Oops DJ, another find ...
sbichinaprovident.com
The Fundamental Business of the country,…
is on a Sound and Prosperous Basis.
The President of the United States
Saturday, 26 October.
The President was asked to say something
More specific about the market
- for example, that stocks were now cheap
- but he refused. [1]
September 2002 Manager's Commentary
--------------------------------------------------------------------------------
Head For The Hill(s),
Senlac Hill (1066)
--------------------------------------------------------------------------------
The Battle of Senlac Hill, better known as the Battle of Hastings, was fought on 14th October 1066.
Yes, Call me Myer if you like. Nasdaq has blown clean through 1415 - Agincourt is a distant dream and we are Going Back to the Future. Next Stop looks like 1066, but some strategist, are even calling for 500 - financial equivalent of the Dark Ages!
But in spite of all that the market seems not to be doing, "This Myer's Not for Turning."[2]
We disagree strongly with the Nay Sayers. Chicken Little is still confused, the Sky is not about to Fall on our Heads. In fact far from being 1929 revisited, we are on the cusp of a sustainable economic expansion:-
• Interest Rate Are At 41 Year Lows
(Stop Press, 44 years now).
• Steep Yield Curve
of some 200 bps between the 10 Year Treasury Bond and Fed Funds.
This does not indicate a recession, for the yield curve would be flat to inverted!
• Strong Economic Growth.
1Q came in @ + 5.0% [3]
2Q was @ + 1.3% [3]
3Q is expected to be @ + 3-4%! [3]
4Q is expected to be @ + 3 1/2 - 3 3/4%[3]
Full year 2002 is projected @ + 3 1/2 - 3 3/4%[4]
and 2003 is projected + 3 1/2 - 4% [4]
Some Recession!
• Valuations are Looking Cheap.
Steve Galbraith, Morgan Stanley's US strategist has benched 2002 S&P Earnings to $47.50 and 2003 S&P Earnings @ $55.00 (this is lowered from his early summer estimates) [5]. With the S&P Earnings @800 this implies 14.5X 2003 average earnings. With our valuations we have the Broad Market at some 40% undervaluation. Keep in Mind Interest Rates are at 2 Generation Lows (and Going Lower!). With the S&P @600 this equivocates to 11X P/E, but after adjusting for record low interest rates this is even lower. And Yes that was S&P @600, not a typo, not because valuations will bring it there but apparently Irrationality will. [6]
• Consumption Continues, Strong.
GM for example expects 2003 sales to match the record year 2002! [7].
How can that be?
Well, to paraphrase the '92 election,
• "It's the Re-Fi's Stupid."
We believe that some $300 Billion[8] of 3Q Re-Fi cash is about to flood into the market. That's just 1 quarter's worth of Re-Fi's but is a clear sign of the Great Force being unleashed when compared to 2001's total of $150 billion when Treasures hadn't really started the rally.
So as far as I can recall from Econ 102, GDP = C + I + G + (X - M).[9] With Two (Consumption and Government spending) of the four strongly positive and one strongly negative, (business Investment) it doesn't take a Rocket Scientist to figure that Federal Reserves estimates of average GDP growth of + 3.625% in 2002 and + 3.75% in 2003 is readily obtainable.
Now, don't forget not only is there the Re-Fi injection, but the $1 trillion Bush tax cuts will put another 1% of GDP into our pockets. Now, that is a lot of Beef! [10]
Also, the 1990-91 IRAQ war conservatively has been estimated by us to have cost $61.1 billion[11] or approximately 1% of 1991 GDP. Adjusting that to 2002 prices of $100 billion we easily have another 1% boost to GDP lurking out there, not to mention the 1-2% GDP boost from ongoing homeland security expenditures.
And with a $10 trillion economy chugging along in excess of 3.51%, which mathematically we note with some amusement is in excess of the 2.5% speed bump espoused by Chairman Greenspan way back in the 1st Clinton Administration, why is everyone going totally irrational[12] and predicting our impending demise? Personally, I think the Answer is simple: As Obelix used to say to anyone willing to listen to him "These Romans are Crazy." Indeed, Pearls of Wisdom from a Menhir Delivery Man.
• Quite Frankly, I could go on and on ad-nauseum with (meaningless?) statistics that demonstrates the point, but really only 2 points need to be belaboured here as to why we collectively sit at the Edge of the Investment Cliff of Dow 7,702 (24 July low); S&P 797 and Nasdaq 1,206 and are collectively Falling Off, whilst, all the while, the economic conditions are quite sound.
POINTS TO BE BELABOURED:-
1. No, we won't have a Depression (which is what the markets are increasingly predicting) because of the stock market crash.
Why? Because Stock Market Crashes never produce Depressions (see July - August Manager Commentary for all the good stuff on why, wherefore, what!)
Only Real Estate Market Crashes do.
2a. No, Deflation is not Intrinsically Bad.
The 1873-1896 Great Deflation was a period of unprecedented Economic Growth, Wealth and Prosperity for Britain and the Empire. During that "nasty" period of time British Real GDP growth averaged some 4% p.a. throughout the 17 year period and the Empire reached its zenith. Some Depression!
And keep in mind this was achieved with the Depressive weight of the Gold Standard wrapped firmly round their Imperial necks.
2b. Yes, Deflation can be Beat!
This time round we don't have the Gold Standard to pummel us into a Great Deflation. In its place we have the wonderful Redwood Trees Standard-better known as Fiat currencies or paper money. The great thing about this system is that it is a Greenback system, which means the US gets to print, print and print some more. When Brazil needed more this summer, the US put $60 Billion into the IMF package, payable naturally, in Wood. That is to say in more formal English, payable in US Dollars, backed by the full faith and credit of the great Pacific Northwest Redwood Forests where loads of trees will be cut down, incidentally, creating lots of employment for lumberjacks, and pushing up the Money Supply…..
Too Bad the Mighty English didn't figure out this amazing system of funny money as the Imperial British system was built on Gold and each time a crisis came "The Empire Over Which The Sun Never Set" went straight to the Brink with enormous shrinkage and suffering.
IN SUMMARY
• Economically we are on the Mend. Mending quite nicely in fact.
• The Chance of Economic Depression is far outweighed by the Very High Probability of Sustainable Economic Recovery.
• General Price Deflation is NOT a serious threat and never will be under the Redwood Trees Standard.[13] Disinflation and Price Stability in Fiat terms is highly probable. The Threat and thus our Opportunity is Devaluation of the exchange rate.
• But markets disintegrating to 1066 and falling further below into the Financial Dark Ages is an increasing, though very temporary probability, because of Psychology:
• Greed and Fear is the Stuff of Man.
Rational Markets is the Stuff of Economics text books Only.
In 1999, Greed Gripped us.
In the Autumn of 2002 Fear has.
And then there will be Panic. That's when we see the Dawn of the New Bull Market.
By the way, the President I quoted at the beginning of this article was one Herbert Hoover. That particular Saturday, the 26th October, was in the year of our Lord 1929. Curiously, this years' dates are identical.
Adrian Churn
24th September, 2002
Victoria, Hong Kong
--------------------------------------------------------------------------------
FOOTNOTES
[1] The Saturday Evening Post, Garet Garrett - 1929. [Back]
[2] Paraphrasing Prime Minister Margaret Thatcher, as her Naval Armada steamed towards the South Atlantic in the Spring of 1982, and the dove's pleaded with her to turn the ships around (British Blood should not be spilt over some sheep....) [Back]
[3] United States Department of Commerce - September 27, 2002 [Back]
[4] "The central tendency of the forecast for the increase in real GDP over the four quarters of 2002 is 3-1/2 percent to 3-3/4 percent, and the central tendency for real GDP growth in 2003 is 3-1/2 percent to 4 percent" Monetary Policy Report, Federal Reserve Board - July 16, 2002 [Back]
[5] Steve Galbraith, Morgan Stanley - September 2002 [Back]
[6] For more amusement please see Chairman Greenspan's Irrational Exuberance Speech - December 5, 1996 [Back]
[7] Asia Wall Street Journal - September 20, 2002 [Back]
[8] Barton Biggs, Morgan Stanley - September 16, 2002 [Back]
[9] GDP = C + I + G + (X - M), "C" is for Consumer spending, "I" is for Investment spending, "G" is Government spending, "X" is the spending by foreigners on the nation's Export, and "M" is the spending on iMported goods from foreign nations. [Back]
[10] This is the paraphrase of that Great 1980's Wendy's Hamburger commercial with little old Grandma Smith exclaiming "Where's the Beef? Boy that's A Lot of Beef!" [Back]
[11] Figure of Congressional Research Service data quoted by "Profound Effect on U.S. Economy Seen in a War on Iraq", New York Times - July 30, 2002 [Back]
[12] For more amusement please see Chairman Greenspan's Irrational Exuberance Speech - December 5, 1996 [Back]
[13] Its got quite a pleasant ring to it don't you think, compared to the Formal "Bretton Woods" denotation? [Back] |
