Model Price Question #4

Facebook Comment (from our Model Price Facebook app)

Brian, I read your latest blog with great interest. I’ve been reading some articles recently on what’s being called “the great unwinding”. It centres on the underlying fact that Global debt is increasing at a much more rapid rate than expansion of Global GDP, countries are trying to narrow the gap through various means. Seems to me the trickle down effect always ends up on the doorstep of individual households. Governments, central banks & corporations have many tools at their disposal to unwind. What can Joe & Jane average do to unwind when they are so overleveraged? When I hear commentators on BNN talk about real estate and they encourage people to buy at any cost (paraphrasing) simply because rates are low, I really start to wonder where all this is going! Thanks again for making MP available, it has been an invaluable tool for me in terms of knowledge, making $ and keeping what I have safe.

From ModelPrice Guy

OK, it’s Friday afternoon, Master’s weekend, and I’m working on my S&P/TSX Composite blog but this subject is more fun…so with a little ADD, I will give you my 2 cents worth on this subject.

I am incredibly optimistic about the future and our kids and grandkids well being. Yes, I think legacy companies and debt will be an issue but we are on the verge of creating whole new industries and jobs that will leap over everything and anything man has created since we have been on this planet. That’s right, I think there will be a reset in equity prices, a retracement back to the lows, that we saw back in March 2009, and this will be one of the biggest buying opportunities for the next 20 plus years. So you better be ready, because this buying opportunity could happen anytime and not last long.

Hogwash you say. Well consider these three things while Jordan Spieth wins the Master’s this weekend.

Artificial Intelligence – Google’s computers (AI) just won at ‘Go’! OK, the worlds leading Go player won 1 game out of 5. And like chess, soon the computer (AI) won’t lose any games. AI is here and it will impact our way of life forever. And its possibilities are endless in the fields of finance, drugs, medical, hell, we might as well say everything. Today this may be a novelty but tomorrow it will show up in everything we do, giving us a productivity miracle that mankind hasn’t seen since the 1820s.

Global Warming – Did anyone notice the temperature in February? It was not only the warmest monthly temperature on record but it completely smashed all records by the widest margin. Global warming is exponential not linear! When the world’s leading countries got together in Paris to talk strategies about lessening our carbon footprint both the scientific community and politicians agreed that a 2 degree Celsius warming would cause huge global dislocations. Well folks, maybe you don’t know this but we are at 1.38 degrees of warming so far. Climate change is going to happen but there lies the great economic potential. Carbon will have to be left in the ground because as a human species we can’t use it anymore. Why do you think Saudi Arabia is pumping all the oil they can? They figure, and correctly, that they will be left with oil reserves in the ground in the foreseeable future when the world, together as one, will not let the Saudi’s (or anyone else) pump oil someday. So with every barrel they sell today they are at least getting something, instead of nothing. But alternative energy will be an economic boom for those willing to participate. US coal companies had a market capitalization of $45 billion three years ago, now it’s only $2 billion and we used the largest amount of coal as a global energy source worldwide in 2015. Oil companies of today face the same future, it’s only a matter of time.

Debt – Central Banking – Banking, Finance Industry – Yes, debt is at an all time high. And yes, central banks around the world have the wrong monetary policy. This is going to change.

Debt – A huge amount of debt is, in my opinion, located in legacy companies/industries that are slowly dying. Take Tesla (TSLA) versus General Motors (GM). GM has debt of $155 billion dollars with a market capitalization of $45 billion. TSLA has debt of $7 billion with a market capitalization of $34 billion. Mr. Musk could snap his fingers on this Friday afternoon and eliminate his debt by issuing stock at a huge valuation compared to GM’s. GM…will probably die, longer-term, with bondholders owning the company. Debt will have to be written-off, as bondholders will get something on the dollar. This will happen to every company/industry that doesn’t have a future. And as we head past 2020 there will be a lot of legacy debt, and assets for that matter, that will have questionable value.

Central Banking – Please consider all the economic textbooks ever written in the history of man, not one, has a chapter or even a paragraph on negative interest rates. That’s why the men and women of the main central banks of the world are academics. They have to figure out a way to restore or reset the monetary system, where interest rates are normalized and credit is functioning the way it was before the financial crash of 2008. Sure they could fail, but what if they succeed? Can you imagine the worldwide equity rally? And conversely, the bond market crash, if and when this happens. This most certainly would be a major buying opportunity as I’m sure the equities would be pounded (crash) temporarily as interest rates normalized. This will happen sometime in our future but I have full confidence that these men and women can figure this monetary conundrum – negative interest rates – out.

Banking, Finance Industry – Will never be the same again. The market is already telling you this. Yes, Citigroup/Bank of America are in the ‘Blue’, below EBV-3. It’s time we broke up these ‘too big to fail banks’ and find others ways to issue credit to the economy. At their worst they were criminal organizations extracting too much economic rent from the real economy. They need to be ‘disintermediated’ and in this high technology world alternative platforms could be easily designed offering lower costs and full transparency to all participants. For instance, credit as well as loans could be provided by peer-to-peer apps. Call it the Uber of loans were I have capital and lend this capital to people with a FICO score of 700 and in my own neighbourhood or across the country. As these big banks are broken up thousands of smaller specialized shops could/will be founded and staffed by people that would do a better job with lower costs.

Yes, call me an optimist. The ‘Great Unwinding’ will happen but for the benefit of everyone. It’s a great time to be live!

This is the world as I see it, on a Friday afternoon, Master’s weekend.

 

One response to “Model Price Question #4

  1. cobbiangrant April 10, 2016 at 5:45 pm

    BRIAN, your scaring the crap out of me! Not cause I think your wrong, but I understand just enough, that I think your correct. Problem is, I do not understand enough on how to protect myself. I do not have any debt, I only have you my friend. What moves should I be making in preparation for this warming and winding down of these corporations?. I don’t hold any bonds, so that’s a good thing. In years gone by people bought swamp land in Florida. With this global warming all ready occurring, should I start buying up farm land around James Bay.? Or building resorts on the sea floor?
    Looks like Willett is on the cusp of winning the MASTERS….Ian ,Sat. 5;30pm

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