re: Contrary Investor predicts a sub-par economic recovery
Actually, they don't seem that bearish. They are predicting a trading range, a lot of volatility, not a (further) collapse. And, short-term, they see a rebuilding in inventories making everyone's numbers look better. They don't say how long they expect the rebuilding of inventories to prop up asset prices. My guess is, inventories are going to bottom soon, and the rebuilding will go on, all the way into 2003.
They are correct, to be very worried about debt levels (in households, corporations, and many governments). They are correct, an economic recovery is dependant on interest rates (ST and LT rates) remaining at today's historically low levels. However, those worries about debt levels have been with us for a long time. The question is: "when do debt levels reach an inflection point, a point where the trend to ever-higher debt levels is unsustainable?
IMO, that inflection point will happen when/if one of the following events happens:
1. deflation, sustained over several years. Deflation makes it ever-harder to service debts. Individuals see their paychecks decreasing, but their mortgage payments don't go down. Corporations see their sales and profits decline, but their debt servicing burdens don't go down. If it looks like we are heading for an era of sustained deflation, I will: eliminate all debts (including paying off my mortgage); make a major asset reallocation into cash, hard assets, and gold; and fully hedge all long stock positions with shorts and put LEAPs. I don't think this scenario plays out, but I am aware and watching for the danger signs.
2. If LT interest rates move too high, and it looks like the 20-year trend in declining interest rates is ending. My threshhold, my BigRedFlag, will be if 10Y Treasuries go above 6.8%, taking out the January 2000 highs. The recent rebound in LT interest rates, since September 2001, is not yet worrisome. LT rates are still near generation lows. My most likely scenario, is that 10Y Treasuries, through 2002, stay within the range set by the 2000 highs and the 2001 lows (4.1%-6.8%). Another trend to watch warily.
3. Even if the overall economy isn't held back in 2002 by debt levels and a shallow rebound in demand, there will be numerous companies and entire sectors where this gloomy prediction does happen. Housing, and everything that tracks with housing demand, is not "immune" to a recession, any more than techs like EMC and MSFT were immune (remember all the wishful thinking about "immunity"?). The auto industry is borrowing sales from the future, to make current sales numbers look better, a process very similar to what the telco-equips did. I think it is crucial, for investing success in 2002, to be in stocks of companies with low debt, and where overcapacity isn't going to persist endlessly. We have already seen the inflection point in semi capacity utilization, which is a very positive sign for the semis. But we have not seen an upturn in semi-equip bookings yet, and those two trends (semi capacity utilization and semi-equip bookings) may be decoupled for a while (worst case: into 2003). |
