Thursday, June 25, 2009

Uninspiring Stability Breaking Out All Over?

We reported very recently that a GE Vice President reported no green shoots hanging around GE's neighborhood. Yesterday, Warren Buffett gave an interview to GE's subsidiary network CNBC stating that he receives daily updates on about 70 businesses, that the economy in the U. S. is in "shambles", and that there is no economic improvement visible. He did express optimism that on a 10-year basis, the stock market will beat the Treasury bond market. Uncle Warren said he has NO fear of deflation, just inflation on a 2-year horizon and beyond.

EBR believes that Mr. Buffett is making the wrong comparison between stocks and Treasury bonds. One buys Treasuries for security, not to "beat" stocks. The correct comparison is between stocks and corporate bonds. On that basis, corporate bonds are strong competition for stocks on a risk-reward basis.

Further in the anti-green shoots meme, we can point to Mervyn King, head of the Bank of England, who is bearish on the U. K. economy; the American Automobile Association, which has downgraded its estimate of the number of drivers to hit the roads this season; Johnson Redbook, which recorded below expectation retail sales, and others. On the other hand, Nouriel Roubini appears to grudgingly accept that matters are "stabilizing". For him, that's wildly bullish. And of course, the ECRI has "pounded the table" that recovery is certain this summer.

I feel like a religious agnostic. I can believe that all points of view and predictions are correct, but just not all at the same time. Inflation? For sure, but when. Bonds: they make sense with slack in the economy and perhaps chastened consumers for years to come. Cash: sounds good; keeps your powder dry to jump in the correct direction. Gold: for sure, but too many true believers have kept it churning. Stocks: primarily as income vehicles to compete with cash; and, the right tech stocks, which sat out the last cycle, are due to have their day.

One good rule of life: the future is more like today and yesterday than one thinks. If GE, Berkshire Hathaway and the Bank of England see no green shoots growing, why should tomorrow suddenly burst out with wild and crazy growth or sudden inflation? Anything is possible, but I wouldn't bet on it.

Copyright (C) Long Lake LLC 2009

No comments:

Post a Comment