“China? Numbers? Everybody knows the Chinese numbers are fraudulent.”
Janet Yellen has been approved by the Senate for the top post at the Fed. Your editor has given up hope. He had thrown his own hat in the ring, hoping at least to get a free chauffeur service as the new Fed chief. But his hat was not even noticed. The phone never rang. And the person not calling was none other than the POTUS himself, Barack Obama.
Rejected, ignored, and cold-shouldered by the powers that be, he has turned his attentions elsewhere. To China, for example.
Putting this in perspective, your editor also provides some advice to his own Family Office. Said advice may be sage, or not. It may turn out to be good advice, or not. But at least it is consistent.
“Profit is made when you buy”, he said recently. “Buy cheap. Buy good. Don’t worry about what happens to the price”.
This last piece of advice was a fastball he was throwing at his own family, hoping it would get by them without notice. His advice at the beginning of 2013 was to ignore expensive US stocks and buy cheap foreign stocks – particularly those of Russia and China. By the end of the year, the US stocks were even more expensive. Russian and Chinese stocks, on the other hand, were even cheaper.
“Price doesn’t really matter. Not in the short term. What matters is value. And price doesn’t tell you what the value is. You have to look deeper”.
We interrupt this investment commentary with a look at a profound absurdity. If price is a measure of value, a work of art by Christopher Wool, entitled Apocalypse Now, is worth $26,485,000. That is the price that a willing buyer, presumably compos mentis, paid at auction in New York on 12 November of last year.
The masterpiece, for the benefit of readers who don’t know it, can be described as a poster, with the words – “sell the house, sell the car, sell the kids” - emblazoned on it. As a decorative object, this would be worth – in the Bonner household – maybe $15. Or it would be tossed out with the empty pizza boxes.
A critic describes it as “singular, strong, organic… as deep as it might appear shallow.”
We doubt it is that deep.
But what do we know? From our point of view, if profit is made when you buy, this buyer just lost $26,484,985. The buyer of Russian or Chinese stocks, on the other hand, made money (despite the price movement).
Looking more deeply into the Chinese and Russian markets, we find lots of value. We also find, under the surface, lots of trouble, which explains why there is so much value still lying around on the ground.
Bill Bonner on markets, economics & the madness of crowds
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“It is very hard for Westerners to appreciate how corrupt Chinese business and political life is”, continued our expert, who will remain nameless lest the Chinese revoke his visa.
“Almost every rich person in China owes his fortune to some criminal activity. Because, when the country first took the capitalist road after 1979, you almost had to break a law or two. There was no getting around it”.
In China, as in Russia, the sudden release of billions of dollars’ worth of state-owned property into private hands was a rough-and-tumble affair. It helped to know people in high places. It helped, too, to have a flexible view of right and wrong.
At the millionaire level, corruption on the local level was endemic. Still is. Building projects, contracts, licences, bribes…
“You cannot do business in China without some connections at the local level”, our friend continued.
“China is a big place. The national government sets the agenda, but local leaders often pay no attention. They have their own agendas. And everybody expects to get something…”
At the highest level, the ‘princelings’ – typically family members of powerful party bosses – are often billionaires.
“There’s so much money in China. China is even more reckless with its easy money policies than the US. The money supply is now $17trn. That’s in an economy only half the US size.”
As a point of reference, the US money supply is only $10trn.
Will the Chinese economy blow up? Will its markets melt down? We don’t know. But you make your money when you buy. Buy China and you will likely make money now.
The same can be said for Russia – another longtime favorite of our Bonner Family Office research team, led by Robert Marstrand. Now, US colleague Steve Sjuggerud likes Russia too: “Russian stocks soared the last time they were this cheap. Our database shows a 328% gain from 2001-2004 and a 167% gain from 2008-2011. We have the potential for a similar move right now.
“Second, the dividend yield on Russian stocks is very high. That, too, has only been this high twice in the last 12 years – in 2001 and 2009. Those peaks led to an 83% gain in six months and a 119% gain in 15 months, respectively.”
One of our favorite Russian companies, Gazprom, is priced as if it were going out of business. It sells for only three times earnings, and it delivers a dividend yield over 4%.
Why so cheap? Well, there are plenty of reasons, not the least of which is that investors regard Russia with great wariness. They fear that Vladimir Putin might not be fully committed to democracy and that there could be some dirty dealing between the government and the oligarchs.
We take both things for granted, just as we do in China. Just as we do in the US. But a dollar’s worth of earnings is a dollar’s worth of earnings.
And if you are willing to look beyond crashes, coups, and financial collapses you can make more in Russia and China than you will in the United States of America.
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