Thursday, December 24, 2009

Boom and Bust

Steve Hanke has an interesting, informative piece in GlobeAsia titled Booms and Busts.

He discusses the relationship of skyscraper construction in relation to easy money-induced booms, the fallout afterward when the boom turns to bust, and then suggests that we should be entering a boom phase:

Moving from Dubai to the United States, the spread between
Baa and Aaa corporate bond yields has dropped from its peak of
350 basis points at the end of 2008 to under 120 basis points. The
narrowing of this spread is the largest since the 1930s.

As the accompanying table signals, the United States should
have entered a boom. Indeed, if the annualized real growth rates
in the next two quarters (Q4 2009 and Q1 2010) don’t hit 7%, we
will know that the Obama administration’s interventionist policies
have been a bust.

We now know (for now!) that Q3 GDP was more or less flat absent cash for clunkers and the credit for first-time homebuyers along with the massive ongoing government stimulus. It is hard to see that Q4 will be dramatically better, given the certainty that consumer spending has been sluggish and given the commentary from Warrren Buffett and many others that their businesses have not seen much in the way of revenue growth in the U. S.

So, leaving aside Dr. Hanke's political comment above, my comment would be that we are at the tail end of the effectiveness of interest rate cuts to be associated with/cause a boom. This is the Japan scenario: ice, not fire. Demographics, debt levels, burdens of quasi-empire, better ROIC in developing countries, etc., all suggest that the cyclical rebound is to date more muted than in the past (just as the downturn was actually more muted than it could have been). Not the end of the world, though.

In this scenario, the Fed stays easy and bodies in motion stay in motion until, one fine day, they don't. In other words, the trend is your friend, until it is not. Let us see if gold stays within a well-defined structural bull market. For now, it's resting and I am sitting tight, having bought part of my large position back after about a 9% pullback. There are lots of arguments for and against gold; I'm ignoring them and simply saying that easy money is inflationary and therefore good for gold.

For now, my attention is more on Oracle, Teva, Ross Stores, and other stocks that have broken out to new highs or multi-year highs (ORCL) not just on price but based on 50 day or even 200 day moving averages. IBM is close. I am not aware of any major asset class that is undervalued.

But "money" must go somewhere. Investors should watch with gimlet eyes. Boom, bust, schmoom, schmust, all that stuff comes and goes, but fundamental valuations drive long-term returns. And right now I continue to dislike what I see in that regard.

Copyright (C) Long Lake LLC 2009

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