Coffee talk with an old friend

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It is good to be back to work after a long Chinese New Year break. Over the weekend, I had a very interesting conservation with an old friend who is a brilliant fifty-something fund manager. He spoke to me on a number of things and was quite provocative. Sorry, we did not touch on Bitcoin. I picked a few interesting questions for this limited space out of our long conversation of about 2 hours.

YH: We finally got a much needed “correction” of overbought market conditions.  Similar to a steadily boiling tea kettle, an overheating stock market must let off occasional steam. What do you think?

Bob: We just always seem to forget that corrections happen. Stocks staged a recovery last week. The recovery has stalled near retracement objectives, which could be a potential turning point in the market. I feel that making a short-term bottom may be more of a struggle because of the ferocity and speed of the correction. It may take a few weeks or longer to work itself out.

YH: On CNBC and Bloomberg, you see some popular pundits scratching their heads blaming inflation and interest rates as being responsible for the correction. In this case there was a small bump in the 10 year treasuries and in inflation numbers. You mean nobody saw this coming at all?

Bob: Nobody cares as long as you are making a profit. Nobody cares how that profit is being produced. Institutional investors repeat whatever nonsense they think their clients want to hear.

YH: The age of knowledge and experienced traders is gone. In order to find a consistent return, the substitution is higher risk and not higher knowledge. What is your view on the new investment products launched for the public investors these days? 

Bob: Excellent points. Joe Six Pack is always happy with the beautiful numbers presented on the glossy brochures, but he does not necessarily know as a matter of fact, he does not know how that money is being made.

YH: What is the biggest wildcard in 2018?

Bob: The Fed shall move at least three times this year to tighten monetary policy and to raise the overnight fed funds rate. The biggest uncertainty is whether the Fed shall move for a fourth time and by how much? The introduction of deficit spending, dressed up as fiscal stimulus, in the US has the potential to foment inflation.

YH: While the US and European markets have been getting all of the attention, Japan has quietly grabbing more buying out there. Japan is one of the cheapest developed markets. Trading at a forward PE of 15x it is well below the global PE average of 17X and the US’s lofty forward PE ratio of 18.6X. Any thoughts on Japan?

Bob: After underperforming relative to the rest of the world for decades, Japan is getting more interesting for medium to long-term. I like Japan. Improving fundamentals and accelerating momentum are what I am looking at.

YH: What is your view on oil?

Bob: The value of the US dollar should be the most important factor for oil prices over the next 10-12 months. I am a long-term bull on oil and commodities but volatility is set to pick up. Shorting oil is a good short-term trade idea at the moment.

YH: Yeah, we should also not forget that the Saudis and Russians want higher prices. There seems a tight negative correlation has developed between the US dollar and commodities. Any comment on the greenback?

Bob: Over the last year the US dollar has weakened and the price of oil has risen from a low of about $43 per barrel to over $60 per barrel. I have turned bearish on the US dollar and expect a gradual decline over the coming years. This is a general bet and the dollar may still gain against selective currencies. Nothing will go up or down in a straight line. A counter-trend rally is expected from time to time.

YH: The doomsayers are predicting another financial crisis to hit the US. They point to a much weaker dollar, higher US inflation and interest rates.

Bob: Do not make me laugh! If these events unfolded rapidly the resulting economic crisis would affect not just the US but also the rest of the world.

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