May 2016


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Fingers crossed, I can’t stand Clinton.

There is now more than a theoretical chance that Hillary Clinton may not be the Democratic nominee for president.

How could that happen, given that her nomination has been considered a sure thing by virtually everyone in the media and in the party itself? Consider the possibilities.

The inevitability behind Mrs. Clinton’s nomination will be in large measure eviscerated if she loses the June 7 California primary toBernie Sanders. That could well happen.

 
Hoover Institution Research Fellow Bill Whalen on the latest Golden State poll and the implications for next week’s presidential primary. Photo credit: Getty Images.

A recent PPIC poll shows Mrs. Clinton with a 2% lead over Mr. Sanders, and a Fox News survey found the same result. Even a narrow win would give him 250 pledged delegates or more—a significant boost. California is clearly trending to Mr. Sanders, and the experience in recent open primaries has been that the Vermont senator tends to underperform in pre-election surveys and over-perform on primary and caucus days, thanks to the participation of new registrants and young voters.

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Trump previously discussed defaulting on US debt. It of course wouldn’t be the first time, Roosevelt in 1933 in confiscating gold, defaulted.

Nixon in 1971 again defaulted, through, once again gold.

Inflation is of itself a default. Inflation has been a constant issue since the default in 1933 and will continue to be a default.

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I received yesterday the submissions for a case that is being heard XXXXXXXXX. The issue is actually a very simple issue that is detailed within a decision letter.

At its heart, this is an insurance claim. I pay my premiums, if I am injured, I can make a claim to be compensated for that injury. The twist is that the insurer is the government, via a government corporation. The insurance policy is legislation that has over the years, 1972, 1982, 1992, 1998, 2001, been amended. Each amendment makes it easier for the insurer, not to pay out on the policy.

The current legislation makes small claims relatively easy to claim and there are not too many issues. The problem lies in long-term claims, where, the person is pretty much injured for life. The purpose is to support them financially etc. What ends up is either (a) they are denied cover [and walk away] or (b) they are denied cover and a protracted legal struggle ensues.

This person has had legal issues since 1985. This case is just 1 of several cases. This case in-of-itself, is, as I said, a simple issue. However the submissions raise the history from 1985, which, are only tangentially relevant as factual matrix and do not really impact this very specific issue.

The reason that they are not really relevant is that the insurer accepts the claim. The insurer accepts the injury. The insurer accepts that ‘but for’ a technicality, the claim should be paid.

The technicality is a point of law. The law is clear however, the ‘but for’ technicality does not exist at law. Thus, the decision is null. The plaintiff [ought] to succeed.

We’ll see.

 

 

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I remember lining up for petrol as a child with my parents. I think we could only buy petrol on certain days of the week depending on car registration or something, might have been alphabetical based on your licence.

When we first went to the States, petrol was something like $0.30/gallon. Incredibly cheap. Prices sky-rocketed.

Currently, after the ‘peak-oil’ scare, oil is again [seemingly] in plentiful supply. Electric cars have established enough of a toe-hold to eventually replace petrol based cars, although it will take a while yet. Thus one of the safest trades, the oil trade, is now questionable.

Its not going to totally fall apart, but buying oil producers as an investment will become much harder than it has been. Previously you could buy the big national producers and ride out any slumps. Can you still do this?

I’m going to have a look at the various ETF’s in the space just to see what’s on offer and whether there are any compelling valuations that might overcome the decidedly questionable longevity of the trade now.

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Start with the big picture. Milken explained how successful investors first look for big global shifts that will affect many facets of life, and then drill down to find ways to invest in that coming shift. These tectonic moves can be even more lucrative since so few investors take the time or have the ability to see them coming. “The best investors take a look at the world on a macro basis and then try to figure out, looking at the macro basis, for the best ways to deploy,” he says. “We are quite often surprised how little research people do and how divorced they are … from the real world.”

* Know when to be afraid. Managing risk is one of the biggest jobs for investors and executives. But many decision makers allow themselves to mistakenly think risky investments are safe because others say there’s no risk. “Often the greatest risk is when you perceive no risk,” Milken says. Milken pointed to the poor long-term performance of government debt as a good example. Investors typically pay up for so-called “sovereign debt” as they think the securities are safe and government officials say they are. But that assumption has caused costly mistakes by banks in the past and could return.

* Risk is necessary for progress and needs to be taken intentionally and consciously. Investors and CEOs must take risks to succeed. To underscore his point, Milken quoted Facebook (FB) co-founder Mark Zuckerberg, “The only strategy that is guaranteed to fail is not taking risk.” But Milken said rather than taking risk, many investors and CEOs think they can sidestep danger by taking what they think are safe bets. But this is a folly as these executives are actually taking on greater risk as a result, Milken says. “One of the major challenges we have is so many investors perceive they haven’t taken risk, when they’ve taken great risk.”

* Find companies that will be big dividend payers. Facing the needs to generate steady returns on their money, large investors often seek companies that have large dividend yields right now. But Milken cautions it’s often companies that don’t pay big dividends now that might prove to be the biggest dividend payers in later years. “It’s a lot better to buy the dividend stocks of tomorrow rather than the dividend stocks of today,” Milken says. “You’ll get a lot higher rate of return on your money.”

* Know your limits. Milken spent much of his time subtly criticizing the recent trend in investing to buy passive investments such as index funds. Index funds don’t try to find the best opportunities, but instead offer investors a low-cost way to diversify and get exposure to the market return. Milken, though, says macro events can present big opportunities that require expertise to find — or those to avoid. “If you don’t have expertise in a sector or knowledge, invest with some else who does rather than diversify,” he says.

One of the troubles with trying to beat the market, or picking someone who says they can, is that it takes many years of outperformance before one can prove the investor is beating the market due to skill, rather than luck, says Mark Hebner, founder of Index Fund Advisors. For instance, on average it would take 180 years in order to prove that the average fund manager who beat the market did so from skill, rather than just luck.

Milken acknowledges the difficulty professionals have in finding these opportunities again and again. “In reality, very few people achieve those rates of returns … for a long period of time.”

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He pressed upon me the importance of understanding the macro environment. “Many people describe themselves as stock pickers,” he would say, “but you have to consider the economic, social and political context in which the stocks are being picked.” He encouraged me to meet as many people of influence as I could. For him, networking never stopped. He would test his ideas on those he respected, and if he ran into a strong opposing opinion, he would reflect on it seriously and sometimes change his position. While he never lacked conviction about his ideas, he was open-minded and flexible. “Nobody owns the truth,” he would tell me.

As I look back on the titles of my essays about him over the last 15 years, they provide a chronicle of the market’s glory days and pitfalls. In my first essay about him in June 2002, nine months after the attacks on the World Trade Center, he was “upbeat.” He believed that although terrorism was a continuing threat to investors and an incident could destabilize markets for a period of time, the world economy was huge and had plenty of momentum, so he was very positive.

Some of what he said in 2002 rings especially true today. “All the portfolio managers I know in America are complaining about how hard it is to make money. No powerful themes are emerging that they can put big money into. The only way to perform is to trade, but the friction costs are great. Portfolio managers in New York still don’t understand the importance of global interdependence.” So when many investors were still cautious, he said, “I see an opportunity to make some serious money here: I bought gold on leverage, sold the dollar short, put money in European hedge funds and invested heavily in Russia. I am excited and very busy and I expect to make a killing.” And he did.

In 2003 he talked about the opportunities in China “which is on its way to becoming the manufacturer of everything the world wants, but, as it moves up the technology scale, it will seek political influence. The U.S. is abdicating its political and economic leadership position. You Americans think of yourselves as the brains of the world. You cannot provide jobs for your 300 million people as a service organization. Nine-tenths of your population simply cannot find gainful employment cutting the grass, doing the laundry and cleaning the houses of the one-tenth that the world holds in awe.”

In 2004 Edgar was down on Europe and the United States, but bullish on Asia where he saw an expanding middle class. At that time he was beginning to understand the importance of monetary policy in determining the future course of stock and bond prices. He suspected that even though the Fed was likely to be accommodative, inflation was going to stay low, despite the theories of Milton Friedman of the University of Chicago.

In 2005 he was bullish on bonds because of the build-up in liquidity around the world. Few people expected interest rates on U.S. government paper to decline as much as he did. He thought U.S. stocks would do well as a result. He was, however, worried about the debt accumulation taking place at the government, corporate and individual levels. In 2006 he was focused on the migration of economic opportunity from Europe and the United States to Asia, and the prospect of stagflation in the mature developed countries, but he was still bullish on the United States. He sensed a movement to the left in America (he should have lived to see Bernie Sanders), but he didn’t think it would undermine the capitalist spirit of the country. He was positive on India and concerned about the rise of Islam. He was buying gold.

By 2007 he was growing cautious. The title of my essay that year was “The Smartest Man Is Wearing Rain Gear.” The title in 2008 was “Overcoat Time for The Smartest Man.” He was nervous about the debt incurred by marginal borrowers to buy assets that he considered overvalued. As a result, he pulled out of all the hedge funds where he was locked up beyond one year. By 2008 he was recommending cleansing the U.S. economic system through bankruptcies and a devaluation of the dollar to revive manufacturing, but said that America was not ready to go through a period of severe pain. In any case, he expected the standard of living to remain flat in the West and rise in Asia. He was beginning to cool on globalization.

In 2009 he was bullish again because of the sharp sell-off in world markets. He did caution correctly that growth would only be 2%. While he was positive on the U.S. and Europe, he thought there would be stronger growth in Brazil, Russia, India and China. In 2010 he was worried that the debt in the U.K. and the U.S. had reached a point where the problem could only be cured by fiscal discipline or inflation or a combination of the two. He thought warning signals would be higher interest rates and inflation, but so far we had not seen either. He was cautious in 2011 and his only investments were in Swiss francs and gold. He was still talking about the high level of government debt everywhere, the possible decline of the dollar and the uncertain stability of the European Union. He continued to be positive on China and India.

Edgar suggested a title for the 2012 essay: “Dancing Around the Fire of Hell.” I paraphrased it, but his view that year was that the debt problems were still there, even though various governments had figured out a way to postpone their consequences. He complained that too many investors think “incrementally,” without looking at the broad range of problems facing the markets. He was troubled about Greece, but thought its problems were indicative of flawed financial planning everywhere. He anticipated higher interest rates and inflation. He owned a few stocks like Apple and IBM, and had some gold and energy investments.

In 2013 he was bullish on Europe, which was a very contrarian idea at the time. He was impressed with the operating efficiencies that had been put in place by European companies. He had sold his gold and was cool on emerging markets. He was concerned about the Middle East and the confused policy approach of the United States in that region. He was buying Yahoo and Google because of the possibility of open-ended earnings. By 2014 he was totally committed to innovation stocks, believing they represented a new industrial revolution; that theme continued in 2015. He did not expect the markets in Europe and the United States to do much, but he continued to believe technology offered opportunity. He thought governments around the world had proven ineffective at problem solving. His conclusion in 2015 was that there were more risks than opportunities, but you could still make money in technology and biotechnology.

My purpose in reviewing Edgar’s thinking over the past 15 years is to show how he consistently tried to integrate his world view into the investment environment. That was his imperative. He wasn’t always right, but he was always questioning himself and he remained flexible. When he lost money, it tended to cause minimal pain in relation to his overall assets, and when one of his maverick ideas worked, he made what he called “serious money.”

Edgar was a mentor for me. Over the years I’ve learned that mentors fall into two categories. There are those you work with every day who are continuously guiding you to improved performance. The late Barton Biggs, my colleague at Morgan Stanley, falls into that category. He developed the concept of impressionistic strategy, writing his essays in the first person as though he was in a conversation with investors rather than in a totally objective style similar to an academic paper. He was totally devoted to his work and he never wasted time. He would take an hour out of each day to exercise, and he loved sports like tennis, golf and touch football, but when he wasn’t exercising, he was reading and writing, and his output included essays and two books with a third in process when he passed away.

The second type of mentor is one whom you see intermittently. These individuals provide guidance because of who they are and what they do. Edgar fell into that category and I am forever grateful to him for what he taught me. He was fond of breaking rules. Suspicious of diversification as the hiding ground for those without conviction, he believed in concentration: If he liked a country, a sector or an asset class he was willing to put considerable money into it and exclude representation in other areas more popular with institutional investors. He sought high rewards and was willing to tolerate high risk in the process, once buying an office building in Iraq and selling it a short time later after it had doubled. He was not a trader, but he knew that a good investment had three phases: the period when you are waiting for an offbeat, but promising, idea to work; the period when everyone agrees with you and the stock or asset performs well; and the final period when the asset may still be appreciating but it is time to look for something else because the additional gains will be small. It can be dangerous to overstay a position. I still have not learned this lesson. He was particularly skillful at selling his mistakes quickly. Happily, I have learned that lesson.

But he taught me much more. He took great pleasure from knowing smart people and exchanging ideas with them. In the Morgan Stanley days when Steve Roach, our head economist, and I would come to Geneva, he would organize a dinner for us at his home and invite a dozen of the leaders of the Swiss financial community to discuss the important issues of the day with us. The Benchmark lunches that I put together in the Hamptons each summer are an outgrowth of this. He taught me to look at houses and objects of art as permanent possessions, not items to be sold at some point. I should buy them because they would enrich my life and I should not sell them because they had appreciated in value, because then I would be parting unnecessarily with something I loved and there would be emptiness as a result. My heirs could do the selling.

He taught me the value of trust and the joy of friendship and the futility of envy. He was proud of his own success but also an admirer of the success of others who were his friends. He never talked about missed opportunities except when he was criticizing himself. He was his own toughest critic and he encouraged me to be the same. Even if you are an intelligent risk taker, you will make many mistakes. Recognize them early, but never stop taking risks, because that is where the real opportunities are and your life will be more stimulating as a result.

Edgar enjoyed his cigars and his 1982 Bordeaux collection and his circle of influential people. He worked at the bank until the end because that was the way he could enjoy each day as much as possible. My life is better as a result of having known him and I will always be grateful for that. He wrote a book about his life and called me one day to ask me to write the foreword to it, which I did. Afterward he wrote me a thank you note that I quote here.

“I am grateful for what you have written. I do not deserve your nice words as my professional life has been directed to give the best of my capabilities.”

“It was nice that you accepted to write and realize the friendship and feelings you have towards me. I do value your qualities and feel proud of having you as a friend.” He was modest and generous to the end. Every mentor should follow his lead.

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Apple and Samsung supplier Foxconn has reportedly replaced 60,000 factory workers with robots.

One factory has “reduced employee strength from 110,000 to 50,000 thanks to the introduction of robots”, a government official told the South China Morning Post.

Xu Yulian, head of publicity for the Kunshan region, added: “More companies are likely to follow suit.”

China is investing heavily in a robot workforce.

In a statement to the BBC, Foxconn Technology Group confirmed that it was automating “many of the manufacturing tasks associated with our operations” but denied that it meant long-term job losses.

“We are applying robotics engineering and other innovative manufacturing technologies to replace repetitive tasks previously done by employees, and through training, also enable our employees to focus on higher value-added elements in the manufacturing process, such as research and development, process control and quality control.

“We will continue to harness automation and manpower in our manufacturing operations, and we expect to maintain our significant workforce in China.”

Since September 2014, 505 factories across Dongguan, in the Guangdong province, have invested 4.2bn yuan (£430m) in robots, aiming to replace thousands of workers.

Kunshan, Jiangsu province, is a manufacturing hub for the electronics industry.

Economists have issued dire warnings about how automation will affect the job market, with one report, from consultants Deloitte in partnership with Oxford University, suggesting that 35% of jobs were at risk over the next 20 years.

Former McDonald’s chief executive Ed Rensi recently told the US’s Fox Business programme a minimum-wage increase to $15 an hour would make companies consider robot workers.

“It’s cheaper to buy a $35,000 robotic arm than it is to hire an employee who is inefficient, making $15 an hour bagging French fries,” he said.

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