This note was originally published at 8am on November 21, 2014 for Hedgeye subscribers.
“We hang the petty thieves and appoint the great ones to office.”
Ali Baba and the 40 Thieves is one of the most famous of the “Arabian Nights” folk tales. It tells the story of a poor son of a merchant, Ali Baba, who over hears a pack of thieves (40 to be exact) who are visiting their treasure store at a cave in the forest.
After hearing their password, “Open Sesame” (akin to using 1,2,3,4 to unlocking your iPhone no doubt), Ali Baba waits until the thieves are gone and uses the password himself to enter the cave and steal some of their gold. Ali Baba’s brother, Cassim, realizes the secret of the cave and goes back to the cave with a donkey to try and take as much gold as possible.
Largely because of his greed, and lack of planning, Cassim is locked in the cave and when found by the thieves on their return is subsequently killed and quartered into four pieces. The thieves then do their best to find Ali Baba, to little avail, and eventually the thieves meet their demise and Ali Baba is the only one left knowing the secret of the cave.
The one obvious parallel between the Ali Baba folk tale and the company Alibaba (BABA) is the name. If you go deeper than that, it is also clear that for a long time the Chairman and Founder, Jack Ma, was perhaps one of a small group who knew the secret of the treasure cave. Now that BABA is public, though, we all have the opportunity to understand the secrets of the monolithic BABA.
To be fair, we aren’t suggesting that Jack Ma or his colleagues are thieves, although the corporate structure of BABA and transfer of Alipay’s ownership might be construed as thievery by some, but rather that just like the Ali Baba of folklore, the modern Alibaba has limitations on the amount of “gold” it can take.
At 11am today, our Internet and Media Analyst Hesham Shaaban is going to be hosting a call titled: “Baba: Risks & Timing, What Others Aren’t Telling You”. The bear case call will be focused on the following:
- China Can't Grow Fast Enough: Top-down analysis of the key factors driving E-Commerce in China.
- Growth Will Come at a Price: How the China growth story will pressure BABA's Business Model.
- Timing the Short: Model Projections and the Key Metrics we're tracking to monitor our thesis.
Email firstname.lastname@example.org if you’d like to learn how to get access to the call.
Back to the Global Macro Grind…
Perhaps we are being a bit too harsh on BABA. It is after all a veritable monopoly with very high returns on capital, but at a valuation that is also priced in. More importantly as we think of thievery and the global markets, it is probably more apropos to think of the extreme policies perpetuated by the world’s major central banks as thievery.
On a basic level, the average consumer is being robbed of his return on his savings, and punished with monetary inflation. Recently, of course, the inflation has started to deflate, which may be beneficial eventually, but also brings about its own set of challenges and unfortunately also gives central bankers the carte blanche to manipulate monetary policy even further.
The mystical ECB head Mario Draghi once again opened the treasure cave of policy in a speech at a banking conference earlier today when he said:
“We will continue to meet our responsibility—we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”
That’s a pretty direct comment, especially for a European.
The Chinese central bankers took it one step further and actually walked the walk with a 25 basis point cut of the deposit rate and a 40 basis point cut of the lending rate over night. On some level, this of course epitomizes the new currency war. The Europeans used rhetoric, but the Chinese answer back with some monetary artillery fire.
Of course nothing truly compares to the shock and awe that the Japanese are capable of when it comes to monetary policy, or as my colleague Darius Dale called it “getting crazier”. In an update note on Japan Wednesday, Dale summarized the outlook for Japanese policy moves adroitly:
“Japanese consumption be damned, we now know that the BoJ is completely comfortable with going “full Weimar [Republic]” with Japanese monetary policy, as most recently highlighted by today’s 8-1 vote in leaving monetary policy unchanged; recall that the board was split 5-4 when Governor Haruhiko Kuroda opted for additional easing last month.
What we found even more surprising is the fact that Kuroda reiterated his “upbeat” assessment of the economy. Yes, the same Japanese economy that is mired in recession and contracting -1.2% on a YoY basis!
What this tells us is that he is likely leaving room for a downside surprise to his targets, which would afford him scope to expand QQE sooner, rather than later. Per Bloomberg, sellside consensus expects a further expansion of QQE by June. Kuroda surprised us once; he won’t catch us off guard again!”
In summary there is an increasing case for Japan to ease more aggressively than consensus believes and with a negative correlation of -0.94 between the SP500 and JPY/USD, that is one really important reason for U.S. equity investors to keep Japan and its monetary policy front and center!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.29-2.38%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research