By Chirs at
www.CapitalistExploits.at
A couple of weeks ago I said Jim Rogers has been
wrong. I promised a follow up to that article and here it is.
Truthfully, I was being a bit hard on him. Jim is an intelligent
investor who has long railed against the revolving door between our
political and financial systems which should be clear to all but
the dimmest amongst us.
It is ironically
this hideous system which Jim despises almost as much as we do,
that is the cause as to why Jim got it wrong. Not wrong on being
bullish agriculture but rather wrong in expecting bankers to be
handed their just dues. I explained briefly why this is the
case a few weeks ago.
Perhaps, like us, he wishes for a world where justice is served
via a free market capitalist system. Where failed businesses, built
on the back of taking obscene risks with other peoples money by
ever increasingly arrogant CEOs (yes, you Blankfein and Dimon, you
obnoxious goats) enjoy the brutal but honest reality of a market
based system instead of bailout capital, and where hard working
entrepreneurs are rewarded, not by crony capitalism but by their
value they bring to society.
I know, I know... unicorns, bunnies and rainbows, right. It's
just not the world we live in.
Successful investing involves determining risk and reward and
further identifying opportunities skewed in the investors favour.
Let me be clear - I don't want to invest in a "fair" market. I do
wish for a world that involves a "free" market. Fair markets don't
and will never exist. Not because bureaucrats will screw things up
which they most certainly will, but because
human nature ensures that the perception of risk and reward
swings wildly.This will never change.
Agriculture provides a favourable risk reward setup for
investors for all the reasons that Jim has many times so eloquently
pointed out. While agriculture has been doing well, the guys
providing services to this sector have been making a killing. As is
often the case those selling the picks and shovels make more than
the gold miners themselves. To highlight my point I'll share with
you correspondence I had with Brad Farquhar CEO of
Input Capitalwho I mentioned many times
previously.
"On a note related to your note which mentioned us, over the
last 5 years, during some very good times in Saskatchewan
agriculture, we got our first Porsche dealership, Mercedes
expanded, and the local Audi dealership split off from its shared
space with VW to have its own stand-alone dealership. The
number of luxury cars is accelerating, and the guy who own the
pizza place near my house has two Lamborghini's.
Every farm equipment dealership has built massive new
facilities, and the owner of Brandt Tractor (the largest privately
owned John Deere heavy equipment dealership in the world), which is
based here, built a $25 million house north of town. He's still not
done building the golf course (
Google Maps).
So there's an extent to which Jim Rogers was right. The town is
booming, and we still have no investment bankers here!"
One of the reasons that Jim was wrong about bankers earning less
than farmers is due to the fact our current monetary system is
built on a foundation of crony capitalism. This system has been
pushing the envelope on all fronts and this cannot last forever. In
that respect, I suspect Jim may yet be proven correct.
All good things come to an end... And so do all bad things.
A reset is coming. In fact, it's already begun.
Case in point: the bedfellow of absurdly low interest rates is
historically high levels of government incompetence, corruption and
interference. The de-pegging of the Swiss franc from the euro is
one cog in the machine which has been removed increasing the
likelihood that this unstable and unsustainable house of cards
comes toppling down.
The cards are lining up to fall as expected. In Europe we have a
rapidly deteriorating situation whereby those that are "in the
room" are scuttling to get out. The Swiss, now the Greeks. Who's
next? The "confidence" holding this together is unwinding and with
nothing but smoke and mirrors to keep it glued together we're in
for a massive USD rally.
Black Swans
Asteroids aren't meant to strike us, kebabs at 2 AM are not
meant to be healthy, or even edible, and currencies are not meant
to move as they now are.
Many years ago I worked on a project for JPMorgan with a bunch
of guys who called themselves the "6 sigma team". These quants' job
was to figure out all the risk metrics for the hundreds of
products, currency crosses and so forth that the bank was engaged
in. The name 6 sigma stemmed from 6 standard deviations from the
norm, being an extreme event. It was thought that if contingencies
were in place 6 sigma event risk then the bank was pretty damn
safe. How safe? Well, by definition a 6 sigma event takes place
every 1.4 million years!
The
CHF move we all just witnessed shattered the event risk red
line odometer by clocking in at over 20+ standard deviations to the
norm.
FX moves of this
nature are the sort of thing that takes place in illiquid
currencies managed by tinpot dictatorships, where such moves are
ostensibly NOT 6 sigma since one expects this of tinpot
dictatorships and as such market participants trade
accordingly.
The swissie, on
the other hand, is not run by a tinpot dictatorship, is not
illiquid, and is not prone to violent volatility. It is the 6th
largest currency unit by volume and it got there by behaving
itself. Very few saw this coming. It's like finding that little
Johny who's been getting straight As, winning the debating contest,
coming first in recorder, harp, and guitar classes, has been
cooking meth in the garage, gang-raping the convent girls down the
road after music lessons, and has buried the missing bus driver in
the back garden after beheading him at a satanic ritual.
Surprising!
When you get
moves like this, stuff blows up. Right now risk models everywhere
are blowing out. That I can guarantee you. This is akin to finding
out that your 2 AM kebab from the dodgy diner is actually prime
Kobe beef on a bed of organic rocket instead of roadkill or some
mixture of horse, goat and whatever was at the bottom of the
freezer. It's basically never meant to happen which is why nobody
believes it until it actually does. A black swan in Taleb's
world.
"Confidence" is
the only remaining reason that anybody uses fiat currency, and
maintaining that confidence at all costs is absolutely critical.
This confidence is slipping inch by inch.
THIS could be the straw breaking the camels back!
The recent happenings in the European bond market should come as
a red flag. Post the CHF decoupling the results of the Bundesbank's
EUR2B 8/46 tap are now out and it was a complete disaster. The
Troika must be wringing their teeth and gnashing their hands and so
they should be. The Bundesbank sucked up a whopping 53.1% of the
offer setting the record for any German auction going back to the
beginning of the Euro. This, folks, is NOT meant to be
happening.
Bradhas been building positions for the last 6
months as we've been explaining why
we're heading into an incredibly strong USD bull
market. We went so far as to put together a complimentary
detailed USD reportwhich you can access
here, explaining why this would be the case,
and further detailing specific trades which stand to benefit as
this plays itself out. It's still relevant today.
Capital flows are really important and need to be understood.
It's dangerous to look at the greenback, or any currency, or asset
class in a vacuum. Markets are interrelated and capital flows are
global, which brings me back to agriculture.
Why agriculture? Because it's not some piece of paper. Because
there is a supply demand setup which is highly favourable and
because food and water are absolutely vital. As the loss of faith
in government accelerates and begins to rip through the sovereign
debt markets, tangible assets in a safe jurisdiction hedge this
risk.
There are few countries in the world that provide both political
stability, and agricultural opportunities as does New Zealand.
I recently listed all my own personal reasons why I believe New
Zealand is an exceptional place in
"12 Reasons Why Here and Not There" but
certainly the fact that most every New Zealander has roots on a
farm, lives on a farm, or in a farming community is one reason. If
you're going to get run over in New Zealand it's far more likely to
be by a farmer than a banker.
New Zealand will struggle to starve. It claims 1.3rd of world
dairy exports meaning it's basically the
Saudi Arabia of dairy. Fully 37% of its land mass
is devoted to agriculture and 48% contributing to total exports
with 90% of farm production exported. Why so much? Because it's
empty. No really, there is nobody here.
The UK, a country roughly the same size has over 64 million
people. I'm still puzzled it hasn't sunk. New Zealand, on the other
hand, has just 4.5 million people.
The country has gone from being one of the most regulated
countries in the OECD to one of the least regulated and as a result
the economy has boomed. The current political party in power has
been diminishing the states involvement in things such as housing
for the poor. Housing, like every sector of the economy, is best
dealt with by private enterprise, not government. Just the other
day the government took yet another step towards getting out of
things which they should never be involved in
by selling down state housing.
Clearly we're not the only ones who think New Zealand is an
exceptional place from a risk reward perspective. Many of the
wealthiest people in the world, who have the resources to go
anywhere, and buy anything have been quietly establishing escape
hatches here:
"I know hedge fund managers who are buying airstrips in places
like New Zealand because they think they need a getaway." - Robert
Johnson, previous MD at Soros Fund Management
We believe we're rapidly entering a bull market in safety and
security, and we're long. Our up coming
Seraph Bullring meet
will avail attendees of the opportunities available
globally that we are personally involved in.
Attendance at Seraph events is as always strictly limited, and
the majority of the spaces are taken. We strongly encourage you to
Book Now to avoid any
disappointment.
- Chris