Hi Grace, I apologize for my mistaking your observation for a recommendation. Now, onward to your observations (we like doing this, do we not :0)
<<In fact a lot of companies just had a really good year>> and many more a merrier decade. The financial environment is now substantially different, savings are much lower, savings rate will have to turn positive, people are closer in time in need of both; net worth is decreasing; debt will cause more unemployment; we may soon be hit by either deflation or inflation, or worse, both, garnished with recession, spiced with unemployment for high earners, or reduced income for high earners; all inward capital flow to the US are mostly in the form of hot money, and are at high meter readings; end-user aggregate demand have fallen sharply, and any recovery may at most be tepid; and the world ex-USA is sinking in a synchronized and bubble energized fashion, gurgling in capacity, choking on germs of competitive devaluation and protectionism.
<<But the trick always is not to follow the money but to anticipate where it will go next>> You are spot on for the purpose of the thread. I think the money is shortly going to where it has been spiraling towards, what CB describes as money heaven, and what I postulate as eventual value nirvana, routed in the interim through price purgatory. I am controlling my natural optimism with my innate caution, observing that there is no compelling value in big caps, small caps, long bonds, real estate. I believe there are some compelling values in Asia, but also believe they will become even more compelling in the coming event that defines an era on the US markets. My position on gold is a uncomplicated hedge.
I do observe that the indices are actually pretty well pinned in place by the FED rate cuts and continuing flickering of eternal hope. In the aggregate, the big non-tech shares have been pinned for the past several years after a ‘collapse’ from high. The Nasdaq has really only given up the peaking spike (3000 points), and have yet to regurgitate all the previous bubbly froth (another 500-1000, depending on policy). What is the correct valuation for tepid growth? 5 x earnings? 10, 15?
What do you see?
The market cap weighted average decline is poisoning the equity backing for corporate and consumer loans, and expected wobble in real estate will further pollute the pool of funding with toxic levels of confidence destroying agents and hope dimming dust. Some folks may argue with my vision of real estate price decline, in which case they will either have to concede that massive inflation could take place, or convince themselves that the FED can indeed steer the economy and make porridge not to hot and not too cold. I think these folks final education will be a bitter one.
<<The risk is spread out, stripped out. I'm not saying there won't be consequence but this is not Japan. We write off bad debt faster here.>>
I do not believe the US will live through the Japan experience because folks in the US can carry guns. The US will live through a US experience. Bad debt is traditionally written off faster in the US when the US tax payers, ever more realistic, are willing to pickup the tab via tax increases (in the case of utility and state/municipal debt), unemployment (in the case of corporate debt), or homelessness (in the case of private debt). Yes, people will cope, they always do, and new corporate leaders will take the place of the fallen. Other companies will serve Lucent’s market, Cisco may simply become a service company, Dell may take Cisco’s hardware business. Money will become tight before it becomes easy again. Whatever one buys now will more likely go down rather than up in the interim.
Writing off debt alone is often not enough. Given Japan’s wealth and deflation, Japan can write off and/or inflate away all of its debt and save all of its banks at a moment’s notice. Given their almost zero interest rate, would it not be better to write off 50% of the debt, inflate away another 25%, and pay their savers a 10% interest rate? Why do they not do it? Maybe, just maybe, because they know it would not do any good. There is no demand and life-styles must ratchet down … thus Japan deflation, punishing the debtors, rewarding the savers with actual positive real interest rate of possibly 5%, higher than the US.
Japan should have created a prosperous and mutually supportive neighborhood when they had a chance, instead of encouraging, through selfish “make and export everything, import nothing” motive, the forced establishment of duplicates of themselves (Korea, Taiwan), crushing demands through saturation.
As long as we are speculating on science fiction, let me put my stake into the ground. I am just making it up as I go, and I have no answers. The simple answer, when offered, is a false answer. There are no simple answers for Japan, and I do not believe there are simple answers for the US. I do not believe the US is undergoing (a) an inventory adjustment, or (b) a simple economic boom-bust cycle. Simple debt write-off will happen, but will not likely be the answer. For the US, writing off debt of the rust-belt companies was not the answer, creating new companies was. For Japan, trying to export their way out of their current difficulties is also not the answer.
The adjustment from Now to Next will involve navigation of an interim dark void similar to the gap between Rust-belt and Silicon Glory. I believe the US is on the cusp of a grand inflection point, where the old will have to be phased out and new grasped at. I do not know what the new will be, maybe biotech, possibly nanotech, perhaps space mining or something simpler, like bio-food.
I doubt it will be manufacturing such as INTC, AMD and not even software such as MSFT, ORCL, and certainly not KO and P. I think the design, service, marketing and distribution parts of these businesses will do well, but mania leaders they will not be.
The entertainment and communication sides of AOL, MSFT and similar businesses may have ‘superior’ growth worth a premium P/E. For the tepid growers, 20 is too generous, and 10 may be more realistic.
As I stated earlier, I have no answers. I do have an approach, for now, during the interim, and that is high, geographically diversified, un-leveraged, patient, interest bearing, even metallically shiny, cash.
There is nothing to buy now. The onset of inflation, deflation, stagnation, recession or explosion is all more tolerable as long as one has cash.
What do you think? |
