Hi Maurice, many thanks for your comment regarding what I said and did not say. In return I will do you this favor ...
I am writing to you using my new toy, a Compaq Pocket PC attached to a keyboard, while attending a Board meeting of a project my client has no interest in because I got them out.
This is the last Board meeting, but full of acrimony because one local partner is pissed that we sold our shares to another local partner, circumventing their veto through Jay's re-jigging of the holding structure offshore to China.
I am writing to you about some secondhand open secrets that may be of passing interest to you, and if you are concerned about your NAV before, you should be flat out frightened now.
(a) The recent jubilation concerning the recession that apparently never-was is triggered by the 'truth' that real GDP growth in the fourth quarter of 2001 was positive 0.2%, instead of the expected decline of 1%.
(b) The paltry upturn is primarily comprised of two items, state and local government spending, and business spending on computers.
(c) The problem is two fold ... state and local spending increase is bad news, and
(d) The IT purchase increase, when measured in current dollars, is USD 1.9 billion, and after hedonic treatment, becomes a USD 23.5 billion.
(e) Without hedonics, real GDP growth would be negative 2% annualized.
So, nothing to celebrate at all, even though the press and officialdom chose to fete and wine, concentrating on productivity increase.
In the age of computers, people are working 10-12-14 hours a day, often at home, even though they are logged by the bean counters at 8 hours per day, thus showing absurd levels of sustainable productivity growth. But, hey, whatever, because the fiction has no affect on J6P unless they want to be affected, by buying equity of inflated shares based on the belief that GDP is growing, strongly, in a sustainable fashion, unimpeded by debt mountain.
The magnitude of the fiction is amply demonstrated by the inconsistencies in the numbers, S&P 500 pro-forma earnings is USD 45.31 per share, with a PE of 24.7, and GAAP earnings were 28.31 per share, with a PE of 40.
The words 'mirage', 'fiction' and 'fraud' come easily to mind.
The presentation is pro-forma earnings heavy, merger/acquisition accounting convoluted, served on a comparison against reduced expectation and whisper numbers.
But, hey, again, caveat emptor.
Another part of the open secret is more bothersome to J6P, whether they buy into the equity market or not, and that of course is the fictionalization of the CPI index.
First, we have the invention of 'core' inflation, an analog to the CPI as pro-forma earnings is to GAAP earning. But, again, never mind, as this artifact do not have to affect you unless you let it.
Second, we have the creation of a CPI that accounts for quality improvements and consumer satisfaction, all subjective concepts enabling the CPI to show whatever the quant guys want to show.
The problem with all this CPI manipulation is that it affects the SS payments, and causes the bond market to mis-price, to be step-function adjusted downward at some future date upon full realization by J6P.
Now, at this late stage of the game of confidence, we have the officialdom getting rid of the 30-year treasury benchmark, and an initiative to introduce a chained dollar CPI, accounting for the substitution of chicken for beef, as the potato prices are inflating due to weather in Tonga.
I am encouraged that you find the current environment benign to equity ownership, especially of the higher PE issues such as the Q, but I am keeping my exposure to what Greenspud's has wrought to a minimum.
Should all of J6Pdom be similarly encouraged, and create a new new world of equity wealth effect creation, thus saving their retirement plans, then we are indeed saved, until we are not, once again.
OTOH, should the debt, trade deficit, dollar strength, war, political deadlock, fiscal deficit, and, yes, money creation, be concocted into a toxic brew for the unsuspecting J6P, and they, upon realization, refuse to drink the pop soda of ‘spend now and pay later’, then we capsize now and move on to a brighter future.
Chugs, Jay |
