Notes from the Diamond #7: Hittin ‘Em Where They Ain’t (Part 2)

David A. SalemEmail: [email protected]: @dsaleminvestor Log of no
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  1. “I have a natural if unfortunate tendency to craft sentences that run longer than most readers presumably prefer”.

    Ya think? Lol, good stuff.

  2. Avatar for faust faust says:

    Can you explain a bit more what you meant by including Germany in the three currency blocs you expect to be around in the 2030s? Do you mean that because Germany is the Eurozone’s economic powerhouse and it effectively holds the pursestrings that the Euro is driven by Germany? Or are you saying that the Euro will unravel and Germany will return to the DM?

  3. Excellent question, Sean, for which I’m grateful. Answering as concisely as I can (while watching Vlad Guerrero Jr. make his MLB debut), I don’t know how to assign odds to the Euro unraveling over the next few decades. Whether certain current Eurozone member-nations abandon it or not — and I can’t imagine circumstances under which Germany would exit the Euro without the Euro being abandoned by most if not all nations now using it — I believe strongly that whatever currency(ies) Germany chooses to use as that nation’s official currency will also be the preferred medium of exchange and unit of account for most commerce within and among the countries comprising Europe. As for the Euro’s evolving capacity to play the third role that reserve currencies worthy of that label play — store of value — I have my doubts. But we’d all agree that the Euro is less likely to undergo material debasement over the long term if Germany “remains” than if it were to “exit”. Hope this helps. Thanks again for the question, and for reading Note #7.

  4. Avatar for faust faust says:

    Thanks for the response, David. I am not in the camp that the Euro will disappear despite the imbalances and incompleteness of the Eurozone system. There is too much political will and in many countries there is too much memory of life pre-Euro to disentangle without political and social agreement.

    If individual nations did leave or if Germany decided to leave, then either the rumpEuro or newDB will appreciate in value and be a “big country” equivalent of the Swiss franc. In short, I can imagine that type of currency being more willingly used as a reserve currency notwithstanding reduced liquidity.

    Still, from my perch in London I struggle to see positive structural factors in the Eurozone and am more positively inclined towards North America & Asia.

    And it was good to see Vlad Jnr’s debut & the BlueJay support for him.

  5. Just to clarify, I found the piece to be very interesting and informative. My simple brain isn’t used to reading such highly complex and structurally challenging writing. It may take me awhile, but I know it’s worth it.

  6. Great post! I have to say, it’s taking me a little while to wrap my head around all these concepts. Is the gist of this that the US political and corporate environment has trended away from investment that increases the productivity / competitiveness of our economy. Therefore, when the global cooperative games change, our “free lunch” of immigration and globalization will run out. When we take this situation, combined with inflation and a move away from the USD as the reserve currency, a primarily US based investment thesis carries a much higher risk of “tails you loose”?

  7. I agree that there is little coverage in US media on Asian public listed companies ( Tencent’s excepted ) ;
    But the large Asian cultures - Indian, Chinese , Indonesian - all operate on a scarcity mentality. All of them…they may have fancy modern buildings - but the mindset, particularly of the Governments , is still locked up in the Feudal Farmer stage of Human development. Tight control by bureaucrats is considered the only acceptable form of administration.
    As to MMT, the Chinese are way ahead of the US ; that is one of the key reasons why they are unable or unwilling to float the Yuan. The RMB is even more of a ‘fiat’ currency than the US$. Totally and only backed by authoritarian Government power.
    “Power grows out of the barrel of a gun” - Mao Zedong.
    Of the big three , only Indonesia, a commodity and resource economy , has a free floating currency regime.

  8. Okay, the mistake I made was setting aside only a half hour to read this (and glad to see others making comments share this view) highly intricate piece; hence, I read it in several parts and need (and will) go back to read it again, this time, in one sitting.

    I have too many question owing to that - and it’s not fair to burden others or David with my confusion - but thought I’d ask one question: David, you describe one of the “intractable problems” as being -

    “America’s unsustainably undemocratic approach to self-government.”

    Are you referencing the intentionally designed undemocratic structures built into our constitution - electoral college, the need for super majorities for some legislative actions, etc., - or something else?

    Thank you for an incredible piece that I know I will value even more when I’ve reread/studied it (a few times, at least) so that I actually understand it (and can not just half fake my way through a discussion of it).

  9. Willem: Thanks for taking the time to read Note #7 and for commenting on it. Addressing your comments as concisely as possible, the true gist of Note #7 isn’t the particular geographic focus or desired “circle of competence” identified in it (i.e., Asia) nor the parts of the world from which I personally would draw capital in order to fund Asia-focused investments (e.e., the US and Old Europe). Rather, the true gist of Note #7 is the concept of defining and then staying within one’s circle of competence, whatever that happens to be. As suggested in Note #7, it helps greatly (and rather obviously) if an investor’s self-defined circle of competence comprises opportunities respecting which he or she enjoys favorable odds and has an actionable edge. Hope this helps and I hope too that you’ll continue consuming my writings as well as other ET posts with a critical eye and commenting on them as your schedule permits. Thanks again. Best, David

  10. I appreciate your comments and ascribe what seems to be a difference of opinion respecting the phenomenon you cite to one or both of two root causes, neither of which should be interpreted as criticism of you: (1) semantics, including especially what I mean by “scarcity mindset” as manifest in the words and deeds (defined broadly to include acts of omission as well as commission) of a nation’s citizenry as distinct from its leaders; and (2) differing time horizons, with my arguments underpinned not by perceptions of where the “pucks” (borrowing language from The Great One in hockey) are at present in given nations’ economic, political and social evolution but by where such “pucks” might be found a few decades from now. My opinion, which I’m careful to label as such, is that some if not many of your unarguably correct observations about the current status quo will not apply to evolving conditions in Asia by the end of the planning horizon conjectured in Note #7.

  11. Mark: Thanks for the question, my answer to which is essentially “Yes – it was indeed the ‘intentionally designed’ structures to which you allude that I had in mind when I used the phrase ‘unsustainably undemocratic approach to self-government’.” FWIW, in an earlier life or rather lives, I had the pleasure and privilege of not only studying the founding of the American political regime in great detail but co-teaching a course on the founding (at Middlebury College) … and “practicing” con law (to the extent one can do that) as an admittedly low level staffer in the executive branch. These experiences awakened and raised to a permanently high level my appreciation for the safeguards that Madison, Hamilton et al dialed into our constitutional machinery to both inhibit “tyranny of the majority” and essentially filter the electorate’s evolving passions; by careful design, the US is a representative democracy, with direct democracy being practiced only at the most microscopic (localized) levels of government (e.g. classic New England town meetings). All of the above having been said, given government’s vast scope, scale and intrusiveness in Americans’ lives circa 2019 – and regardless of how much I or anyone else admires what the Framers devised in 1787 – I think the odds are pretty high that Americans as a group will take steps within the next few decades to make it easier for the majority to have its way, hopefully and ideally without trampling on essential freedoms protected by the Bill of Rights. Hope this helps and look forward to your further comments and questions. Best, David

  12. Thank you for the comprehensive answer. My humble, undergraduate-degree-only view is that I hope those controls stay in place. I didn’t vote for T or H - to me, it’s not about “this moment” in our politics, but what is good for the long-term health of our Republic.

    That said, I think you are right as the big sweep seems to be moving in the direction of more direct democracy as the measured, long-term views the Founders held either aren’t taught to or haven’t stuck with younger generations. We will know a lot more in 2020 only if the Dems win - then, we’ll learn if they were tactical frustrations (and dropped) or a real generational passion (and advanced).

    Thank you again for the response and the very impressive piece.

  13. Hi David,
    Thank you for replying. Actually, I am glad you brought up the issue of the ‘Scarcity Mentality “ because in my humble opinion, having been born, and lived most of my life in Asia, this is the single biggest issue holding back the progress of the large Asian cultures. & one that nobody talks about……
    Now, if it changes with the new generations, then yes, we shall have great economic progress and concurrent investment opportunities.
    The late Peter Drucker shares your opinion –“The dominance of the U.S. is already over. What is emerging is a world economy of blocs represented by NAFTA, the European Union, ASEAN. There’s no one center in this world economy. India is becoming a powerhouse very fast”
    That is from a 2004 interview with Fortune magazine.
    My old college roommate from NYC went back to India and founded what is now the largest student loan financial institution there.
    We still write back and forth about Asian development issues.
    I wrote a couple of essays, one for him on India, another for a close Singapore based friend, on the similarities between Mainland China & Singapore. I would be happy to email them to you if you would like to read them, but they are about 7-8 pages each ….
    Thanks again

  14. Noted, with thanks. Drucker was an extraordinary thinker — and writer. Please do pass along your essays via [email protected]. I look forward to reading them. Best, David

  15. How do you effectively diversify representation in Tenet 1 before worst case conditions for worst case conditions?

  16. Victor: With apologies, I’m not sure I understand your question. Could you clarify your question or concern, following which I’ll do my best to address it? Thanks. David

  17. I have >three years of liquidity. Currently, it is represented digitally in several IRA brokerage cash accounts (supposedly not money markets). That is not diversified. I have cryptos elsewhere, still digitally represented. Physical gold is a joke; ask any jeweler how to divide it up, and you still have a verification problem! Physical currency is like bearer bonds: secure at your own risk, and which ones: US paper or coins, Euros, Swiss Francs…???
    Without going full Rickards or prepper, but respecting the “reset” of Mauldin or Stockton, how would you diversify the way your 3 years of liquidity is represented to prepare for a variety of worst case conditions?
    And finally, don’t you think Warren Buffett would have been an opposite field hitter except when he knew it was going to be a hanging curve?
    Thanks for taking the time for any reply!

  18. I agree that Buffett would likely have been an opposite field hitter if he’d been athletic enough to play MLB. By his own admission, he is anything but an athlete – never has been – but I suspect he would’ve made a heckuva manager if he’d decided to make a living in baseball. As for your question about potentially diversifying a sub-portfolio held for “Tenet 1” or exclusively liquidity purposes, I would keep this as simple and straightforward as possible. For US citizens domiciled in the US, including me, this translates into whatever combo of short-term US treasury bills and FDIC-guaranteed bank deposits fits the bill for a given investor. What if one’s “worst case” entails highly probable or (gulp) certain nominal losses on one or both of the investment media just named? By my lights, living conditions would be so dire under such conditions (i.e., those giving rise to nominal as distinct from real or inflation-adjusted losses) on short-term US t-bills or FDIC-guaranteed bank deposits (with such deposits spread around multiple banks as needed) that forced sales of other portfolio holdings ate potentially depressed prices to meet cash flow needs will likely be the least of an investor’s problems. Hope this helps, at least to the extent of clarifying my views on “Tenet 1” reserves. They are simple, I admit, but hopefully not simple-minded.

  19. Most excellent - thank you! USTs and FDIC CDs it is, and I’m keeping all my nickels and copperish pennies!

  20. Great write – up !!! ….will need time to digest it properly.
    I would be very wary of China, but I am biased, living here in Hong Kong where we’re protesting the dumbass extradition law sponsored by Beijing.

    An anecdote for you – in 2014 I was living in Shanghai, and my partners – two well-off locals – were buying stocks during that short-lived boom. Like all smart moneyed Mainlanders, they had already parked their wives and families and some wealth overseas – Australia in the case of these two – & were living it up in Shanghai. I asked the junior guy , who seemed to be killing it at the time , how he knew what stocks to buy …what metrics to evaluate….his reply : “Don’t waste your time on that, even I don’t know what businesses they are in. Its all fake. The big fish decide what stock they want to ‘fry’ and you buy on the rumors….that’s all. None of the companies’ business models are real anyway. The big money in China has to partner with the communist party, there is no other way”.
    We would joke that he’d made a 911 the past quarter…ie enough money to buy a Porsche; then it became two 911s, then 3 , followed by the bust when we counted his losses in 911’s as well……

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