Tano Capital Commentary: February 2009
As 2008 wound to a close, we heaved a collective sigh of relief here at Tano Capital. While we are not certain at all about what 2009 will bring, the one certainty we do believe is that it cannot be any worse than 2008.
We are most impressed by the absolute dearth of any positive news about anything, andare hard-pressed to remember any other time during our 30 year business career that has seemed as gloomy. The term “falling off a cliff” does not even approach doing justice to describing the current economic environment and future outlook. Sentiment across all markets is approaching five standard deviations away from “normal” whatever that may be in this day and age. Reaching back into the deep dark depths of our mind, we vaguely recall from a tortuous statistics class that that translates in plain English to less than 1% bulls and 99% bears. Sir John Templeton once tutored us that “When you can see light at the end of the tunnel, it is already too late.....” We certainly can see no light anywhere at present.
So far in 2009, we are in the unenviable and lonely position of being both “long and wrong.” We have been here before, and while it is always uncomfortable to be wrong, we would feel much more uncomfortable staying short with the consensus, and betting affirmatively with the other 99% of the world. So be it, time will tell as it always does. We cannot shake the intuition that there is an explosive upside rally lurking somewhere out there, and our only cause for pause is that technically neither the S&P nor the Nasdaq has tested the absolute lows set in November of last year. In our 30 years of trading experience, we have almost never seen a market not test its lows at least once before reversing course. However, as we are disciples and students of all disciplines, but blind devotees of none, we choose to buck the 99% negative consensus and ignore to our potential peril the “cause for pause.” We choose to stay long, as our conviction is strong.
Your ever humble portfolio manager recently completed a two week trip which encompassed stops in Tianjin China, Mumbai India, Singapore and Dubai. Needless to say, the doom and gloom we feel in the US is shared pretty much across the globe. Upon posing the question to a senior Chinese government official: “Why do you guys keep dumping your currency surpluses into the US bond market when real yields are negative?” I got a surprising response. He said “Where else are we going to put it?” He then elaborated as follows: “Our growth targets for this year are 9%, and at current run rates we are only growing about 6%. We are very worried that if we cannot grow at 9% minimum, we will have social unrest. We need to continue to create jobs, and that is our sole focus for now. What we earn or do not earn on our trade surpluses is not relevant to our main problem.” So, as crazy as it may appear to those of us who benefit enormously and unjustly from this current dynamic, it would appear that it will continue for the foreseeable future, which to my mind has interesting and positive implications for the dollar.
In India, it is back to business as usual. Aside from a few broken mirrors and random bullet holes in the places where the terrorist attacks occurred, the event is over and things have settled back down. I have been going to India on business since 1995, and I had absolutely no qualms about returning to Mumbai in early January. What happened there could have just as easily happened at the Waldorf in New York City. The economy is slowing, and the Satyam scandal is not helping matters. Even so, we remain steadfast bulls on the Indian economy.
In Singapore, it was no surprise to find that things are slowing there also, and that the economy recently contracted for the first time in a very long time. Singapore is very leveraged to the rest of the Asian economies, so this is no big news. In characteristic fashion, the Singapore Government has reacted to the situation with an aggressive policy response, incorporating both tax breaks and additional fiscal stimulation which should get things moving in the right direction more quickly than other less enlightened and less well governed countries. I had the very great privilege on this trip to have dinner with the Minister Mentor, otherwise know as Mr. Lee Kuan Yew, the founder and architect of modern day Singapore (photograph). He is cautiously optimistic that the worst is behind us, and that Asia will rebound sooner than the west because they do not have the toxic debt problem...
In Dubai, I had lunch with an old friend, and asked him to describe local economic conditions.
Basically, he indicated that things were bad; both stocks and real estate markets are down almost 60% over the last twelve months. He indicated that the trading portions of the Dubai economy are still holding up well, (his company ships a lot of goods to the US military in Iraq); so there is at least some underpinning of optimism on that front.
In closing, I wish to incorporate two additional slides which graphically demonstrate just how bad things have gotten.
The chart prepared by Ned Davis research purports to show the increase in debt per decade divided by the increase in GDP per decade, which gives a ratio of how much incremental debt the economy needed to take on to add $1 dollar of GDP growth. So for example, in the decade of the 1950’s, it took and additional $1.36 of debt to add $1.00 dollar of GDP growth. In the 1960’s, it took $1.53 of new debt to generate that incremental $1.00 of GDP, in the 70’s it required $1.68, in the 80’s it needed $2.93, in the 90’s it took $$3.19 and in the 2000’s it needed a massive $5.39 in new debt to create that $ 1.00 dollar of incremental GDP. The point is, the economy is unlikely to be able to support any new debt, and we are clearly in a deleveraging mode, which means further and deeper contraction and deflation.
The other interesting chart I leave you with compares the relative market capitalizations of many once large financial titans, from second quarter of 2007 to January of 2009. All around, nothing very pretty about this picture.
Have a great 2009!
With all best regards,
Chuck Johnson
Feb 1, 2009