The last time Nicholas Vardy was a guest blogger he generated quite a buzz with his article and the comments that followed. This article should do the same, but you'll have to read on and let your thoughts and opinions be heard. After you read the article and comment, please visit Nicholas's site (Global Stock Investor) to read more articles and opinions from him.
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U.S stock markets have just come off of their worst decade ever, with inflation-adjusted returns in the S&P 500 dropping as much as 30%. That's a far cry from what investors were expecting at the turn of the millennium. The Internet was creating paper billionaires overnight.
Fast forward 10 years, and Nasdaq is still 40% below its peak. In addition, the Pew Research Center just designated the past decade as the "worst in 50 years."
But just as there was a technology bubble in 2000, today there is also a strong "pessimism bubble" about the U.S. economy over the coming decade. And like all bubbles, this one will eventually pop – as will the rising China bubble. Understanding this is the key to ensuring you don’t end up like investors who have spent the last decade waiting for Cisco to "get back up to $80."
Rarely has the global stature of the United States been lower than it is today. A recent Washington Post/ABC poll found that 61% of the American people think the United States is in long-term decline. In another poll, 44% of Americans said that China was the top economic dog in the world, compared with only 27% favoring the United States.
Much of the investment world holds the same opinion. In fact, the world's top hedge fund managers are piling into gold, betting billions that the U.S. dollar is toast. Meanwhile, 17% of the U.S. workforce is unemployed, underemployed or has stopped looking for work. And that’s music to the ears of contrarian investors.
Contrarian Trade #1: Buy American
After the financial meltdown of 2008, the greatest contrarian trade in the world became a bet on the United States. But that’s exactly what I’m doing by shifting my own money and my clients assets back into the United States.
First, investment is a game of expectations. Or as Bill Browder, formerly the largest investor in Russia, pointed out, Russia doesn't have to turn into Switzerland for him make money. It just has to turn out better than people expect. In 1998, an investor I met in Russia said that he'd rather eat nuclear waste than invest in Russia. Yet, had he invested there, he'd have made 60x his money, just as Browder and his investors did.
Second, having lived abroad since 1991 has only strengthened my conviction that the global economy largely runs on U.S.-generated ideas. (This is not, as you can imagine, a popular position). The American Academy of Sciences estimates that 85% of economic growth in the United States is now produced by new ideas. In 2007, companies that were founded by entrepreneurs backed by venture capitalists provided 10.4 million American jobs and generated $2.3 trillion in revenues. That's equal to the GDP of France.
Nowhere is the power of ideas more evident than in the case of decidedly unsexy U.S. manufacturing. On one hand, the media bewails that the American manufacturing workforce has shrunk by more than 40% since its peak in 1979, with 6 million of those job losses taking place over the last decade. But thanks to innovation and advances in technology, U.S. manufacturing output per worker recently hit an eye-popping $234,220 for each of that sector's 11.6 million workers. Workers today produce twice as much manufacturing output as their counterparts did 20 years ago and three times as much as in the early 1980s. The U.S. steel industry -- left for dead in the 1980s -- produces more steel today than it did 30 years ago.
Contrarian Trade #2: Sell China
If there is one surefire way to make quick money in financial markets, it's to bet on bubbles popping. Noted value-investor John Templeton made his first fortune over a 40-year period by betting on the rise of Japan. He made a bigger and quicker fortune by betting on the dotcom bust in 1999. I believe we are smack dab in the middle of a "pessimism bubble" about the United States, much like the bubble about Japan 20 years ago, the Internet 10 years ago, and China today.
Twenty years ago last month, Japan's Nikkei index reached its historic peak of 38,916. In 1989, Japan was #1, as U.S. business school students pored over Japanese language texts and studied Japanese management techniques. A mere decade later, Japan had been long forgotten, and the world was in the midst of another frenzied bubble called the "New Economy." Today, Japan and the Internet have been supplanted by the "China Miracle."
Everywhere you look, you see serious experts earnestly predicting the decline of the United States and the rise of China. And they will give you incredibly cogent, well-argued reasons for why you should listen to them. Many of these arguments I agree with myself. But the next time you read predictions about what the world will look like in 10 years, consider this. The most widely recommended stocks 10 years ago were America Online, Cisco Systems, Qualcomm, MCI WorldCom, Nortel, Lucent Technology and Texas Instruments. MCI WorldCom and Nortel went bankrupt. And if you invested in a portfolio of the others that survived, you'd have lost about two-thirds of your money. If the fates of Japan and Internet stocks are any guide, a similar fate awaits your "China strategy."
Unlike many of those pundits who are so certain about what the world will look like in 2020, I never took that class on how to predict the future, naively opting for a course on Japanese joint ventures instead. But the two themes I'd bet on over the coming decade are to buy the United States and to sell China.
For the sake of my financial future, I hope you disagree.
Thanks again for reading my article today, and thanks again to Adam for the opportunity to give you some insight into two contrarian trades for the coming decade!
Nicholas A. Vardy
Editor, Global Stock Investor
London-based Nicholas Vardy holds degrees from Stanford and Harvard. He writes a weekly e-newsletter called “The Global Guru” focusing on international investment expertise. He is also editor of the wealth-building newsletter Global Stock Investor, as well as a weekly trading service, Global Bull Market Alert.
It really doesn't matter whose markets tank first- when one goes, so will the others. Nimble traders will be rewarded. Many others will loose.
There is the desire to be "invested long" in many of us, hence this debate is more meaningful to us, and so to "us" I'd say use a tight trailing stop, as holding through this next downturn is unwise.
There is lots of data to support all the views expressed above, even for Mr. Vardy's views, though he doesn't reference any. It's mostly a question of timing. Here in the US we'll have to unwind enormous private and public debts,entitlements, and excessive regulations and taxes, whereas others do not face these long term obstacles to a rebound.
Good articles should make us think, and this one surely did that. My biggest concern is that you might be right, and given the political issues the U.S. faces today that means "ordinary" Americans will continue to loose, both in terms of financial and personal freedoms. While I don't like it, I recognize that, like the financial markets sometimes require, a political "adjustment" is needed. Hopefully, it will break all previous records.
Academic studies have put in doubt the usefulness of sentiment readings. They may be no more useful than darts at predicting market direction and duration. So I suggest everyone "read the tape." Technicals are more important. (If you don't use technicals then you better be very careful how you use fundamentals.) If there is a trend, don't buck the trend. If there is momentum, ride the momentum. Synchronize your investment time frames (long, intermediate and short). Buy off support, sell off resistance. Cycles and timing are more important than price (A stock at $100 can go to $0 but a $0 stock won't go to $100). If we factor in the result of "official" 4% yearly inflation with a 30% loss in the U.S. stock market (worse for the NASDAQ) for the last ten years we see a net loss of 53.5%. Only the few successful traders and few lucky buy and hold investors made much money and they had to overcome the three-headed monster: market losses, inflation and taxation.
I'm English, having attended university in New York, worked on Wall Street, and now back in the UK. I find a lot of the comments are quite emotional, whereas in investing and trading surely one needs to be unemotional? Isn't the China success story a fundamental case of cheap manufacturing, compared to the rest of the world? And wasn't this the original secret of success with Japan, even though Japan went on to add quality? The issue is, how long can China keep cheap? Although, it remains to be seen how well China uses its massive war chest (for good or ill v. the rest of the world). The paramount issue is, however, which nation or nations are best at innovation and entrepenurial enterprise? Surely in a constantly changing world it is these nations, and dare I say democratic, free-enterprise-based nations, that will endure. My vote is that it's the United States that has these attributes more than any other, along with the United Kingdom and other western nations. It must surely be, therefore, the United States for the Long Bet. Short term, however, might be a different story.
Dr. Bacon, i agree there is way too much emotion in this blog. The true principles of unemotional trading are largely missing. However, I detect a bit of the "reading of the tea leaves" in your comments as well. While I, like you, wish that the free-interprised-based nations will endure, I try to keep my wishes and my trading seperate. Simply put, I believe if its not happening don't trade it. While I don't think I have seen it said this way, I believe in evidence. If the market is moving away from my political, social, astromomical, and personal beliefs; I will go with the market.
"2" years call market lows throughout the past 150 years. Patience my friends, patience!
How contrarian is it when the Investors Intelligence numbers show the highest bullishness on stocks since 1987 (December 30, 2009)? Other sentiment readings, while not as extreme, certainly showed strong bullishness. Further when sentiment extremes change quickly, traders/investors, are not yet showing exhaustion and capitulation. Does anyone here have any idea how exhausted investors were in 1974? For that matter consider 1982. Now imagine 1932. And yet, with the market down just a tiny bit, we are already willing to be contrarians. How contrary is that? I don't think so.
Why not Japan? Bear market for 20 years, comparable to the Dow in the 40's & 50's. Contrarian but....
Obama has submitted a budget of 3 trillion dollars.
I remember Ronald Reagan's Director of the Office of
Management and Budget David A. Stockman 1981–1985
Always said that the deficit doesn't matter.
I guess we will get to see if he was right........or wrong!
IMHO - it's about liquidity and free money.
Incentives + low rates = markets up.
No / restricted incentives + tight / high rates = markets down.
The only economist that made money in the market was Darvas and he never practiced as an economist, he was a professional dancer. The rest are not far removed from Bernie Madoff or the poor smug sod who is proud of his many advanced degrees but basically a loser.
Forget all the babbling talking heads, web hucksters, theorists and arm chair dilettante economists. The markets have no fiscal stewardship, patriotism nor a social conscience. If Obama's budget goes through with or without pork barrels I say we see the markets lift - wait for the price confirmation.
Well after reading the article and above comments it comes down to which kool aide are you drinking. If buy american is the right move it could be way to early. As one commenter said we have not yet hit bottom.
Anyone who believes the worst is over in my opinion is fooling themselves. Markets don't go straight up and a retracement in guaranteed. Wether or not it reaches SP500 magic 666 is not really the point. We are saddled as everyone know a monumental debt, a workforce that is aging and the force that is entering is woefully not prepared because of our poor school system from grades k-12. Combine that with out of control military intervention around the world. By the way we are in approximately 700 military bases all over the world. Reminds me of the Roman Empire. The forces were spread out so think they could not defend their homeland. We do not know how to withdraw once we have put boots on the ground. Korea over 50 years, Europe over 60 years. We even provide security for Japan. An aging population demanding more and more health care with fewer and fewer workers able to carry the burden for health and social programs. This is why amnesty will be granted to the millions of illegals.
To make matters even worse were irritating our largest debt purchaser China by selling weapons to Taiwan. All china has to do is wake up one morning and make a comment about changing their support for the dollar. Wether or not they care about the impact or even hedge the bets to some extent we become toast.
With a community organizer as a president the task of a global leadership is far beyond this man's capabilities as can be seen by the first 12 months in office. Anyone who thinks China is finished growing has sadly under estimated this country and it's people. When they work the first 300 million to death there is another 300 million waiting to step into their shoes. China's reign will last more then 60-70 years. They can construct a skycraper in a year we can't rebuild the twin towers since the attack on 9/11.
To many of our citizens feel entitled to a government check. Over 50% of all household have some form of government subsidy coming into the home. The small businessman the corp of the US system is being destroyed with over taxation and regulation. Yet the billion dollar financial corporations are borrowing money at zero interest rates. I think I can make a profit borrowing a zero.
all the talk about the common man is mere political rhetoric. The checks keep coming in because no one wants to lose their benefits and the crooks keep getting re elected. The US citizen does not want to pay the real price of change. So, we muddle along making one catastrophic decision after another. After all the hundreds and hundreds of billions dollars spent on foreign aid and government we are still the most despised and hated country in the world.
We will in the end pay the price in full measure. The bottom has not yet been hit. Buy american and sell china is absolutely a fools move.
I agree that America will some day be a buy. I am guessing it will take 10 years before that happens. But we will have to go the way of USSR and default on our debts first. Dennis wrote:
"Russia had a financial collapse before the economy was able to revive itself. The old welfare state repudiated its obligations to pensioners and those on relief. Russian debts were defaulted on. Living standards for the average Russian had fallen terribly for the average Russian."
After this happens in America I will be buying American stocks with every "Amero dollar" I can find. Until then I am going to hang on to my hard assets and wait out the storm. You may get richer with a different plan but I sleep better at night with mine.
Sorry but I feel he is mistaken. There is a time to be realistic. This is somewhat different from other busts in the United States, cause in 3 to 5 years the United States will go bankrupt much like the UK did in the mid forties after World War Two. Also bear market cycles tend to last 15 to 20 years, the last one began in 2000 so probably the US market will not bottom until the 2015 to 2020 period on an inflation adjusted basis which is most of the upcoming decade.
Again yo have to be realistic looking a fundamentals China is a huge creditor the United States is a huge debtor. You could have written this article in 1950 about the United States and Britain, and guess what the United States continued to outperform for the 20 years that followed!
If you want real contrarian play buy Japan, Japan is ending their 20 year bear market cycle and NO ONE is bullish. Japan is also proof why just after a bad 10 years doesn't mean you can't have another bad 10 years. Major secular bull markets like 1921, 1949 and 1982 begin when stocks are ultra cheap (eg under 10 times earnings and 7 percent dividends) and the US market has a ways to go before seeing that!
Nicholas, just like you, I do not know if your predictions are right or not. I do know that if you are right or wrong, there will be hundreds of thousands of profitable trading opportunities within the timeframe you have described. Your very well written article asks us to believe in your vision. If traders act on beliefs, yours or anyone else's, they will fail. Traders must focus on the present: the present trend, the present reversal, the present consolidation. Investors may win or loose on your predictions but unemotional, reality focused traders will profit either way.
Remember, if its not happening don't bet on it.
Don
obama has put the hangmans noose around Americas neck, but it will take the people of the US to spring the trap door.
The U.S. still leads the world in the number of Nobel Laureates in important fields such as science and medicine. The rest of the world benefits from our discoveries. Obviously our economy is in a shambles, but we still have superb research institutions and we still have an inquisitive and entrepeneurial spirit that attracts many of the brightest individuals from around the world. China manufactures much of the junk that is sold on late night TV. American scientists at AMGEN found a way to help millions of people avoid the miseries of severe anemia.
The only ones making consistent money in up and down markets are the web hucksters.
There are plenty of poised and compelling commentary of potential opportunities or observations of the foregone. Like modern business with its emphasis on slick power point delivery, sickening politically correct relationship building the hucksters of the investing and trading world need to be viewed with the clarity of the facts - do they have money in the game or are they gaming the dumb money?
Just watch price action and let these guys go do something biologically impossible with themselves.
I think the storm warning flags have been raised for China for several months and the FXI ETF WEEKLY chart is into a third week of decline with rising volume.-
The true contrarian play may actually be Japan which (on a monthly chart) is showing positive divergence and recently crossed over the MACD HISTOGRAM's zero line- which last happened mid-2005.
Hi Nicholas,
I agree with you (unfortunately for you !!) .. I think people in the US are seeing the "glass half empty" at the moment. I am an immigrant and I must say, if I look at the US from my old country .. I still see a land that is phenomenally strong and inventive.
We will need to go thru a tough time as we start unraveling all the debt we have built around us, and in the process we will fix a lot of our problems -- the system will force us all to do that. It will be painful. Just as the system is forcing our politicians to face the truth.
But what comes out the other end will be very strong ...
Basically contrarian investing can be succesful, id you know on what you are contrarian.
But following your logic should not we invest now in Japan, since everybody has been avoiding this market for several decades, and should not we give up the theory, that the US Dollar is world money No.l? That would mean to short T-bonds (several opinions), short China (as Mr. Chanos) and being long on Nikkei (Mr. Bill Bonner/Agora). These three would be contrarian investing ideas as well.
Only those theories can survive, which can make profit. But nobody can see into the future. So my idea can be as good as yours, just now and theoretically. The result will be written by the history.
But one thing is sure, those economics are sound, where the government does not issue more and more fiat money, and the country has a lot of resources, and agricultural products. So I am betting in the long run for Canada, Australia, New Zealand, Russia, also China having a lot of financial reserves.
Of course, each country has its own problems, but nobody can survive on printing money and making debts endlessly.
Contrarian isn't always right......!!!!
That analysis will be probably correct a couple of years down the road but not yet.....!!!
US stocks don't even remotely represent value but they will as they always do when an overvaluation cycle ends....!!!
Credit and debt busts don't end so fast...the one here has just started....give it a couple of years to work out the excesses....
N,
you would make a good politician. China'm markets have been falling for 2 months already, and the US is riding very positive sentiment on the wings of one of the fastest market recoveries. Yes other capable forecasters ARE predicting slow to no rebound from Obamanomics while waiting for the US Treasury bubble to deflate.
Well China's 30yr growth record holds more weight for me than your opinion regarding their future.
As for our future, you sound like Wall Street, trying to encourage more buyers, before they unload their holdings again, leaving the sheeple holding the bag.
For all the potential merit in the analysis, we can be sure of two things:
- The argument above is about the relative fundamentals versus supposed market expectations, not about trading;
- Anybody reading this blog does not have the edge on knowing these issues better than the rest of the market combined.
In this case the trade triangles are better than we are, i.e. long-term movement in price action will be the best signal to trade on. So put away your politics, cynicism, boosterism, patriotism, contrarianism, or any other -ism, watch for signals in the China ETFs and US indexes and trade accordingly. But never bet a hunch on "Obama = Bad" or anything else. The market may be wrong in the long-run, but until then, the trend is your friend.
Thanks for the vote of confidence in the USA. Good investors buy when the market is down and turning up. I agree with you about the United States. Now is a great time to buy.
I never agreed with both parties giving huge sums of money to the "super to large to fail banks." They should have been allowed to fail and their pieces absorbed by smaller fiscally responsible banks. Government spending to stimulate jobs is another matter. Congress should release the billions that have already been approved for economic stimulus and improvements in our education system, infrastructure, and developing new technologies for our future. If it takes more government money to get things going we need to do it or face a 1930's unemployment of 25% or more.
China is booming because they are spending stimulus money themselves and they have plenty of people who have nothing that are being kicked into the 21st century. To do this their leaders are allowing factories to work the people for slave wages, they are willing to destroy their environment by polluting their land, air and water and they do not care if some of the population gets killed off from the sale of poison tainted goods, they have plenty to spare. For this reason we should increase the size of the FDA to enable them to inspect every product coming to us from China so they are not allowed to poison us too. The additional cost should be born by the sellers in China and the buyers in the USA and not the tax payers.
Interesting position... thanks for sharing. You seem to be highlighting two non-technical aspects of trading that are critical for investors to understand in order to make money on the markets every morning, namely, emotion and perception. Emotion drives the markets... and I trade with emotion until over 80% of people have the same bright/gloomy feeling. Then, I become more contrarian... and begin moving against the direction of the tide... getting ahead of the emotion.
The second area, perception, is the underlying catalyst of emotion. If you perceive the future of the markets in a particular way, it will control how you feel about that market... and drive your investment decisions.
Unfortunately, most investors trade based on emotion without understanding how one's perception feeds those feelings... leading to more losses than gains. After all, I believe emotion is a trailing/lagging indicator... to make money, you have to get ahead of the emotion of the masses and understand how they are perceiving the markets. This will help you make money as you move in and out ahead of the mass emotion that moves the markets.
A strong resurgence in the U.S. economy is an overly hopeful and optimistic view that clashes with economic reality. Today we have an aging demographic in this country, which is becoming more expensive to support and obviously less productive. Entitlement programs, e.g. social security, medicare, and veterans' benfits, will only increase the national deficit while 40% of the population pays no federal taxes. Goverment employment numbers now exceed the number of production employees in this country. We're fighting two wars and maintaining a military infrastructure of the size, scope, and costs unknown to mankind. Most states are broke with several on the verge of insovlency. Government intervention in the form of increased taxation, regulation and deficit spending only exacerbates the problems they wish to solve.
How does an economy overcome these headwinds and compete against China where line workers make $75 per month and engineers make $750 per month.
I would like nothing more than for the author's theory to be proven correct; however, the existing facts persuade me to think and believe otherwise.
Thank you Nicholas for confirming my belief that the United States is not finished yet.
I travel to China regularly, and I can assure you that, though the country presently enjoys a burgeoning economy (also thanks to trillions of yuan stimulus), it has a long way to go to take the lead from the U.S.
I believe that it is prudent to remember also that China is a closed society, despite its cosmopolitan appearances. How true are the numbers we receive?
Thank you again,Nicholas.
Jack
I do not know of Mr. Vardy or of his political-economic views contrarian or otherwise. I do believe that a successful trader must always have a macro view as suggested in the above article, especially when trading longer time frames. My Macro view for forty years has and continues to be ; never bet against the United States. It has served me well over the years and brought me back into the market Long in March 2009.
I am not an American so no patrioric bias here. I continue to base my trading on the fact that over a lot of years a lot of people have lost an awful lot of money betting against the U.S. -and yes it was usually premised on the mantra that yea that was the old America but this is a new world. I didn't believe it then and I don't for one minute believe it now.
Any rationale behind your thoughts, other than just being a contrarian. Why not than also short energy, brazil, apple and google.
Wheres the beef of your analysis, or should I say opinion.
Japan's decline in the 90s from the hyperbolic 80s was an eye-opening lesson. In the 80s folks in the US were routinely talked about Japan buying up all of America. But it was all a bubble. It burst in the 90s when sky high stock and real estate values crashed to more sensible levels.
However, China has not reached the bubble status yet because her manufacturing base is robustly expanding and infrastructure is still being built. They have a foolish policy of one child per family. In about 15 to 25 years, China will regret and reverse this policy. Look at Japan's shrinking population and labor shortage.
A very good article and I agree. First I think the GDP figures the government releases are phoney or at best not accurate and I think we need to rebuild the manufacturing base in the United States and start producing more and consuming less. Next I think that Obama is one of the worst presidents this country has ever seen and I think he is going about the recovery in the wrong way and he is trying to insill socialisim in this country. A country can't grow and prosper with a presidet you can't trust. All in all I believe the comments of Nicholas Vardy.
I am tired of all the USA bashing that continues; from the media to Barack Obama and his radical cronies. We are a nation of creative folks who are self reliant, hard working and solid citizens of this great country.
I'm a contrarian when the president spends our hard earned income without considering the consequences that encourage laziness and entitlement! I worked hard all my life washing dishes, short order cooking and selling kids shoes to pay for college tuition. What an education!
Today I am able to
This guy can't be wrong in one article or the other. In this contrarian viewpoint article, it's sell China and buy the USA. Go to his web site and he is touting the Chinese perhaps in neigboring countries but the Chinese people nevertheless. No mention of buying the USA. Sounds like a sleeze bag to me.
I checked his website and was directed to the visitors page. His three headlines are: "The Other China, How the Alpha Traders Are Investing Now in Gold, and An Ultra-Safe Currency Play on Emerging Markets." I see the "sell China" bit. But here is what he says about the US. " It pains me to say this, but the so-called stimulus package and the Federal Reserve's efforts to get banks lending again have been utter failures. Employment isn't getting any better, and until people are ready to spend money, the economy won't recover."
So color me confused.
Great comment David, and you are not confused. Some of these writers are like "gamblers news letters". They write 2 newsletters and take the opposite side in one or the other, then of course they can show you they were right on ONE of their predictions. Never showing the other prediction was incorrect.
All I know is we in the US have no economic plan. We spent the last year jawjacking about health care and the problems created by the previous 20 years of government.
Fianlly, the world is so different than trying to make commparisons from 20 years ago. The "new normal" will challenge all of us. I encourage my grandchildren to learn Mandarin.
I'm waiving my American flag as I type. Nice piece
arresting opinion! I've been buried by places like Weiss Research touting China , the East, etc. as the place to be.
Russia had a financial collapse before the economy was able to revive itself. The old welfare state repudiated its obligations to pensioners and those on relief. Russian debts were defaulted on. Living standards for the average Russian had fallen terribly for the average Russian. The election of Putin would have been a safer time to invest in Russia.
The United States still has the same discredited people in power. The social security system has not yet defaulted, and our treasuries are still used as risk free assets. We have not hit bottom yet.
I couldn't agree with you more David regarding the nanny-state America has developed into. And due to the political realities, the debt created by this utopian nightmare will first lead to massive deflation of assets (including gold, real estate and the stock market) and quite possibly a sovereign debt default.
Unable to borrow, helicopter Ben will print, print, and print more. In that scenario, we get deflation now and possibly hyperinflation later. Simply put, the USA has no good alternatives left other than to immediately stop deficit spending entirely.
Can you imagine Komrad Obama not deficit spending?
...I didn't think so.
NONSENSE!