Archive for December, 2015

So the reality is that you just had 25% chance to make money in US. And same goes for most markets.

The only things that paid off was quality…quality earning, quality profit…etc.

In 2015 the clear winner were the internet giants….next year probably will be different (see Apple), but Quality again.

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Well this year not much worked

Year to date (27 Dec)

Australian ASX200 -3.8%

In USD

SP500 +2.19%

Bonds (US T Bond 30) -2.04%

US 3 M Cash Bills 0.11%

Commodities -23.42%

Australian Real Estate (average -5%)

Australians did better than this due of the fall of the Australian Dollar.

In practice the classic  asset allocation did not work this year.

The conditions for next year are even more difficult. The main returns were driven by the fall of the Australian Dollar.

One thing that one should have at least learned from 2015 is that crowded trade (where most of the analyst say “do this”) did not work in this market.

A weaker Australian Dollar is the current crowded trade for the next 6 month….so pay attention – it could not work (statistically the first rate hike in US produce a fall in the USD – as the interest rate hike has been anticipated for 18 months).

How did I do this year? About 13% with a quite simple strategy of corporate Australian bond (circa 6%) and the classic sell in May buy in October. And definitely avoiding indexing.

Next year we will see what is the game….but I think more difficult.

There is no question that the 2 nations are upset at each other, but they are also careful of not overstepping…until now.

All the Russian sanctions are hitting Turkey…above the belt. It is just like a show for public viewing.

If Russia really wanted to hit Turkey it would just close the energy supply. It owns more than 50% of energy flow to Turkey and all other sources are at full capacity. Cutting energy would freeze and cripple Turkish economy for good.

In Syria Russia is considering helping the PKK (Kurdish Worker Party) to fuel an insurrection in lower Turkey (it had a similar strategy during the soviet time). Until now it has been more words than actions.

Turkey per converse could block the Dardanelles straight and cut off Russia from the Mediterranean sea. This option is quite remote – as the international agreements say that the straight can be closed only in time of war…a proper declaration of war by Russia will be practically inevitable.

Where the games are done is in Ukraine. The Tartars (Turkish descent Ukrainians) are the one responsible for the cutting of energy supplies to Crimea and they say they are sponsored by Turkey.

And Turkey is trying to establish a kind of protectorate in North Syria and North Iraq upsetting specially Iran, long term friend of Russia.

Plus there is the Nagorno-Karabakh (a place behind Turkey / Georgia/Azerbaijan) that has a crossover of oil pipelines (…like Ukraine and Syria) where Russian and Turkish are trying to play polite so not to have a new Ukraine also there.

2016 will be interesting to see if Russia and Turkey will try to de escalate.

It would be interesting to see what Putin wants. He definitely new (previous post) that one of its jet fighters would be shot down.

Why he wanted it? Probably to entrench Russia in Syria with the S400 anti aircraft system (feared even by the US) and help Iran, the great Saudi enemy. As a studious of Putin…he still a grudge with Saudi Arabia (in his mind responsible of the fall of the oil prices in 1985 that finished the USSR – in the own words of Putin “last century biggest disgrace). And Putin usually keeps a grudge…forever (he hates the Americans due to the humiliation of Russia in the war against Serbia).

If not, the risk of something really very pear shaped would grow immensely.

Geopolitics 2016

Posted: December 29, 2015 in Uncategorized

2016 is the middle year in the three year of change 2015,2016, 2017

Middle East

This year will be an extension of 2015.

Islamic State will not be defeated, but will be under pressure. In light of this it will try to organize more terrorist attacks to remain relevant.

Apart the Western targets, there will be a focus in trying to attack Saudi Arabia and UAE specially.

But the big space to watch is Turkey/Iran/ Russia/Iraq.

Turkey wants to reaffirm is dominance as New Ottoman empire, but the Russian intervention makes everything more complicated.

Turkey wants to establish a buffer in Syria and a de facto protectorate in Northern Iraq.

The risk of clashes with Russia will be high. Any eventual issue will be treated with extreme caution as a leaked paper from  the Kremlin clearly shows that, in a confrontation with NATO, Russia will use tactical nukes on Turkey’s infrastructure.

Saudi Arabia is starting to feel the pressure of low oil prices and two wars (IS and Yemen), so in the second half will try to see how to increase oil prices.

Iran will try to keep a low profile now that is back with the good boys – but still pursuing its Iran/Iraq/Syria/Lebanon strategy.

Israel will keep a low profile in this increasing violent Middle East and is trying to appease Turkey versus a common Iran. As usual it will “kill” direct threat without obeying to orders from the US or whoever else.

Europe

No major crisis in Europe.

There will be just more nationalism and a continuous drifting apart between France and Germany (both with election in 2017).

Borders policies and immigration will be the core issues.

Italy will continue having banking issues, but with Quantitative Easing in full steam it should not end in a full blown crisis.

Greece will keep a no growth situation, but, aside revolutions, there are no pressing issues.

The big potential issue are the Balkans. A lot of illegal stopped there (specially Bosnia) and the Balkans have always been the hot spark of Europe. A Corriere della Sera (main Italian  newspaper) has even identified a town where IS flags are shown (Buzim, North West of Bosnia Herzegovina). Interesting the article says that the area has been purchased with the money of one of the supposed Western allies, Qatar.

UK – the Brexit referendum is to be held end of 2016 or 2017. If it will happen in 2016 the polls say it will be a NO.

Ukraine will remain a low intensity frozen conflict

Russia will focus on economy and its pivot East

USA

For the US is a Presidential year (8 November). It will be mainly concentrated in its economy and if it really has reached the escape velocity….or if it will require Quantitative Easing 4.

China

China will continue its painful pivot to consumerism. The main risk is capital outflow and hard devaluation of the Yuan.

Still more pain to come as internal and external regions keep on diverging.

No commodities savior.

India.

PM Modi lost some elections and so the reforms will be harder to pass. India will push for investment and Made in India, but the issues of infrastructure (lack of) will make it hard for the economy to improve quickly.

Pacific

There will be more integration between the non-China nations (including Australia) to  balance China in the Pacific.

South America

The best position in South America is Argentina, but Brazil and the rest will keep on struggling with low resource prices.

 

So practically 2016 will be a transition year for issues started in 2015.

Unfortunately for the first time since 1983 (Able Archer 1983 exercise), there is the very rare possibility of tactical nuclear weapons being used.

 

 

 

Japan just approved the largest military spend for the Fiscal Year 2016. This, in conjunction with the passing of a self defense legislation in July/September 2015, clears a path to reclaim the position of Japan as the main antagonistic force to China. (Japan defence budget is within the top 6 world spenders)

Plus it is making a few international alliances with Vietnam and India in light of a China containment.

Definitely a more assertive Japan is in the near future.

This is not a big issue, unless you consider the automatic defence pact between USA and Japan (at the end of the 2 World War, Japan agreed to be a pacifist region – but if attacked the US has to protect automatically Japan).

All the media and the theory is about the great attack or “colonization” of Christian countries by Islam/Muslim.

Well I examined the idea that…everyone could be wrong.

This terror attacks could be literally the death pain of a dying religion.

UN studies that 60% of Muslim in the Western world are “pro forma” Muslim (as a lot of Christian and Jews).

Even over 20% of Muslim in Muslim countries are going to mosques and pray just to be seen.

And the infiltration of Islamic State operatives in the mass of illegal immigrant has the purpose of “stopping the boats” (so in IS strategy Europe should close the border as they are upset that they created the perfect Caliphate and everyone want to escape in the decadent West).

It is just a contrarian theory, but very is a great example.

Christianity reached the peak brutality (crusades, witch hunt and things that makes IS look….quite tame) in 1500…just before the reign of reason (1700) took over.

Since now everything is faster….Islam will enter its reign of reason by 2050/2100.

Ok quite far, but interesting pattern with even more interesting economic consequences.

In November ber there will be the US election.

We do not know who will win, but any candidate will be the product of its own party (even Trump).

Democrats foreign policy will be a continuation of President Obama.
A slow disentaglement from world affairs (specially Middle East) with the strategy of supporting regional powers to create balance. Practically stepping back from being the world policeman.

A Republican win would be a return of an aggressive engagement of the US on the world geopolitics (eg Afghanistan, the 2 Iraqs wars were under Republicans).

Before choosing camp…there is no good camp.

The theory goes that while the Republicans brought us the Cold War with the numerous small wars (Vietnam, North Korea and many more), the Democrats with the no intervention policy created the environment that brought us the 1 and 2 wars (Eg Hitler was not stopped in the 1930s…and that ended pretty badly).