Monday, December 28, 2009

Reasons for "Optimism" on Asset Prices

We have been bombarded with recitations of how poor the past decade his been. This is good. "Morning in America" is not mainstream yet in financial market thinking. Just this morning, leads with the following:

The Big Zero by Paul Krugman, which says:

But from an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true.

The next headline is also gloomy from an American perspective:

The decade the world tilted east by Niall Ferguson, which while more uncertain in message than Dr. Krugman's, contains this telling paragraph:

While the developed world teetered on the verge of a second Great Depression, China suffered little more than a minor growth slow-down, thanks to a highly effective government stimulus programme and massive credit expansion.

DoctoRx here.

The Krugman comments are way over the top. Nothing good happened? Nothing at all? What about the election of a progressive President? None of the optimistic things that were envisioned at the start of the decade happened? None at all?

This sort of thinking does not win one a Nobel. Where was Dr. Krugman's editor on this one? The editor's job is precisely to tell the writer that OK, now that you have vented, let's make the article one in which every sentence is literally true.

As far as Dr. Ferguson, his view is more the conventional one. But as Japan shrank in importance economically, China grew due to outside investment, not due to internally-generated funds. China offered cheap labor and a place for the West to evade environmental restrictions.

When you put matters in perspective, yes, readers know I am generally skeptical of much of what has gone on in the U. S. economy and especially in the financial system per se. But we need balance here. The Chinese are not, metaphorically, ten feet tall. They may be like the U. S. in the 1800s, with frequent booms and busts. Currently the imbalances in the U. S. are such that there may finally be some investment plays wherein the fundamentals and technicals are on the same page, as opposed to the relief rallies in low-quality stuff off the March 2009 bottom. The trend-following strategy is to go with super-strong high-tech companies with low-ish P/E's that generate lots of cash from operations, such as Oracle and IBM (risk capital only). The contrarian one comes from a poll of bloggers I read yesterday on Paul Kedrosky's site, Infectious Greed. Bespoke Group asked their predictions for 2010. There was unanimity on only one asset class. Every blogger was bearish on Treasuries. Happily, one of the other not-bullish asset classes was gold.

Gold and high-tech have the best charts over the best year or two and are the farthest from government support a la AIG and Fannie/Freddie. The best long-term chart still belongs to Govvies. To round out four legs of an investment table, a number of global dividend payers have yields that exceed the yields on the companies' own short-term debt.

In a world of overvalued financial assets all across the spectrum, the best one can do with money is find the best relative value. Whatever one does, one has to be able to sleep at night with one's asset allocation if a bear market in that asset occurs. That's an individual decision that no one can make for anyone else.

Copyright (C)

1 comment:

  1. What about the election of a progressive President?

    Wen? Hu? I missed that election