Market Review: Oooooh, That 'Global Healing' Feeling
The Great American Consumer to the rescue?
Hmmmn, let’s try and look at the facts. "First-quarter GDP growth of 5.8%," David Tice writes to shareholders of the The Prudent Bear Fund, "confirms that there has been a strong resumption of borrowing and spending."
Easy credit conditions have created a wildly buoyant housing and mortgage market. Luxury car sales, including brands like BMW and Mercedes, are exceeding historical records.
And as AP notes, citing a Commerce Dept. report released on Thursday, "Americans’ appetite for foreign-made cars, TVs and clothes, propelled the U.S. trade deficit to a record $35.9 billion in April. The deficit was 10.7 percent higher than the $32.5 billion trade gap reported for March."
It seems fairly clear, the world – not the least of which includes Joe six-pack and his summer barbecue buddies – is prepared to buy the US-led "recovery" lock, stock and two smoking barrels.
And why not? It worked last time didn’t it? Following the twin currency contagions – Asia 1997 and Russia 1998 – and the meltdown at LTCM, the Fed opened the spigots and the dashing US Consumer on his plastic white horse of credit cards and profligate spending raced in to do his part.
So… what’s to worry this time around?
Meltdown in Argentina? No problem. Enron having a little trouble keeping its books? Nothing to it. Keep rates low a little longer. No doubt the US consumer will take the bait… and sacrifice his personal balance sheet for the good of the world.
Trouble is, warned Morgan Stanley’s Stephen Roach on Friday, "America," – that great freedom loving conglomerate – "is not in any position to save the day by administering the tonic of global healing that worked so well three years ago."
"Back in the crisis days of late 1998," Roach continues, "America’s current-account deficit was ‘only’ 2.7% of GDP. While most of us thought that was high at the time, in retrospect, there was considerable scope for further expansion as the US stepped up and led the world into a glorious recovery that we dubbed ‘global healing’."
That spate of ‘global healing’ propelled the current account deficit to record highs… and to a hair’s breadth of 5% of the nation’s GDP. Any further increase – like what we’ve just seen in April – "would push the external imbalance up to 6% of GDP," says Roach, "requiring financing via capital inflows of close the $2 billion per day."
Is it just me? Or is two billion dollars a day is a lot to cough up. Maybe not if we’re in the grips of bull market euphoria… but foreign investors are, no doubt given recent weakness in the US markets, rethinking their willingness to invest in US equities.
One early warning symptom this spring – recent weakness in the US dollar – suggests it might be sooner than most are comfortable believing. Since January the dollar has slipped 7% against the euro and 6% vs. the yen.
Although, according to Fortune magazine, the decline represents "a fraction of the dollar’s advance since the mid-1990s – a period when the buck rose 50% – economists are predicting an additional 10% to 15% drop before the end of the year." Chief Investment officer at Pimco, Bill Gross, told Fortune this week: "The current and potential continuing dollar weakness is one of the most critical threats to the U.S. economy."
And, one might suggest, to Wall Street, too. The Dow shed fur like a sheep-dog in July last week, falling 274 points Thursday and Friday to close at 9253. Friday also marked the Dow’s fourth triple-digit loss in eight sessions on Friday.
The "sell-off" brought the Dow – and it’s mountain cousins the Nasdaq and S&P 500 indexes – to new lows for 2002… and even closer to the lows that followed the terrorist attacks in September. The Nasdaq rests just 2.9% and the S&P 4.2 percent from their respective Sept. 21 lows. The Dow is hanging in there with 14.5% percent to go…
"It’s crunch time for the old recipe of US-centric global growth," writes Roach. "What worked so brilliantly for the past seven years seems unlikely to do the trick this time. Global risks are mounting and there may be no easy way out for world financial markets. This time, as the outbreak of global trade tensions also seems to indicate, it’s every country for itself!"
And needless to say… every investor for himself. That includes you.
In the meantime enjoy your weekend,
The Daily Reckoning
June 22, 2002
P.S. Early this year, part-time writer, full-time friend and bluesman, Thom ‘Bomb’ Hickling was on THIS side of the pond to conduct an extensive interview with former managing director of the Dresdner Bank, Dr. Kurt Richebacher.
Any regular reader of the Daily Reckoning reader worth his (or her) salt will recognize the good doctor immediately. His research and analysis on the credit bubble and it’s disastrous aftermath forms the heart and soul of much of what you read in these pages.
Mr. Hickling spent three days in Cannes, France at Dr. Richebacher’s home and office. He videotaped the whole affair. And now, Thom tells me, after exhaustive cutting, editing and splicing the polishing touches are just about finished and "Dr. Kurt Richebacher: The Video" will debut soon. This week, we released an advanced copy of the most relevant and piercing excerpts of the interview.
What do you suppose the good doctor thinks about a US- led global recovery scenario for 2002?
"Bogus!" comes the vociferous reply. And the fallout could be disastrous for anyone who continues to listen to Wall Street and the government quants who’ve cooked up these numbers.
P.P.S. And… don’t forget. There’s still time to reserve your spot at the Annual Agora Wealth Symposium. In mid-August, San Francisco might be the perfect destination for your summer vacation, what do you think? We’ve arranged for you to get a room at The Palace, a five star hotel, for half what you’d normally have to pay.
At the symposium you’ll discover at least 11 different takes on "The Hidden Hot Spots Of Today’s Market" – investments outside of the mainstream likely to do well in the wake of weakening US markets. For more details, click below.
The Agora Wealth Symposium
August 14-18, 2002
The Palace Hotel,
THIS WEEK in THE DAILY RECKONING
by Bill Bonner
06/21/02 END OF THE GILDERED AGE, II
"…We come back again to George Gilder today, dear reader, not to praise him, nor to bury him, but only to tease him. For Gilder seems like a decent sort, after all. He put his money where his mouth was…and lost it fair andsquare…"
06/20/02 END OF THE GILDERED AGE
"…The press is full of ‘the mighty fallen’ stories; George Gilder’s name appears on a long list. But we will not join in kicking the poor man when he is down. Still, since we were practically alone in poking fun at Gilder two years ago, we feel entitled at least to pick up a stick and prod thecorpse…"
06/19/02 PLAYING CHICKEN
Guest Essay by C.A. Green
"…In my opinion, there is only one reason that multiple insiders back up the truck to buy their own company’s shares. Based on their ‘unfair advantage,’ they think their shares are set tosoar…"
06/18/02 TURNING JAPANESE, PART 73
"…Despite widespread anticipation, the U.S. economy still seems bothered by hidden torments that keep it from making a fullrecovery…"
06/17/02 JUST ABSOLUTELY FREAKIN’ TERRIBLE
"…A bear market does what a bull market does – only in the opposite direction. No logic, nor argument deters it; it keeps going until it is exhausted – fully correcting whatever camebefore…"
HEADLINE, NEWS And INSIGHT: Myers on The Real Asset Riptide…Nestmann on the Social Security Time- Bomb…Tice on the Great Exodus from The US Markets…
Real Asset Riptide Set to Roll
by John Myers
"…The gains provided by the Internet revolution have largely come and gone. It is safe to say that the markets no longer deliver the excitement and returns that investors had come to expect. For the first time in years, the mainstream is recognizing the appeal of natural resourcestocks…"
The Social Security Time-Bomb is Ticking…
by Mark Nestmann
"…Soaring theories of "entitlement," longer lifespans and fewer workers supporting beneficiaries mean social security systems in most OECD countries are headed for a train wreck…In the United States, bankruptcy is projected in2038…"
Watch Out if Foreign Investors Turn Against U.S. Markets
by David W. Tice
"…Between 1997 and June 2000, foreign investors were the third largest purchasers of U.S. equities…But how long will foreign investors keep buying our stocks? After all, the factors that piqued the interest of foreign investors are now working inreverse…"
FLOTSAM AND JETSAM: Fund Manager John Mauldin suggests that when winds of a bull market are at an investors back even blind dogs and Janus managers can make money. But when the secular bear howls, the list of successful strategies gets a whole lot shorter.
Blind Dogs and Janus Managers
– John Mauldin
"…The received wisdom is that a bear market is when stocks go down by 20% or more. It makes for a nice neat media sound bite.
Trying to time bear markets can be a very tough task. In the recent 18 year bull market, there were several occasions when stock markets drop by 20% or more, only to spring back quickly to even loftier heights.
Investors were rewarded for being patient, and many became used to large swings. Their advisors, and the mutual funds they bought, kept telling them that new highs were around the corner. Each drop in the market was a buying opportunity. Corporations churned out ever more glowing earnings projections as a reason for increasingly high valuation multiples.
Then the music stopped in the first quarter of 2000. It has been downhill ever since. But you would not know that to hear from the pronouncements of the "sell-side" investment community.
Even as $6 trillion dollars has disappeared from equity valuations over the last two years, each new low is greeted as the bottom, and the sell-side brokers and managers find ever more reasons for you to give them your money today! Bear markets, we are told, do not last forever. The economy is out of recession and growing, and thus you should get in the market today (preferably into whatever they re selling), before the next big run- up begins.
Staying in the market was precisely the right strategy for the 80’s and 90’s. It was the wrong strategy for 1966-1982. How can we know what strategy is right for today?
Perhaps you have heard the term, "secular bear market" or "secular bull market." The Latin word for cycle is "secula," so when economists use the term secular, they mean cyclical. The term generally is used to indicate time periods of long length.
Since 1800, there have been seven secular bull markets and seven secular bear markets. According to Michael Alexander in his prescient book called Stock Cycles, the average real return in a secular bear market is 0.3% (even though the market was falling, investors still got dividends). The average return during a bull market cycle is 13.2%.
Not coincidentally, this averages to the 6.7% the Ibbotson study (among many others) tells us that stock investments return over the long haul. The average length of bear markets is almost 14 years, and for bull market sis almost 15 years. But the average complete cycle of a combined secular bull and bear market is 28 years.
If you invested in a ten year period contained within a secular bear market in the past, your returns were quite likely to be close to zero. And that is with the historical advantage of dividends averaging 4-5% or more. In today’s world of dividends of less than 2%, if this secular bear market should last another 10 years, staying even will be a hard row to hoe.
Within each secular bull and bear markets, there are often intermediate bull and bear markets. These are shorter term in nature, but still are significant moves up or down.
In a secular bull market, each bear market fails to get to previous lows and moves on to new highs. In a secular bear, each rally fails before it gets to the last high mark, and then stumbles down to even deeper depths.
In secular bull markets, buy and hold works, as well as momentum investing, sector rotation and a host of strategies designed to take advantage of a rising market. Blind dogs and Janus managers make money in bull markets. That is because the wind is at the back of the market.
In secular bear markets, making a profit from these strategies becomes much more difficult, if not impossible. Money managers, who I track for a living and who made significant and steady returns in the 90’s, now languish with flat or losing returns. In the 90’s, there were many managers with nimble strategies who significantly beat the market while reducing risk.
Alas, these same managers are still reducing risk, but they clearly need a bull market to give investors the returns. The number of managers who are doing well is a much smaller list…"
[Editor’s Note:] John Mauldin is an investment advisor in Texas and an authority on hedge funds. His latest book, "Absolute Returns," on hedge funds and alternative investments, will be out this fall. He also writes The Accredited Investor E-letter, which teaches qualified investors how to find and invest in private offerings.