Praying for Nicaragua when you live in Tunbridge Wells is the first sign of madness.
– Evelyn Waugh
Dow down 98. Gold down $8 an ounce. No biggie.
“Three more cows died,” Jorge, our Argentine ranch manager, reported yesterday.
We had reacted as fast as we could. Still, the disease – whatever it is – moved faster.
Jorge and his crew of five gauchos worked for three days – including a Sunday and a national holiday – almost without rest. From first light ‘til after dark they rounded up the cattle and ran them through the stocks.
It was hard work. But there were no complaints. They all knew it had to be done. All the animals have now been given an injection. Whether that stops the epidemic, or not, we wait to find out…
We are beginning to ruminate on the strange, wide and unappreciated gulf between Nicaragua and Tunbridge Wells…
A stock character of show-business (less so now than 50 years ago) was the “hick.” Recently fallen from the turnip truck, he knew his bucolic world. He knew his cows and his bottom 40… but the larger, outside world was a mystery.
Confronted with a public policy issue (for these men were often elected to the House or the Senate), he resorted to folk wisdom and practical experience.
“Well, if you give money to lazy people, it won’t make them any less lazy,” he might have opined on a welfare program.
Or: “”I don’t know why we need to put fancy theatras and basketball courts in public high schools. I went to a one-room school house. And I can guarantee you it didn’t have air-conditioning.”
This down-home outlook made the hick a laughingstock to urbane policymakers. And he was often a fool. But it endeared him to the bumpkins who elected him.
President Johnson was one of the last major politicians who used this rube charm to good effect. When the occasion called for it he wore his cowboy hat. And he had many colorful expressions to substitute for real thinking. One of his favorites was: “The time to kill a snake is when you have a hoe in your hand.”
The expression brought back the reality of country life. When you saw a snake with your own eyes you knew what to do… especially if you had a hoe in your hands. But a hoe is one thing; a Huey helicopter is another.
Here on the ranch, we find a dead cow. We make decisions that put the whole farm into motion, costing us a few thousand dollars that we can ill afford. Either we are right. Or we are wrong. But at least we operate on facts, as best we can. And we suffer the consequences as we must.
We are six hours from the nearest city. Things happen here that we see, feel… and within the limits of our own senses and sensibilities… understand.
But the markets are a different animal. At our Bonner & Partners Family Office research department, a question has been preoccupying us: Does QE transmit inflation to consumer prices?
Much time was spent researching how the banking system works in a fiat money world. More time was spent wondering how and when the velocity of money might increase.
Experts disagree on major points. Can banks use their excess reserves to increase lending? Even this simple question throws up so many different viewpoints… and so many footnotes and nuances… that we regard it as beyond meaningful understanding.
On what facts does Janet Yellen operate? How connected is she to the real world? Does she understand the connections between QE and consumer price inflation better than we do? Or does she mistake the US Army for a hoe and the Vietcong for a snake, as Lyndon Johnson did?
You can judge for yourself. Our old friend John Mauldin is quoted in a film about how the Bank of Yellen operates. As you will see, Yellen has no real facts. She has no hoe. And she wouldn’t know a dead cow if it bit her on the derriere.
Since the beginning of time until today, there is no evidence that activist central bankers – like activist politicians – have ever done anything but cause mischief. Yet the entire market is depending on them, as though they knew what they were doing. We repeat our warning: A distorted market is a dangerous one.
Warren Buffett’s “Secret Sauce”
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
You already know what Warren Buffett’s “secret sauce” is…
In a 2004 letter to shareholders, he made it abundantly clear:
Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
Buffett isn’t big on market timing. He’s big on value. But it just so happens that value tends to present itself when investors are fearful… and it tends to evaporate when they are greedy.
That’s because when investors are fearful they panic and sell quality stocks at discount prices. And when they are greedy they buy stocks (including ones with little or no underlying earnings) at elevated prices.
This is human nature. And so shall it ever be. The trick is to have the courage and the conviction to follow Buffett’s advice.
Most investors like to think of themselves as contrarians… until they pick up the newspaper and find out that a market… or a stock… is deeply out of favor. At this point, they usually forget their contrarian ideals… and join the stampeding herd.
Ask yourself: When Vlad “The Bad” Putin sent troops into Crimea… did you start to draw up a wish list of Russian stocks? Or did you “tut tut” and decide to avoid Russian investments like the plague?
And when the so-called “crisis” in the emerging markets hit the headlines this year, did you start to hunt for bargains… or look to lighten up on your emerging market positions?
Right now, fund managers are bailing on emerging market stocks… and the newspapers are clogged with horror stories about emerging market meltdowns – from a potential “hard landing” in China… to a New Cold War between the West and Russia… to the peso crash in Argentina.
There’s some truth in all of these stories. (In some more than in others.) But what most investors don’t realize is it’s precisely because of these negative stories that stock markets start to offer real value.
As you can see from the chart below, today the MSCI Emerging Markets Index is trading at a price-to-book (P/B) ratio of 1.4. That’s the cheapest it’s been since the depths of the global financial crisis in 2008.
The index has been cheaper still, on a P/B basis, during the Gulf War… after 9/11… and during the Asian financial crisis. But it’s entering the “buy zone” at current levels.
These valuation lows all correspond to widespread investor fear… and to a buying opportunity.
Emerging markets can certainly get cheaper from here, as sentiment goes from bad to worse. But at some point, the bad news will be priced in… and a major buying opportunity will emerge.
We recommend you start nibbling at the emerging markets now. Soon, it may be time to take a big bite.