Discussing Our Outlook
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Comment
- CNBC.com – El-Erian: Why Good Companies May Get Even Cheaper for Awhile
Cheap stocks and corporate bonds can get a lot cheaper before regaining their footing. This is especially true when the combination of too much debt and too little income growth forces a system to delever, as is increasingly the case these days. In such a world, markets are driven by top-down economic and policy factors (“macro”) rather than company earnings and balance sheets. It is also a world in which “bad technical” can result in price behavior that deviates significantly from “fundamentals,” and for a long time. The dilemma confronting investors is essentially the same as that facing a home buyer looking at a good house in a rapidly-deteriorating neighborhood. It makes sense to buy if, and only if, the neighborhood is likely to stabilize, the buyer has the ability to hold on to the property, and he/she secures a sufficient price discount on account of the inherent uncertainty. Investors with “permanent capital,” like Mr. Buffet, are particularly well placed to strike this volatile balance. Yet they should only do so if they also believe that the combination of a bad macro and bad technicals will not, in itself, cause company fundamentals to deteriorate substantially and, thus, lower intrinsic values. - The Financial Times – Gillian Tett: Why $14,000bn no longer scares us
‘The more zeros I heard, the more desensitised I felt. Big numbers, like sex, have lost the ability to shock’
Last weekend, for example, I took part in the Annual Meetings of the International Monetary Fund and World Bank Group in Washington, where I listened to leaders toss vast numbers about (€440bn! $14,000bn! Y23,000bn!); but, the more zeros I heard the more desensitised I felt. Big numbers, like sex, have lost the ability to shock. Is there any answer to this (other than returning to a world of cash)? Not an obvious one. These days, some civic groups are trying new tactics to communicate the debt, such as posting pictures on the internet of a stack of 14 trillion single dollar bills, laid out on a football pitch. Some schools are trying to teach personal finance lessons by forcing students to keep cash in a jar and pay for items out of that – rather than getting addicted to plastic cards. And in the exchange traded fund sector, there is a particularly fascinating cultural twist: some funds that deal with ETFs handling gold have now installed webcams in their vaults, to “prove” that these funds are backed by tangible bullion. Investors, it seems, want to watch those gold bars; they don’t trust the idea of zeros flying about in cyber space. But – sadly – there are no webcams in the rest of the ETF world, let alone the rest of the financial industry or government accounts. Even if there were, there would be precious little to “see”; except, of course, for something like that ever-moving electronic clock near Times Square. And its $14,613,324,053,350 score. - The Wall Street Journal – Spooked Investors Make a Run for Safety
To a large degree, the fate of global financial markets is seen as in the hands of government officials, particularly in Europe and the U.S, which investors say makes the outcome even harder than usual to predict.
Jim Was also on Bloomberg Radio Friday talking about the same issue. Here is a partial transcript.
TOM KEENE, BLOOMBERG SURVEILLANCE: Let’s get right to it, Jim Bianco, Bianco Research. Jim, good morning.
JAMES BIANCO, PRESIDENT, BIANCO RESEARCH LLC: Good morning.
KEENE: You have a really sharp note about correlations. This is the linkage of things. We are highly correlated, particularly in the equity markets. Is that a good or bad thing?
BIANCO: It is on balance a bad thing. But you are right, the stock market is more correlated now than at any point since we have data on the S&P back to 1926. Meaning all stocks move up and down together, all stocks – if you put out a stock chart of them – looks like every other stock, which looks like the S&P 500.
Now, a lot of people have argued that the reason that is happening is the markets are being irrational, and I have said, no, they are being perfectly rational.
KEENE: Yes, I totally agree. Continue.
BIANCO: Yes, because every time there is unpleasantry, either in Europe or in the United States, in the economy or the financial markets, we demand the government and the central bank come with a trillion dollar plus solution to it. That is what the complaint is in Europe. Where is the trillion euro solution? Get it for us so we can put this problem away.
KEENE: And, folks, there is a lot of detail here and a lot of financial theory. You nail it, Jim, in one sentence where you say we are all correlated, and at some point we are not going to be and either equities will go to credit, or credit will go to equities. Discuss that.
BIANCO: Yes, because what has happened is is that the word correlation does not exist in the credit markets. The bond market has been doing far worse than the stock market. And when you have these correlations, it tends to be the market that isn’t correlated that is the leading indicator, and that is the bond market. So as corporate bonds continue to do worse and worse, my concern is they are showing us the way that we are going to go. And that the stock market might eventually give it up and go the way of the corporate bond market, which is much lower in price.
KEENE: What you just heard there, folks, is how pros talk. They talk about correlations and co-movements. Like in bonds, they don’t talk about a single yield. They talk about the dynamics between two yields or even three, or the spread market. That was brilliant by Jim Bianco. Ken?
Below are some stories that reiterate our view.