S A Pessimist Warns While Stocks Go Up

Russell Jones writes (for Llewellyn Consulting LLP) about his pessimistic outlook for future macroeconomic policy:

"The misuse of fiscal policy over the much of the post-war era is little short of a tragedy. Time and again governments were happy to embrace fiscal expansion in even the mildest downturns, but then found excuses not to unwind stimulus in the subsequent upswing.

"Furthermore, the effects on government deficits and outstanding liabilities of this habitual policy asymmetry were regularly compounded by optimistic forecasts, politically motivated tax cuts, the supply-side effects of which were often overstated, and a failure to make allowances for the temporarily benign influence of demographic factors on public finances or the [need for facing] a major future financial shock.

"The result was historically high public sector debt then further inflated by the fiscal imperatives of the Global Financial Crisis. However, once the worst of the crisis was past, with more malign demographic[s] felt on public sector balance sheets, the overwhelming focus of fiscal policy became debt sustainability, if not a desperate scramble for solvency. The scope to use fiscal policy actively to respond to new demand shocks was widely perceived to have been exhausted.

"Yet the results of 5 years of onerous budgetary adjustment have been disappointing to those who viewed it as unavoidable. Initial hopes of ‘expansionary fiscal contractions’ rapidly evaporated. Instead it became clear that fiscal multipliers are greatly magnified when economies are all following the same consolidative policy prescription. The headwinds to growth proved formidable, jobless rates [failed] to fall, and real incomes suffered a prolonged squeeze. But the real indictment of this strategy is that budget deficits remain large and public sector debt burdens have continued to climb to new heights, while tax burdens have risen to levels that impinge on incentives, infrastructure spending has been neglected, and elements of society least able to fend for themselves [have been] put under extreme duress.

"Austerity fatigue is building. Political landscapes have become more fragmented, mercurial, polarised. Nationalism and populism are on the rise. Fiscal slippage is likely to escalate, deficit and debt targets will be overshot, and governments will increasingly to move the policy goalposts. There is also the strong possibility in Europe that further large sums will need to be spent in fixing a still dysfunctional financial system.

"With fiscal policy severely compromised or widely perceived to be so, monetary policy has had to shoulder the overwhelming burden of macroeconomic stabilisation. With output dropping far below trend and [slow] to recover, financial sectors in trouble, and inflation uncomfortably low, central banks have pushed nominal policy rates down to the zero bound and pursue other unorthodox strategies: asset purchases and variations on forward interest rate guidance. The Fed may have begun to scale back its bond buying, but both the Bank of Japan and the ECB are preparing the way for yet more unconventional initiatives. There is more unorthodoxy to come.

"With animal spirits depressed and banks still in trouble, the effects of unorthodoxy have not matched expectations. There is only so much demand for goods and services that can be brought forward from the future. Recovery has been shallow, patchy, and subject to serious set-backs.

"Inequalities between the asset-rich 'haves' and the asset-poor 'have-nots' are increasingly in evidence, while the willingness of central banks to purchase large proportions of government debt issuance is creating malign incentives for politicians and running against the priority attached to budgetary consolidation. The effects on asset market dynamics and business and consumer confidence of the unwinding of these exceptional policies remain unclear. Monetary policy policy has been asked to do too much. It has become over-burdened.

"Policy-makers will have to become more innovative, more willing to 'think outside the box', more accepting of unorthodoxies into conventional wisdom." (Published with permission from www.llewellyn-consulting.com of London, UK.)

Next Monday there will be only a brief blog as I am traveling to the Boston area for family Passover Seder celebrations. There will be no blog on Tuesday or Wednesday, both Jewish holidays. There will be a catch-up blog on Good Friday despite US markets being closed. The following week will also be shortened by the Jewish holidays April 21 (also Easter Monday in much of the world) and April 22 (which is also Earth Day.) More from Japan, China, Russia, The Netherlands, Israel, Denmark, South Korea, Italy, Guinea, Brazil, Poland, and Dubai. We have from Chris Loew a stock switch in Japan following up on his note published yesterday, but of course this is only for paid subscribers.

*Chris Loew writes:
We should be looking at Japanese multinationals less exposed to Japanese consumption taxes. Take ~20% profits on BP Castrol (JP:5015) and buy Kubota, (KUBTY), a maker of small tractors used in rice-paddies. Nearly 54% of their sales are outside Japan along with a substantial part of their production. They will be making tractors in addition to harvesters in China. In Thailand they will add hydraulics to their diesel engine factory, aiming at integrated production. Even the US is targeted with a tractor assembly plant being built. Currently most US sales are to equipment renters.

In Norway, Kubota bought Kverneland AS which makes tractor implements, to add larger machines and ones to farm dry land rather than paddies.

The numbers are reasonable with a p/e ratio fo 13.8, a 2.13% yield, and debt to equity at 58%.

I'll add: This is a US traded ADR which is also appealing given the overnight obscurity of buying in Japan, and the high commissions. Pay about $65/sh.

*To continue to prove security updates for the 70% of Chinese computers using Windows XP, Microsoft, which yesterday provided its last security update for the widely used operating system, is partnering with Lenovo, a computer-maker, and Tencent Holdings to continue with the updates. TCTZF told Reuters it will provide permanent XP support free of charge and has set up 2 24-hour hotlines. Other Chinese software shops like Qihoo 360 will help users transition to windows 7 or 8--for a fee of over $48. I'm for the Tencent way and wonder if they will offer it to USA users of Windows XP too.

*Yandex Group is making nice to Vladimir Putin without creating a Moscow listing. It will create a Faculty of Computer Science at Moscow's Higher School of Economics to teach Applied Math-Informatics and Software Engineering to teach more Russian math whizzes how to become Internet techies or academics. YNDX will also add courses in Big Data and Information Retrieval going forward. The new faculty will be headed by Ivan Arzhantsev who had headed Yandex's in-house academic programs.

Putin wants Russian companies to end their foreign listings and move their share trading to Moscow to prevent boycotts over Ukraine. YNDX is sensibly listed in The Netherlands. As I warned I would, I bought more YNDX today at $28.8/sh.

*Delek Group hit a new all-time high yesterday, up 5.8% after news that it would issue a leviathan bond in the US private placement market, raising NIS 2 bn, the largest such issue ever done by an Israeli company. The loan by 2 DGRLY subs and its mini-partner Dor Gas from Israel will be backed by a lien against the currently operational offshore gasfield, Tamar, but will be used to finance developing the larger Leviathan field.

*Also at a new high is Bavarian Nordic which will have an update poster on the phase 1 trial of its Prostvac immunotherapy prostate cancer vaccine at the American Assn for Cancer Research meeting today in San Diego, used in combination with ipilimumab, an immune checkpoint inhibitor. It is early days yet but the combo therapy appears to be well tolerated, one of the things phase 1 trials set out to find. The Danish firm is generating data correlating immune outcomes with the jab to overall survival among vaccinated men. The author of the presentation is Jeffrey Schlom, head of the Tumor Lab at the National Cancer Institute at the NIH. BVNRY is also a candidate for a "pivotal" phase 3 trial in patients with advanced prostate cancer, BVNRY says. It mostly trades in Copenhagen as BAVA. I have been trying (so far without success) to get a readable copy of Dr Schlom's poster from the Danes. They are sending me a PIF file which cannot be read or extracted from.

*Another riser is Shinhan Group, the South Korea bank, reacting to the news that Citigroup will scale back its banking presence in South Korea. SHG.

*Also up is A2A in Milan trading, AEMMF. Its ADR is inactive. Read on.

*Now for the bad news. Guinea's government committee investigating the deal whereby Vale bought its rights to the vast Simandou iron ore project recommended expropriation, stripping the Brazilian mine group of its 51% stake. Vale paid $2.5 bn for it to Beny Steinmetz Group Resources (of Israel) which Conakry says got the mine concession from the former administration by bribery. VALE points out that any misdeed preceded its purchase and it has invested a further $500 mn since then in developing the mine and infrastructure to extract the ore and ship it out. Vale has sold off various marginal assets lately to keep its focus on developing new iron ore holdings in Brazil and elsewhere despite pressures on profits from a lower iron ore price in China. It has an industry-beating gross profit margin of 56% but that is history, and may not repeat given the perils of China and Guinea, and political uncertainty in its homeland.

*The disarray at Hadassah Hospitals has reached such a pass that the govt's Gabbay Committee, assigned to looking into a solution for the Jerusalem institution has called for ending its control by US Hadassah women. The founder organization will only have one board seat in future. The hospital will be nationalized and with board control by the Histadrut union. Like Detroit, Hadassah could sell its art collection to exit bankruptcy; the Hadassah Ein Kerem hospital features Chagall's stained glass windows of the Biblical 12 tribes.

While there is plenty of blame to go around, the main culprit in the effective bankruptcy of Hadassah was Bernie Madoff.

Our portfolio doesn't own the Chagalls but owns Hadasit Bio-Holdings, the hospital's technology transfer vehicle. Hadasit, HADSY, listed in the US 3 years ago. In Israel it dates back to 1986. This business arm commercializes therapeutic innovations Hadassah doctors and researchers discover. The usual format is an Israeli company in which HADSY owns a stake or milestone rights.

Since the Hadassah hospital strike began there has been no market for HADSY here or in Israel. The share is not tradable. I assume the hospital lawyers made sure they owned rights to discoveries in its labs and clinics.

Personal note: As a certified Jecke, or German Jew, I contribute to Shaare Zedek hospital in Jerusalem which was founded in 1902 by Selma, a German-trained Jewish "Krankenschwester" (nurse) and has been supported by members of my family for 6 generations. My maternal grandparents who were murdered by the Nazis donated to Shaare Zedek and so did my mother. Jeckes don't do stained glass but raise money with classical music concerts. Both hospitals have new site in West Jerusalem because the original hospital was cut off by the pre-1967 border.

*Benjamin Shepherd wrote up Market Vectors Poland, PLND, in his Global Investment Strategist newsletter Mar. 13. That was about the time we wrote up EPOL, iShares MSCI Poland Investable Index ETF. Our ETF has $321 mn in assets under management in ~45 Polish shares, and an expense ratio of 0.61%. PLND has a mere $32.5 mn in AUM in about 2 dozen shares, mostly large caps, and while its current expense ratio is 0.6%, it is due to rise to 0.94% next month. Moreover, EPOL is way more liquid and the bid-ask spreads are narrower'nuff said. I learned about his choice in Dick Davis Digest.

*Today I finally gave up in disgust and sold my Dr Reddy's Pharma shares at $43.90. The stock is suffering because of the merger of two rival Indian generics producers, Sun and Ranbaxy. Both currently face US bans on their output because of poor controls. Amazingly, the RDY CEO, G.V. Prasad, wrote an e-mail saying: "Great move by Sun. Consistent with their strategy of acquiring distressed assets and turning them around." Why didn't Mr Prasad try this at RDY? The seller of Ranbaxy is Japan's Daiichi Sanyo which couldn't get quality issues resolved. Having paid $4.2 bn for Ranbaxy in 2008 it is selling 6 years later for $3.2 bn in cash plus ~9% of Sun. The combo will be India's leading generics producer and top RDY. It will be no 5 globally after Teva, Sandoz, Mylan, and Activis.

*Hikma Pharmacy also is smaller. In London trading yesterday HKMPY also fell, by 9.14% (£1.52 down) but the scant-traded US share didn't move. I suspect fear of Sun-Ranbaxy is the cause.  

*Israel Chemicals fighting environmental strictures against its Dead Sea potash works, will now sprinkle the drying ponds and stop filling them to cut down on dust when the wind is blowing toward the city of Arad. This may satisfy the Jerusalem watchdogs and will also lower production as potash prices fall. We sold in Feb.


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