all - we know that there is overinvestment, overcapacities, state-support, financial repression juxtaposed against good brain power, ingenuity, and the willingness to take risks and invest internationally - and in turn get good talent.


3. There is immense friction in the EU. Countries are getting sick of each other (either because of politics, immigration, jobs or economics), and yet seem joined. But one day an Einstein will come by with a beginner's mind and say - the emperor has no clothes; that leaving the EU and the euro aint too bad; after all, things were fine before the euro came into being.

Truth?
A member will leave, and the domino will start. And finally - a country will be able to re-orient itself to its actual competitiveness... Companies will suffer, and companies will become stronger



The hilarious thing will be - in 2019 or 2020; people realising that there was no great deflation, there was no great inflation, and the world just kept muddling along.
We are the all singing all dancing crap of the world

What do we know, what have we learnt

This is from the movie Go, Goa, Gone - where 3 idiots are being chased by zombies.
Applies quite well to the investing world.

I asked this to a friend today...
Any intelligent thoughts on how bad things can get wrt global central bank action and bond markets, and cost of funds?

I ask because it seems similar to 2006-7 where people began knowing there is some kind of a bubble, and that housing prices are not sustainable.
Of course, it took another animal to eventually cause a large scale problem.

Similarly, today, people know about the China overcapacity, real estate bubble, capital flight and bad loan books - and also know that global bond yields are in uncharted territory and central bank balance sheets are becoming absurd.
And yet, people are behaving as though trouble is still far away. especially since there is no real euphoria
..
____

And my answer to my own question made me look back at 2007.

People knew about the bubble, and even if they knew about CDSs and the network of assets and liabilities and the illiquidity of the market, etc. - - even then, the best of the best would have said :

AIG, Bear, Lehman, GS are gonna go down - unless they react quickly enough when the losses or illiquidity strikes. But I dont think things are gonna be too bad - -
It will be a bad recession, and just like always the Fed will stimulate the economy and after sometime, we should start becoming fine.

What happened was that many more companies faltered badly - either because they were directly exposed to these assets (or liabilities) or because their network of companies or customers were overly dependent on good house price, or good paper prices or more importantly, access to the credit markets.


Today, I say that this global bond bubble and central bank nuttiness where every economy is trying to stimulate the economy, EU is trying to hold on, China is trying to contain the mess... one, some or all of these things will lead to the next panic.
The next panic is a certainty, the when is not and the extent of it is not.

But, in 2008, a lot of countries were relatively fine even though global growth deteriorated.
Similarly in 2016 or 2020 - a lot of companies and countries will be fine, and might in fact be antifragile and become better.

The key is to understand - that if commodity prices go way down, or global credit markets freeze, or currency volatilities shoot up a lot, then, an exporters of shovels to a global industry will suffer - - but as long as he is better than competition, he will come out stronger.

A provider or desirable goods or services will suddenly find that people are not spending - but if the product is good and becomes better, the consumer will come back.


____


The worrying aspect is that all this is predicated on no major global degrowth.
The third curve - a book by a movie director - opened my eyes to the fact that humans have begun taking growth for granted when in fact a significant erosion in confidence can easily destroy the human ability to spend.

I am back where I started.
Scared, cognizant but the music is playing - hence I dance.

Statue!

The old childhood game.
I feel like a lot is crumbling about us, and all we can see is pro-India stories.
The invisible Gorilla :)

If China is indeed hiding its true capital outlfows, what does it mean for the world?
WB has often said that macro does not matter - and yet he has shown that he stays cognizant of it.
Move forward but with caution is what Howard Marks has been saying.

If China is indeed unable to control its currency, and there is a capital flight (which is actually happening even today), its usually disaster for an economy that does not have a globally tradeable currency. It has happened in Russia, Argentina, The Asian crisis, India, etc.
You start running out of reserves, means you start running out of reserves until there is a crisis - like how Soros thinks about these things. Reflexivity and effects of effects.

What if someday soon, the world realises that China's actual growth is 3% or that its capital stock has been devalued via weakening currency/ recapping the banks (aka the system) - oddly enough, nothing changes except forecasts and expectations.

Does that mean that tons of capital flows to the US? And may be Japan (which Japan hates oh so deeply)?

How does any of this affect my companies?

Volatility and uncertainty always take a toll. When the global investment and consumption machine stalls (recession) it causes effects.
That said, The world has gone through nutty times, and every few months, for the last 100 years and more there is always something around the corner.
And there are always corrections, and at times longer recessions; but as long as we like chocolate, and cars, and entertainment and pizzas, and air conditioning, the world goes on.

All this said, I wonder if a domestic economy is capable of weathering a global storm much better simply due to its own demand for stuff.

We live in fun times, and here I am - very sure that a correction is around the corner - Nifty 8350 - and yet, I stay invested because my companies are good, still cheap and seemingly resilient.

Forward, the Light Brigade!