Known Unknowns and Black Swans for Q2
Could This Trigger a Market Correction?
"Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don't know we don't know."
— Donald Rumsfeld
Bush's Secretary of State took a lot of heat for his little speech about what is knowable. The Plain English Campaign gave Rummy its Foot in Mouth Award.
But I always liked it. It created an outline for a logical discussion on problem solving.
What I didn't know until much later was that Nassim Nicholas Taleb, the author of The Black Swan: The Impact of the Highly Improbable, gave a presentation on uncertainty to the Department of Defense shortly before Rumsfeld's speech. It squares the circle, as it were.
Today, we have a host of known unknowns and probably even more unknown unknowns that, like the proverbial black swan, could bring down stock markets around the world. Here are some of the things I think I think about what I know I don't know.
Nationalism is Picking Up, and China is Greedy
China has claimed the South China Sea to be its private lake. From the WSJ:
China's “nine-dash line” lays out its territorial claims against its neighbors. Ten years of trying to negotiate these boundaries have yielded nothing because China doesn't want the problem “solved.”
Oil Rig Diplomacy
A few days ago, China dropped an oil rig in an area claimed by both Vietnam and China. China surrounded its new claim with a navel fleet including submarines. The Vietnam Coast Guard has protested by ramming these ships more than 136 times.
China has also been fishing in the waters of the Philippines and has an ongoing fight with Japan over a few rocks in the North.
Tuesday night, Vietnamese mobs burned down and looted factories in Vietnam that they believed were owned by the Chinese. Sadly, most of these businesses turned out to be owned by Taiwan.
I looked at one company that's drilling for oil off of Vietnam, expecting it to be a “blood in the streets” buying opportunity. It wasn't. Salamander Energy (LSE: SMDR) is up about 45% over the last month due to a buyout rumor.
China's societal arrangement with its own people is breaking down. The deal was the peasants would accept the heavy hand of government as long as living conditions kept improving. But now, the Mandarins in Beijing are getting worried. The Chinese economy is slowing down.
Real estate prices fell 25% in April year over year. Developers are offering zero-down financing. Exports are fading, and the great Chinese miracle of the last 30 years is looking shaky.
When authoritarian economies get in trouble, dictators stir up nationalism. Since Putin annexed Crimea, he's had the highest approval rating he's ever had.
German Slow Down
Germany's export economy is closely linked to China. A looming yuan devaluation will hike import prices. A slowdown in China will hurt.
Furthermore, since Germany closed all of its nuclear power plants, it is now 25% dependent on Russia for natural gas. But due to Russia's aggressive move into Crimea and Ukraine, there is a good chance its gas will get a lot more expensive.
Some 6,200 German companies are doing business in Russia. The Economist claims that 300,000 German jobs depend on exports to Russia.
The German stock market, the DAX, is at record highs. A correction won't be good for anyone.
Dusty Roads, The Indian Dream
Perhaps because India is a messy democracy, it has weathered the post-recession storm better than most. India has had the best-performing market since the bottom of the financial crisis. It is up 192.5% versus 180.6% for the S&P 500. But where do we go from here?
If you have ever been to India, you know their roads stink. It is common to see people making gravel by hand. The Indian method of making speed bumps is putting a row of cement blobs on the road, one handful at a time. It is very innovative — but it doesn't do much for your back.
I've been looking at the India Infrastructure ETF (NYSE: INXX) for years now in the hopes that one of these government bailout projects would boost it. The turnaround could be here.
India has a newly elected government that the market likes, and INXX just broke out of its downtrend. There are higher highs and higher lows.
India has the most undervalued currency according to the Big Mac Index, and if you believe in Indian roads, it should be noted that Tata Motors (NYSE: TTM) has half the PEG ratio of Ford (NYSE: F).
One plan now working through government is called Smart Cities. Infrastructure spending would increase 35% to 70% over the next 30 years.
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.
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