just in in-tray, a communication between hk- and australia-based moolah managers. note what i believe to be a quite typical psychology
player 1
Some interesting thoughts from one of my friends who is a private banker /wealth adviser now based in Thailand …. Not sure what your views are at this stage or if they have changed but I remember you were quite bearish last time we had dinner….
I have been trying to take a more opportunistic view and go with the flow but the up has been amazing and of course money is so cheap now that people are more or less forced back into equities ?
Dear Friends,
I just came back from a trip which took me to Hong Kong and Manila. After the spectacular stock market rebound which started in the second week of March, everybody is wondering whether this is the end of this crisis or whether this is just a bear market rally.
I have read a large number of comments and analysis on the subject. The analysis of Gary Schilling is the one that convinces me most. Gary Shilling is an economist, writer of many books and publisher of the Insight economic newsletter. He is a man with an enormous credibility. He has achieved a high degree of accuracy in his economic predictions since the early eighties. Concerning our current economic crisis, not only he saw it come, and made the right economic calls, but he also made the right investment calls. In 2008, whereas most other analysts who saw the crisis coming and recommended getting out of USD, out of Treasuries, and invest in emerging markets and commodities (Roubini, Marc Faber, Jim Rogers, Peter Schiff), he was advising to stay in USD and invest in US Treasuries, which proved to be just about the only safe place to invest in last year.
Fast forward to today, despite a 30% plus rally off the March lows, Shilling is still sticking with a target of 600 for the S&P 500 (we are now at 903). Shilling concedes that the rally has been powerful:
“It could be a bottom…but in my view there is enough in the way of problems out there that it probably is a bear market rally,“ Shilling says, citing the following main reasons why he thinks the economy will remain sluggish and the market will suffer another leg down this year:
Slowing consumer spending, confirmed by last Thursday’s weaker-than-expected April retail sales.
Financial deleveraging: There was a lot of “financial fluff” in derivatives, Shilling says, but they did help accelerate the so-called velocity of money. The end of the securitization boom means less easy access to credit and less financial activity from consumers and corporations alike.
The increased role of government, which is happening worldwide, can’t be good for growth
Shilling says three trends have to emerge before it’ll be safe to declare the end of the downturn:
Housing bottom: A reduction in the excess inventory of homes, which he estimates are approximately 2 million.
A real resolution of the financial crisis: Shilling isn’t convinced the stress test proved anything, much less marked the end of the crisis. He is concerned about rising bad loans in sectors outside the residential mortgages, including commercial real estate, auto loans, student loans and credit cards.
More stimulus: Shilling estimates that Obama’s $ 787 billion package only contained about $ 200 billion that will actually stimulate the economy. With Americans in savings mode, the government is going to need to do more to “break the cycle of a consumer who is dubious, which means less spending, less production, more inventory problems, and more layoffs,” he says.
If those the trends turn, then Shilling sees the recession ending in early 2010. Even then, however, he is forecasting a slow recovery and subpar growth after that for many years to come.
The “golden era” of growth is over says Shilling, who predicts GDP growth will average 2% over the next 10 years vs. 3.6% from 1982-2000.
Several key ingredients to the 1982-2000 boom years are either not evident presently or are being reversed, he says:
The personal savings rate went from 10-12% range to zero. The level of household debt-to-disposable income went from 40 to 140%. The savings rate is now moving back up and debt will have to be repaid. This is all good for individuals but bad for the nation as a whole, as it puts a dampener on overall economic activity. Money that is being saved or being used to repay debt is not used to consume.
Inflation was as high as 20% in the early eighties. Falling inflation led to falling interest rates, which led to higher P/E valuations for stocks. With the Fed Fund rate now at zero, interest rates have only one way to go in the future. That cannot be good for stocks.
The 1982-2000 period was an era of deregulations and falling taxes. Now, both trends are being reversed by the Obama administration. Higher taxes and more regulation will lead to slower growth and a stifling of economic activity.
I believe he is right in his analysis. It is obviously very US centric. Other parts of the world should progressively be able to dissociate themselves with what is happening in the US and generate either internal growth or intra-regional growth. This is where we will need to focus our attention in terms of investments.
If you wish to know more about Shilling’s thought on the economy, you can read the attached April Insight.
If you want to listen to him, you can go to this link:
finance.yahoo.com^dji,^gspc,SPY,DIA,QQQQ,XLF
Best regards
player 2
As I said to Olivier earlier this year when he asked (correctly) if now was not a good time to buy, one has to separate the markets from the realities of the economy. The point is that we all (me included!) Got so bearish that much of the bad news was already factored into the market. In addition (and this was something I believed in last year but started to loose faith after October), markets are driven by money and liquidity. We got Soooo bearish that the impact of all the (unprecedented) pump priming by governments around the world provided a platform for what can only be described as an incredible rally. Of course one always has to remember the mathematics of how it works...a rally of 50pct still means you have lost 25 pct if you were down 50 pct last year.
This has been a particularly vicious rally...and guess what...not thayt many people are enjoying it! I am hearing that the average hedge fund is only up 4-10 pct YTD. Not great given the carnage of last year (I would note that the team at xxxxx are up 18pct for DFF and 33 pct for Small Cap which has more to do with the stocks than a market view given that they have been largely neutral for most of this year in DFF). I suspect the average hedge fund manager is not enjoying the rally any more than he/she enjoyed the crash. As my old partner used to say, "the market will do what the market must do to FxxK most of the people most of the time!"
So where to from here?
My guess is that there is still so much scepticism and disbelief out there that the market could carry on a while further. But do I think we are through the worst? NO. Do I think we have seen the bottom? Maybe, but this may be because the next problem we face is inflation... And at least certain stocks represent real assets. But for markets to do what markets have to do (as my old partner used to say) I think a potential scenaro could be that the rally is bigger and goes on longer than the majority currently think than wham ... another black swan. What might that black swan be? Well swine flu or some pandemic might be a good starting point. A massive natural disaster another (of course it is a nonsense to try and invest based on such expectations), or a collapse (highly likely within the next three years) of a Pakistan and the destabilising ripple effects of this might be another. And this is before you get me onto my favourite subject which is the weather! Changing and extreme weather has the potential to completely de-stabilise whole sections of the planet which has become wholly reliant on moderate weather patterns. Of course we haven't even touched on the fact that governments cannot (as you article below notes) waive a magic wand and presto... All problems solved.
No .... I think we are in the SHxT so deep and getting deeper that we have not seen the worst.
Reminds me of a wonderful scene from that wonderful movie slum dog millionaire (have you seen it? If not you must!!!)
There is a scene where the protagonist is locked in a makeshift loo (you can imagine in a slum in India!) By his brother who was guarding the door when a helicopter carrying a famous Bollywood star arrive and everyone from the neighbourhood rushes to see (and possibly get close enough to get an autograph). The protagonist, his favourite Bollywood star just out side and he now locked in the loo has to make a decision. Does he continue to yell and scream to no effect given that everyone is focused on the star...or does he do the unthinkable!!! Does he jump down to the cesspool below.
If you have seen the movie you will remember that priceless scene of a young boy covered from head to toe in stinking poop rushing toward his hero... As you would imagine the crowd clears and he wins his prized autograph...
There is a lot in that scene that is appropriate for today's situation...those that had the courage to have jumped into the proverbial septic tank and are now rushing to their hero for an autograph are likely to be winners...but it wasn't fun getting cover head to toe in SHit!!!
Talk soon...boarding a plane to sydney,
Warmest
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