October 22, 2010
Mumbai, Maharashtra, India
Usually when flying from east to west on long-hauls, flights leave in the daytime and arrive a bit later in the day due to changes in the time zone. For example, you might leave London at 12pm and arrive in Miami at 4pm even though it’s a 9-hour flight.
On the flight to India, though, they obtusely scheduled our departure from Hong Kong late in the evening, arriving at about 3am. It’s like a red-eye, but in the opposite direction; in fact, if I had to come up with a name for this type of flight, I’d say ‘red face’ because everyone on board seems pretty miffed.
Fortunately, I’ve been traveling so much over the last few days between Africa, Hong Kong, and now India, my body has no idea what time zone it’s in. Everyone seems to have a method for dealing with jet-lag… sun exposure, pills, whatever. Mine is simple: eat when you’re hungry, sleep when you’re tired.
Granted, it can be a little inconvenient at times, but luckily I have a slew of subscriber questions to keep me busy at this odd hour!
First, Des asks, “Hi Simon, a few months ago I think you warned us of euro/USD parity (with USD) and a real risk of breakup of EU. Do you think you overreacted?”
Negative, I didn’t say that the euro and dollar were going to parity (meaning $1 = 1 euro). This past July, while the euro was low against the dollar and it seemed like every knucklehead was going on TV talking about parity, I wrote the following:
“To me, the best indicator is simply watching a bit of Bloomberg or CNBC. When all the guests who come on the show talk about euro/dollar parity, it’s time to exit the short [euro] position.”
Exiting the short euro position back then was a good idea, it’s surged over 10% since I wrote that letter. The thing is, though, the euro’s recent surge is not a vote of confidence for the euro, it’s a vote against the dollar.
Both of these currencies are fundamentally weak; their problems took decades to develop, and those problems aren’t just going to disappear in a couple of months.
Favor among the major currencies will shift back and forth– it’s like turning an hourglass over and watching the sand drain in the other direction. Eventually, the market will turn the hourglass over and capital will flow back into the dollar.
Again, this won’t be a vote of confidence for the dollar, but rather a vote against the euro– a financial determination that the dollar is the ‘least worst’ store of value at that particular moment among the major currencies.
Another thing I’ve written about before is purchasing power parity between the two currencies. In my estimation, in order for goods and services to be roughly the same price given tax rate differentials and the like, the euro should be priced between $1.18 and $1.25.
Anything significantly more than $1.25 is an ‘anti-dollar premium’ that the market is willing to pay for a safer store value. When we saw the euro fall within this range, the market was indicating that it no longer believed the euro to be a safer store of value.
Lastly, on the subject of the EU, don’t conflate the European Union with the economic union of the eurozone. They are related, but distinct.
The eurozone will absolutely break apart. The ‘have’ countries like Germany and Luxembourg will not continue to write blank checks to support the ‘have nots’ like Greece and Portugal. And the ‘have not’ problems are just getting started.
Next, Carol asks about dual passports: “Simon- I’m a citizen of New Zealand. I live in the US and have acquired a US passport. If I intend to travel to NZ, do I exit the US with my US passport, enter NZ with my NZ one, and come back to the US with my US passport? Is it possible to switch passports arbitrarily?”
Most countries will require that citizens of that country pass through immigration with that country’s passport. For example, while there is no outbound immigration upon departure at US airports, the law requires citizens to enter with their US passports, regardless of other passports carried.
If you’re traveling to third countries, you can use whichever passport you prefer. When I travel to Chile or Brazil, for example, I always use my European passport. Why? Because US citizens have to pay a hefty fee at the border, whilst Europeans do not. This alone has saved me a lot of time and money.
Last, Julia asks, “Simon, given the run-up this year in global asset prices, do you see anything out there that’s undervalued and worth investing in?”
While there are individual exceptions, valuations are too high in most public equities markets… not to mention I don’t have any confidence in the balance sheets of large cap stocks, especially financials. Does anyone really know what’s under the hood at Goldman or Citi? I certainly don’t.
Sovereign bonds are unsound and out of the question– I won’t voluntarily loan money to politicians. Many currencies and commodities are near all-time highs, not exactly time to go rushing in from an investment perspective.
For me, the most compelling offerings are private deals; there are a lot of brilliant entrepreneurs that need access to capital, even if it’s a small amount. They can’t get it from banks anymore, and many non-public investors are still pretty tight with cash.
This means that the few investors out there who are willing to cut a check are getting great terms for the best opportunities, leaving potential for 10x, 20x, or even 100x returns.
On the balance, the best risk/reward ratio for me is where I can actively influence a small company that’s solving a problem and providing value in the marketplace.
Have a great weekend.