FRA Co-Founder Gordon T.Long and Jeffrey Snider, Head of Global Investment
Research at Alhambra Investment Partners discuss earnings, the Chinese Yuan,
Japanese Yen and the falling credibility of central banks.
As Head of Global Investment Research for Alhambra Investment Partners,
Jeff spearheads the investment research efforts while providing close contact
to Alhambra's client base. Jeff joined Atlantic Capital Management, Inc., in
Buffalo, NY, as an intern while completing studies at Canisius College. After
graduating in 1996 with a Bachelor's degree in Finance, Jeff took over the
operations of that firm while adding to the portfolio management and stock
research process.
In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic
Capital Management of Florida, Inc. During the early part of the 2000's he
began to develop the research capability that ACM is known for. As part of
the portfolio management team, Jeff was an integral part in growing ACM and building
the comprehensive research/management services, and then turning that
investment research into outstanding investment performance. As part of that
research effort, Jeff authored and published numerous in-depth investment
reports that ran contrary to established opinion. In the nearly year and a
half run-up to the panic in 2008, Jeff analyzed and reported on the
deteriorating state of the economy and markets. In early 2009, while
conventional wisdom focused on near-perpetual gloom, his next series of reports
provided insight into the formative ending process of the economic
contraction and a comprehensive review of factors that were leading to the
market's resurrection. In 2012, after the merger between ACM and Alhambra
Investment Partners, Jeff came on board Alhambra as Head of Global Investment
Research.
Earnings
"It is no doubt that earnings have been under-performing."
What's even more concerning is that not even is the top line falling off,
but the cash flow is falling dramatically and this impacts credit along with
everything else. With no earnings and no cash flow it puts us in a high risk
environment. The only thing that has been holding up the market has been
excessive corporate buybacks which has come out of cash flow, and to a lesser
degree, borrowing. But to borrow is tough when you don't have the cash flow
to justify the credit ratings.
"How long can buybacks continue to support a market which is
standing on a fundamentally flawed premise?"
We have had 4 to 5 quarters of falling revenue but the US market seems to
ignore it. At some point reality has got to set in. But it is also important to
note that trade problems are a systemic factor to the decline in earnings.
China's imports are down 17% year over year, but these imports are coming
from basically the emerging markets and commodity markets. They have also
borrowed upwards of 9 trillion USD in the last 7 years that has suddenly
gotten very expensive for them, I think there is more pain to come.
Chinese Yuan
"The health of the Yuan is tied into the global economy and the
fact that the global economy is stumbling."
Less growth in China combined with less growth around the world again
increases financial risk which fuels more reluctance to funnel dollars into
China; it has become a vicious cycle. The Chinese have no choice but to
continue going in one direction, they are in a rock in a hard place. As the
Chinese Yuan has been falling, the Yen has been rising in strength. This has
become a huge issue for Japan to add to their already lost list of issues to
deal with. A fracture is likely around the corner, China and Japan cannot go
long without devaluing the Yen.
The markets are reassessing what central banks can actually do. And what
markets found was that central banks aren't actually as powerful as everyone
believes them to be and Japan is a perfect example of that. No matter what
the BOJ does that Yen continues to move on up. It fits into the paradigm of
the economy, the financial risk, everyone reevaluating what central banks are
capable of etc. The markets are reevaluating central banks because they see
that a tight money environment despite efforts from central banks to fuel
stimulation.
"Some major European bank stocks are indicative of an incoming
banking crisis. We see already low interest rates around the world getting
lower with each passing day; this is indicative of tight money conditions.
Low rates are not stimulating."
Troubling Matters of Debate
"Most troubling thing to me currently is that there are not many
answers available."
What I see is an unstable global currency regime which we are completely
unprepared for. There is no solution that has been presented that would allow
for a stable currency to take over Euro dollars which clearly doesn't work.
Generally the central banks can fix liquidity problems, but they cannot fix
solvency problems. We see that the credit cycle has turned from
non-performing loans so on and so forth.
The idea behind QE for Japan, America and Europe was to kick start a
robust recovery. Now that central banks has lost credibility as well as
support. Then you have all the unintended consequences that come with almost
zero money. We have nearly zero price discoveries and risk is greatly
mispriced.
"Policy makers and economists have simply run out of ideas."
Desperation is a big role of why markets are reevaluating central banks.
If we go back 20 years where Alan Greenspan was a genius and he didn't even
do anything, all he did was talk and he made a career out of not talking. No
matter what he did he was taken as a genius. Whereas 20 years later, Janet
Yellen sounds like a fumbling idiot no matter what she does. All her actions
come across as desperate because the credibility has been blown away. The Fed
has been forced into action and by being forced into action it has only
highlighted what the Fed can't do.
"Resource allocation is the main benefit of price discovery; it is
the life blood of the economy. The more we damage price discovery the more
fatal situations will become."
We need to look at this as an opportunity in the long run. Now that the
power of central banks has come to surface and credibility has been shot, it
in turn opens the door to credible solutions. The fact of the matter is that
the economy is nothing like what it should be and people know that something
is wrong and change is needed.
Abstract writer: Karan Singh
Video editor: Sarah Tung
