Wolves in the background creeping up for another assault?
Wolves in the background, called debt, creeping up for another assault?
Risks and Rates of Return. How huge hidden leverage still haunts the US/EU. The new century does not belong to anybody, instead it belongs to increased global competition.
I have written here before that I view risks and rates of returns as inexplicably linked.
Sometimes an investor will boast the returns he just achieved, but often the unanswered question is: how much risk did he/she take? Traders of course are completely off balance on that and I remind all again here that many studies in the US over decades and through thousand of people show that most traders loose over time. A few Thai marketing officers over the years have told me: most all traders loose here and are gone. Investors like us are the only ones which prolong. Needless to repeat the brokers here are unmoved by that, as they do not view their fortunes aligned with their customers. So violating the first rule in any business as is in many other segments of life.
I am confident my current model portfolio is in good balance with these twins of risks and returns. Its already making some progress and if the SET tumbles for any reason, not least a foreign set back, it will likely hold up better then the market. Time will tell.
Some times the sun shines and things look better for a while, like just now. Foreign money flows in which by definition chases up the Thai big cap’s. The locals, ever the followers, do the same and so the smaller cap’s lag for a while. Just like in the recent movie “The Gray”, where for a time the storm abates and things start looking better just then, but in little time that changes again; and the wolves and storm return. Our job as professional long term investors with my help is to not have the faith of all those poor guys in that movie.
I agree with the recent posting of a long standing member teach34 that things are far from settled with the declining West. This century is the century of dire global competition on all fronts and especially from developing countries and it comes just at a time when the Western world tumbled due to all their excesses. Some may think their model is still successful and despite all their shortcomings of a “Nanny state”, its still a relatively successful society. But is it? Only time will tell as more then a few of us think just now may the sun shine before the wolves return.
There remain many “wolves” in the background creeping up for another assault, here I just mention one US example which has been hugely underreported.
The Globalist in its latest edition asks the following question:
“Could it be that the market for U.S. higher education shares some of the key hallmarks of the U.S. housing sector? In short, could the whole enterprise be a bubble that will burst in the near future? ….Amidst a sea of trouble in the United States, one wonders what's next. Here's a troubling thought: Could it be that the comparative triumphs of U.S. academic institutions share some of the key hallmarks of the U.S. housing sector? In short, could the whole enterprise be a bubble that is bound to burst in the near.”
It starts the article with the fact that the average undergraduate student in the US starts out with 23,000 US$ in debt, and that is just the average. University tuition in the US has increased by an enormous amount in the past 25 years. These have risen from an annual amount in 1985 of $3,900 at public-sector four-year colleges, to presently $17,100 -an increase of 340%! Or double the increase of the average annual income growth per capita, during this same time period.
Again what horror, University costs in the US have risen more than twice as fast as family incomes. How can this be and how is this justified and how can the average person there afford this? The answer, alas, is a familiar one — through rising levels of debt.
“In the 2010-11 academic year, U.S. families borrowed $112 billion through federal and nonfederal loan programs (along with about $6 billion from private lenders). According to a recent study by the Federal Reserve Bank of New York, Americans now owe more in student loans ($870 billion) than they do for auto loans ($730 billion) or credit cards ($693 billion).”
Again, they own more for student loans then auto loans and almost twice as much as credit card debt. Even while so many write for years how the credit card mania is the consumer monster/culprit there, graduates own far far more in student loans.
While credit card debt has gotten the bad deserved name, even in consumer excesses USA, student loans is still viewed by most as a “wise investment”. But is it?
Barack Obama and his wife Michelle recently underscored the fact that they are just regular folks when they announced that they paid off this debt only in their mid-40s. Are they just regular folks? And will all this huge educational debt alike be paid off in the new century of competition? (I wonder what these numbers are in Australia?)
The big but silent question so now is: “Could it be that the ability of U.S. academe to sustain healthy spending increases was primarily related to a greater national tolerance for debt”. We all know what the answer to that question is. While so many people bought big houses on the promise of future endless increases in housing prices, could it be that so many students are increasing their debt on the similar promise that wage rates will forever go up to allow for pay off in the future?
Its one thing to go in debt for a doctor or law degree where its reasonable to expect future higher earnings to allow for repayment. But when so many of all sort in all kinds of fields, amass record amount of debt on the dream of higher earnings, is there not something risky about that. These days plenty of students with very average realistic earnings expectations and average degrees in all kinds of field, at the undergraduate level, are financing college through loans, credit cards and the like.
As that article notes: “One important fact to consider in that regard is that, on an aggregate level, the current generation of U.S. retirees is the first one that will not be succeeded by workers with better education levels — not exactly a prescription for future income gains”
Again to quote the ending of that article, which says it best:
“As in the housing sector, U.S. academe may be in for a double whammy: Fewer students may have access to funds — and the success of the sector's recent past may have been based on an unsustainable debt-financed phenomenon akin to that which is now hounding the U.S. housing sector. Debt, it seems, is a merciless equalizer — and destroyer of long-cherished dreams. “
During an economic downturn its fashionable to go back to school and so avoid the job market, all based on the promise of higher future earnings. Many courses are fun and you meeting interesting people, some even attend as it’s a great fun time and a place to meet future wives/husbands. But will say an undergraduate degree in Psychology, one of the more popular degrees, really prepare you for the new tough world of competition. I won’t even put a question mark after this last sentence.
Its true that since the financial crisis many lenders there have excited giving student loans -but as the numbers show the amount of student debt in place is a silent leverage giant which may well be the next long term bad wake up call. Where current dreams may well be just out of touch with reality; just as ever increasing housing prices were.
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Back in Thailand we too have risks of course. We all know what most of these are. Plus, the ones we don’t think of now. Some of these are: the return of a controversial political figure, a coming succession, a political set back and so protests, China slowing more then just a little, soaring oil prices due to IRAN/USA confrontation, another natural disaster like floods etc.. And not least: another Western induced crisis with Spain defaulting/revolting or whatever and so the SET taking in a correction. Or, the US budget running out of time by the end of this year, and so another rating downgrade which prompts the US$ finally loosing its increasingly shaky status.
Actually, if there is some mild set back here it would be good for many smaller cap’s as it would take the silly current market leadership away from all that big cap. chasing by individual investors, which pay so dearly for liquidity they don’t really need.
The last few months and for just now the sun has come back and the storms have subsided but will this last? What good is a stock which rocks up only to fall back down? As the prudent investor with a risk adjusted healthy bias you know where I mostly view hiding it out. Current and increasing dividends into a future full of risks, may well be the best medium/longer term strategy and I remain convinced off.
Not least, if the local brokers finally get mandated by the Thai SEC to cover far more smaller cap stocks as has been in the news of late, there even could be a re-rating of this whole value sector….as smaller cap growth stocks with their high dividends are an immensely underpriced sector here, for all the reasons we know all too well.
Best Regards,
Paul Renaud.
www.thaistocks.com
