David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


November 26, 2009

We’ve spent two weeks traveling almost 20,000 miles and visiting three cities: Tokyo, Hanoi & Singapore. Meetings included quality time spent with central bankers, investors, pension fund managers, academics, commercial bankers, and others. It has been a whirlwind and well worth the fatigue.

We will summarize the observations with some key points.

Our trip confirms that the Asian emerging-market story is real and is likely to accelerate. This is not just a China story, and folks who view it that way are making a mistake. China is the largest player in the region, but the others need respect. This conclusion is true for newly emerging economies and markets like Vietnam (devaluation of currency notwithstanding) and for seasoned and established ones like Singapore.

At Cumberland, our global portfolio strategy maintains an overweighted position on non-Japan Asia. Asian emerging markets are a terrific story. This is true both for the fledgling ones and for the largest one, China. There are many in the region and they need to be examined separately. We will be going back to Shanghai and Hong Kong in January for another look at the region and to examine how US policy is playing out there. Or should I say, how US policy is failing miserably to play out there. More on that below, but first let’s wrap up the Japan report.

We are still not ready to take the Japan weight to a bullishly overweighted position. That may come after next summer’s Japanese elections, and if the new government is strong enough and determined enough to change policy. Both the electoral outcome and the willingness to change policy are open questions. It is the present policy that keeps the yen very strong and keeps deflationary forces at work in Japan. Government officials know it but are not yet compelled to change. Many there believe that a stable price level or a slightly falling price level is a better choice than an inflation-prone policy. Many reject the Bernanke approach of massive monetization. They heard his lecture many years ago and have taken a different view. We shall see what unfolds now that those in Japan have the opportunity to watch Bernanke apply the policy that they rejected. In sum, the final chapters of this book on Japan and deflation and on QE and inflation are not yet written.

Now to the regional takeaway from our trip

We believe that few trust the United States. This is obvious in private conversation. And it is clear to all that confidence in the dollar is low. This is mostly mentioned only in private.

In public there is quiet response when the Treasury Secretary of the United States utters words about a strong dollar. Asians have heard that for years and with the many different accents of the various Treasury Secretaries. Geithner would serve the country better by ceasing to mouth the same words that his predecessor Snow and others used. He is not believed. Frankly, in some circles he is actually seen as an incompetent political hack. He is blamed by some for the insufficiency of the New York Fed under his presidency to supervise the primary dealers that failed – Countrywide, Bear Stearns, and Lehman. And the ethics issues surrounding the NY Fed under his tenure are viewed as appalling; this continues to surface in private conversations. Some folks are puzzled about why Obama maintains his support for Geithner. Some just attribute it to the President’s inexperience as a leader.

My takeaway is that our present Secretary of the Treasury is seriously and sustainably injuring the image of the United States. He has lost credibility. His actions are real and they impact markets. My conversations with those who are attempting to market GSE securities to Asians and getting rebuffed are validation enough for me on this point. When the Fed stops buying GSE mortgage backed securities, this reality will hit the markets in a re-pricing of that asset class. Spreads are going to widen.

The American federal budget deficits are worrisome everywhere. Policy promises from Washington to reduce them are greeted with great skepticism. Often they are privately described as American arrogance. Publicly, Asians are very polite and do not often subject their guests to embarrassing criticism. Privately they are quite candid. In my view they are correct: America is arrogant and seems to pretend that it is still the best and most trustworthy financial and capital market in the world. There is no basis for the US to have such a view of itself. We have squandered our reputational capital as a financial center leader.

This recent financial crisis is quite different from its predecessors. In 1997-1998, the Asian currency crisis and Russian ruble collapse wasn’t viewed as America’s responsibility. We didn’t cause it. We didn’t cause the 1994 Mexican peso crisis either. And while we contributed to the tech-stock bubble, we weren’t the only ones to do so. But the last two years of Madoff scandal, federal agency failure, rating agency restatement, bond insurer demise, Fed primary dealer (Lehman) bankruptcy, and mortgage securitization deception (CDOs) are all Made in the USA. We led the world into crisis. We caused it. And we haven’t fixed it.

To Asian eyes it appears that this American-made tragedy continues to this day. Proposals for reforms in America are greeted abroad with skepticism and doubt. The political structure of America is seen as a weakness. And confidence abroad is falling, just as it is at home.

Some will view our conclusions as harsh. Maybe so. But the lists of American-made errors that have cost the world billions are factually correct. Say what you want, but Madoff WAS regulated by the SEC, Fannie IS a federal agency, and AAA used to be a respected rating that that has turned out to mean nothing.

This is not just a Democrat or Republican critique. Both political parties have failed the country miserably and both are seen as contributing to the mess, from the Asian perspective. Personally I agree. Our Washington leadership under this president and under the last one has proven to be impoverished. The money influence in politics seems to have overwhelmed any sense of centering ethics.

We come back from this trip more determined than ever that investors must protect themselves. The starting point for that defense is an old principle: diversification of risk. To do that they must take a global view. And Americans need to be very critical of US policy and distrusting of their politicians.

Cumberland’s recommendations include worldwide diversification of security risk and worldwide diversification of currency exposure. Favor spread product in the fixed-income area and avoid US Treasury securities. View all positions as subject to change in strategic ways. Require independent verification of credit rating opinions and do not depend solely on rating agencies. And be prepared to change course as events unfold. Act prospectively and preemptively and not reactively.

Lastly, separate the silos of investment approaches. This may seem self-serving to say, but we believe that the separation of investment management, brokerage, and custody is needed to insure safety. At Cumberland that has always been our view. Not one of our managed client’s accounts had any money exposed to Madoff, Sanford, or any others of their ilk. Separate silos prevent that risk and allow for audit trails.

Cumberland does not take custody of client’s assets; they are held by investment firms or banks. Cumberland believes that a separately managed bond account must be able to “trade away” from the firm where it is domiciled and in whose “wrap” program it is placed. We will not manage an account where we cannot trade independently.

We are finding this view acceptable worldwide. As the globe grows, investors and financial professionals are becoming more and more skilled at their work and less and less trusting of governments and policies. They have good reason, in our view. This approach works for Asians and needs to be the foundation of investing for Americans.

We are often asked if we are optimistic about the future. For the world as a whole the answer is yes. Most of the world is seeking growth and peaceful economic outcomes that enhance the quality of life.

We are less optimistic for the US. Our longer-term trends are working against us. We have squandered our political capital and are neglecting the education of our youth. We practice polices of subsidy and deceit instead of self-determination and transparency.

No, we are not about to abandon our country; we have deep respect for our entrenched American traditions of freedom. But we are directing the harshest of criticism against our politicians of both parties. They are equally accountable and responsible for the mess we have. If only we could limit them – but the citizens are not yet angry enough to do that.

When we Americans have had enough, the voters will throw many of the bums out and start over. That will be a great day of celebration in America. We expect that others in the world will join the celebration. I hope that day arrives sooner, not later. By the way, financial markets will anticipate this change and be moving higher before the votes are actually counted. Markets measure change with sensitivity and find the pulse of that change before events are widely known.

Speaking of events, we built a little cash reserve in the US stock market accounts in the run-up to the Thanksgiving holiday. The Dubai World debt crisis has contagion risk. Insolvency cannot be permanently papered over by excess liquidity, not in the Middle East nor, for that matter, in America. In our global portfolios we are underweight the UK and have zero ETF exposure to the Persian Gulf states. Readers are directed to the Gartman letter. Dennis Gartman identified this Dubai risk well in his Thanksgiving Day missive. At Cumberland, we want to see the market make the adjustment for this risk before we resume a fully invested posture.

In America we have much to be thankful for. Our great freedoms are our strength. Our ability to speak and write with openness and to articulate diverse views is a powerful force. Our press is permitted to investigate and disclose. Our courts are honest and our legal systems include entrenched respect for individual rights. World travel confirms that for me every trip. I worry for my country but I still love it.

Happy Thanksgiving. Stay safe.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

Category: Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

14 Responses to “Asia trip, Dubai news, T-Day wish!”

  1. [...] « A Strategic Guide to Black Friday Bargains Asia trip, Dubai news, T-Day wish! [...]

  2. Wes Schott says:


    gold is holding its ground

    …was almost stopped out of SDS and UUP on Wednesday, should not be a worry now

    Kotok is spot on with his assessment

  3. steve from virginia says:

    David Kotok sez;

    As the globe grows, investors and financial professionals are becoming more and more skilled at their work …

    Maybe they do and maybe they don’t, yet one thing is clear, there are more and more of them. The ‘middleman class’ expands exponentially, all selling each other each- other’s underwear. The fact of middlemen selling the grandest and most prolific promoter of the middleman idea – the United States of America – short is too ironic, even in this Age of Irony.

    So … what exactly are these suited- and- tied jet- setting world travelers actually producing in their spare time, when not hobnobbing with central bankers and other assorted gangsters?

    Kotok does not go nearly far enough, the entire ‘Money- making- money’ meme is bankrupt. M3 is the parasite that kills by embellishing, discounting the cost of money but not the cost of resource waste, mis-allocation and mismanagement. M3 is riddled with errors; these are not simply the failure of US capitalists to admit them. The greatest has been in making them blindly in the first place, then repeating for fifty years!

    Where were the Kotoks of the world when the ‘S’ started ‘HTF’ back in 1973? Investment in conservation would have pushed back our current crisis by a half- century. This was torpedoed by the ‘business as usual’ growth- at- all- costs community in 1982, if memory serves. Rational practices were scuttled as part of the Voodoo Economy.

    Today witnesses the expiration of accumulated expedients; the cheap credit, the currency devaluations, the monetary unions, the asset bubble hedges, the labor arbitrages, the military adventures, the heaping- on of more and more debt. How many of these central bankers preside over balances unpayable without increases in energy flows? The answer is all of them; all are running out of energy. None have any credibility about anything in this world at all.

    I wouldn’t ask any of them what the time was, they couldn’t give a correct answer!

    The foregoing is very hard on Mr. Kotok who is not personally responsible for the crisis that laps over all the world’s children’s feet. Nevertheless, more pleas for late- gained ‘responsibility’ are simply too hypocritical to bear. Where have you been all my life, Mr. Kotok?

  4. ZackAttack says:

    I think nearly everyone here was well aware from the time of his nomination that Geithner is an integral part of the problem set.

  5. John Clarke says:

    I agree wholeheartedly with about 90% of the post above regarding the mess that Paulson, Bernanke and ‘TurboTax Timmay’ have created, but on this issue I have a couple of questions.

    David says:

    “Asian emerging markets are a terrific story. This is true both for the fledgling ones and for the largest one, China”.

    1) Do you really think the Asian story is going (to continue to go) anywhere without the United States and Japan in Todays Global Economy.

    2) Do you really a believe/trust the Rosy economic data coming out of some of these countries, especially China.

    Personally, I think China is Full of Sh*t on the matter…

  6. [...] nor, for that matter, in America,” Cumberland’s chief investment officer David Kotok writes at The Big Picture. “At Cumberland, we want to see the market make the adjustment for this [...]

  7. Jessica6 says:

    @John Clarke:

    Mark ‘Enron Shorter’ Chanos would agree about China.

    Also, it’s hardly secret that people are suspicious of the US Dollar and types like Mark Faber, Jim Rogers and particularly Peter Schiff and Ron Paul seem to have developed almost personality cults. I just can’t figure out why all they are so bearish on the US Dollar because of deficits but not the Yen or the Euro??

    America’s far from the only country to have had a real estate bubble, bad loans, bank bailouts and a serious lapse of ethics, to put it mildly. Nearly every country seems to be pursing policies that benefit the so-called ‘ruling class’ over pretty much everybody else. See http://chinesepolitics.blogspot.com/

    The whole world is a mess and while it’s comforting for those in the East to blame the ‘West’ for the current financial crisis, greed and corruption are thoroughly global phenomena. It’s part of the human condition, unfortunately, and the hunt for a quick buck and damn-the-consequences isn’t restricted to California house-flippers.

    When people in the East talk to Westerners they do certainly like to play up those stereotypes of the East being more ‘spiritual’ or ‘less materialistic’ but as someone who’s married to someone from India and whose mother spent 10 years in Hong Kong and China, I can tell you that it’s utter nonsense. It’s a lot easier to blame ‘Western values’ for being a corrupting influence rather than look internally and I see plenty of people in the US decry the same lack of moral fiber in people who are supposed to be our leaders.

  8. TripleB says:

    I very much enjoyed reading these insights; thank you for putting this online.

  9. Cumberland’s recommendations include worldwide diversification of security risk and worldwide diversification of currency exposure. Favor spread product in the fixed-income area and avoid US Treasury securities. View all positions as subject to change in strategic ways. Require independent verification of credit rating opinions and do not depend solely on rating agencies. And be prepared to change course as events unfold. Act prospectively and preemptively and not reactively.

    Yes, but shouldn’t we have been doing that anyway? ;)

    I would be wary of jumping back into Japan. I don’t think the world is big enough to support both the US and Japanese current spending deficits. I am leaning towards one of them going into a borrowing crisis as the next stage of this ongoing debtism (as opposed to capitalism) crisis (the next significant Oct. ’08 type crisis, not these mini Dubai type crises). I’m guessing it may hit over the next couple years and I don’t see Japan going anywhere until it does hit. At least not anywhere safely

  10. d4winds says:

    The China bubble is the next big one to pop. The tea leaves: (a) rampant official lying in government statistics to tell a growth story that does not exist; (b) excessive, unquestioning media attention and suspect valuations (“it’s different this time”); (c) a Chinese government/private sector that is in a permanent state of investing savings in other countries–like the US–rather than its own: this is the classic pattern for impoverished, materials-rich exporting LDCs that permanently remain so, the “material” in China’s case being merely cheap labor in ultra abundance.

  11. The difference between the Chinese and the Japanese popping bubble is that the Chinese are accustomed to being poor. Americans and Japanese aren’t. A crisis in either of those nations could lead to serious economic upheaval

  12. It stinks not having oil.

    Dubai Background

    Dubai is one of 7 Emirates that make up the United Arab Emirates. Abu Dhabi, with huge energy reserves and a sovereign wealth fund thought to be worth $630 billion, is the richest of them. Its banks are major creditors of Dubai and its companies, but news that they are no longer willing to keep buying or refinancing the debt of Dubai’s major companies shocked the global markets.

    Dubai and U.S. Housing Speculators Play the Same Game

    Dubai has very few energy resources and raises little money via income tax due to its competitive tax policies. The state has consistently run deficits and the Emirate’s growth has therefore been funded via the money markets.

    A huge property-led boom saw money pile into infrastructure and construction projects (sound familiar?). Similiar to being on the cover of Sports Illustrated, building the world’s tallest building has always been viewed by investors as a sign that a local economy is about to head south.

    Dubai World, the most indebted of Dubai’s state-sponsored companies, owes $60 billion of which $22 billion must be refinanced by 2011.

    Worries About Impact Of Dubai Crisis Generate Substantial Selling Pressure

    The U.S. stock market opened sharply lower (down roughly -3%) on Friday, November 27, 2009 in a reaction to the financial crisis in Dubai. The downward momentum comes after Dubai World asked to postpone payment on some of its $60 billion in debt. Worries about a default by the city-state have raised significant concerns about the impact on banks.

    The markets closed down roughly -1.5%.

    Mark Minervini Comment on Dubai Sell Off

    I view short term turmoil in countries and nations outside the U.S. as a long term positive for U.S. stock and bond markets. Similar to the Asia crisis in the late 1990′s, these foreign calamities highlight the relative safety of the U.S. and bolster U.S. credibility. I made this same comment during the Asian crisis, which turned out to have the same effect.

    A Counterintuitive Scribe

    I will leave you with one counterintuitive comment by James Hillman from his book, Kinds of Power: A Guide to Its Intelligent Uses:

    “Wherever we see an increase we feel its weight. All the numbers going up no longer portray the optimistic spirit, but instead indicate monstrosities, epidemics, ugliness, future disaster, extinction. Growth has taken on a cancerous tinge. To use the word now sends a message of potential danger, whether the growth be in debt, the population, the underemployed, the homeless, the dimension of cities, the size of government, the particles in the air, the tax rate, the cost of living, the cholesterol count, even the rising numbers on the bathroom scale. Going up now means decline. What was before the measure of progress has become a sign of

    You might be thinking that this was written to describe the current economic challenges, however his book was written in 1995. Did the world recover, indeed. Will the U.S. and global growth recover this time around…indeed.

  13. [...] interesting reading: Asia trip, Dubai news, T-Day wish! This is a great read about what the Asians think about the [...]

  14. [...] David Kotok w/a balanced look at how the world sees Geithner [...]