Ok – kind of a quirky title, but a lot of smart people were saying smart things in public this week. Peter Schiff made an excellent point in favor of property rights including for Bitcoin which he hates. Moody’s is late, but correct on a potential China downgrade. Las Vegas Sands ($LVS) took advantage of a temporary decline in Sands China (1928.HK) to buy some of the best gaming assets on the planet at discount prices. And the Bank of Japan finally started to recognize reality and talk about raising interest rates again; with potentially bad results for the US stock market.
I’m writing this from Cebu, Philippines, and being 13 hours ahead doesn’t mean I know what will happen tomorrow. It just means I get to analyze these events at night!
At DKI, we often criticize bad policy and bad decisions. The news this week was full of people making good choices. This week, we celebrate their wisdom as we address the following topics:
- New payroll and jobs data is good, bad, mixed, and other.
- Moody’s warns on China.
- Las Vegas Sands and the Hong Kong market shrug off the potential China downgrade.
- Three cheers for Bitcoin hater, Peter Schiff, and I’m not kidding.
- Bank of Japan crashes the Yen. Taking aim at the US stock market next.
Ready for a new week of people doing smart things? Let’s dive in:
1. New Payroll and Jobs Data is All Things to All People:
We got a new month of payroll and jobs data this week. Private payrolls grew 103k which was far below expectations of 128k. Last month’s job growth was revised down to 106k. So, we have positive growth, but at a declining rate. Wages were up 5.6% for people in the same jobs and up 8.3% for job changers. Quits are down as workers realize the risks of entering a slowing job market for smaller raises is not as appealing as it was a year ago. Job openings of 8.8MM was also below the expected 9.3MM. That’s still a robust labor market with a lot of opportunity, but if you check the chart below, you’ll see job openings down substantially from the peak.
Down a lot, but anything above the zero line means more people are employed.
8.8MM jobs available is still a big number and also down from the peak.
DKI Takeaway: The good: The labor market is still robust and growing. The bad: Both the employment report and jobs available report were well below estimates. More good: Wages are up and inflation is moderating (as measured by the inaccurate CPI). The Mixed: Every month this data gets revised and the revisions are typically downwards meaning job growth is usually less than initially advertised. The Other: The market likes to see these weaker job reports because Fed Chairman Powell is concerned about a wage price spiral. A weaker job market reasonably gives hope to those expecting a Fed pivot to lower rates and the growing number of economists expecting a “soft landing”. DKI has been skeptical, but recent data (before revisions) has supported this reasoning.
2. Moody’s Puts China on Downgrade Watch:
Moody’s has China’s debt rated A1. This week, the ratings agency reduced its outlook for China from stable to negative. China is facing a host of issues including slowing economic growth, too much debt, an overleveraged banking sector, and a potentially massive property problem. For years, China’s people have bought apartments as investment properties, and developers have taken on huge amounts of debt to build supply that both meets the demand from buyers, but are also far in excess of China’s housing needs. There are now “ghost cities” with lots of empty apartments and people who have put down deposits. Because some of the builders are going bankrupt, buyers won’t receive the apartments, and the entire banking sector is at risk.
Moody’s is often late, but we think they’re right on this call.
DKI Takeaway: Last year, I did an interview with Dr. David Glancy of the Institute for World Politics. (Full disclosure, Dr. John Lenczowski is the President Emeritus of the IWP and a member of the DKI Board of Advisors.) During our talk, I elaborated on how the design of the anti-Russian sanctions by the US were weakening the dollar as the world’s reserve currency. I noted that this could affect US strategic interests in our ongoing competition with China. Dr. Glancy correctly pointed out that China had economic problems of their own in particular in the overleveraged banking and housing sectors. He was right and also a year and a half ahead of Moody’s.
3. Las Vegas Sands ($LVS) Shrugs off Moody’s and Buys More Sands China:
Las Vegas Sands ($LVS) owns approximately 70% of the company’s massive Macau operations, and Sands China (1928.HK) which trades in Hong Kong owns the rest. This week, Inside Asian Gaming wrote that 5 of the 6 concessionaires in Macau have seen their stocks decline this year despite China reopening. Macau is rapidly returning to pre-pandemic profitability. Las Vegas Sands decided to take advantage of the decline in the stock price, and agreed to purchase $250MM of Sands China stock. They are buying a greater interest in the assets they know and manage. There has been a recent divergence in the stock prices at these two companies.
Sands China outperforming Las Vegas Sands last week.
DKI Takeaway: Las Vegas Sands is providing pre-pandemic fundamental performance while trading at distressed pandemic-level prices. One likely reason for the discrepancy in performance between the two stocks last week is $LVS trades in New York and US investors are concerned about economic conditions in China. Sands China trades in Hong Kong where people are returning to gambling in Macau. Rather than lament the recent decrease in the stock price, management bought back $250MM dollars of $LVS from Miriam Adelson last week, and is buying another $250MM of its own Macau assets from Sands China. Stock buybacks are controversial in some quarters, but when a company buys their own assets at discounted prices using cash on hand, we think they’re enhancing shareholder value.
4. Peter Schiff Makes the Moral Case for Property Rights:
Peter Schiff and I disagree on Bitcoin. Despite that, I respect him as a smart economist and analyst. I think he’s right to be bullish on gold, and his descriptions of how the US government debases the fiat dollar are fantastic at communicating his message to a large audience. This week, he posted a warning about how our government was seeking to invalidate our property rights and explained in one tweet the danger this policy poses.
Strong words in favor of freedom. DKI supports this.
DKI Takeaway: The US needs to have an adult conversation about reasonable levels of taxation and spending. Given that Congress is dysfunctional and well into the “bread and circuses” part of the show, that’s not going to happen. However, the above tweet is why I respect Schiff even in the moments where we disagree. His words advocate for protecting the property rights of all asset holders. No society has liberty without protecting property rights.
5. Bank of Japan Crashes the Yen. Takes Aim at the US Stock Market:
DKI has been warning about an impending disaster in Japan for more than a year. The Bank of Japan (BoJ) has kept interest rates on the 10-year government bond so low that the yen fell to below 150 to the dollar. This made imports expensive (especially energy). The problem is Japan’s debt to GDP was over 250% at the time meaning if the BoJ raised rates to save the yen, they’d create a huge budget deficit which could only be solved by printing more yen. Play that out a few rounds, and you can see why we were predicting a sovereign debt death spiral. This week, BoJ Governor, Kazuo Udea implied they would let rates on government debt rise.
That downward trend on the right is the yen strengthening against the dollar in anticipation of higher interest rates. Chart from XE.com.
DKI Takeaway: For years, there has been what’s called the “carry trade” where investors would short the yen at low yields and buy dollars at higher yields. The traders would pocket the difference between rates, and additionally benefit from the decline of the (short) yen against the (long) dollar. Higher rates in Japan mean some traders will unwind that carry trade. This would lead to selling dollars which would then cause higher bond yields in the US. For those of you who owned stocks and bonds in 2022, this is a reminder that higher bond yields typically accompany a declining stock market. There are ways to hedge against this risk and make your portfolio safer. Feel free to reach out to Deep Knowledge Investing if you’d like some help with that.
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