In Ben We Trust

“The de-rating in Western equities continues to rhyme in a surprisingly familiar way to what we experienced in Japan a decade ago (see chart below). Another cyclical rally has led to a temporary pause in the structural de-rating process just as it did in Japan a decade ago. US equities looked cheap verses bonds last year but will look even cheaper next year!”

Albert Edwards, Soc Gen, August 2010


Below are some articles/videos I have found interesting over the last week:

1. “Valuing the S&P 500 Using Forward Operating Earnings“: Hussman Funds: “If you take away one thing from this week's comment, it is that stocks are a claim to a long-term stream of cash flows that will actually be distributed to investors over time, and that this stream of cash flows cannot be estimated from a single year's earnings number. The main reason for this is that profit margins vary from year-to-year over the business cycle, and tend to mean-revert over the long-term. Earnings (net and operating) tend to be depressed during periods of economic strain, but when they reflect compressed profit margins, they are strongly associated with above-average rates of subsequent growth over the following 7-10 years. In contrast, earnings that reflect elevated profit margins are strongly associated with poor rates of subsequent growth. When analysts take earnings figures at face value, and presume to "capitalize" them simply by dividing by interest rates, they demonstrate a Kindergartener's grasp of securities valuation.”

2. “Why is Deflation Bad?” – Paul Krugman cites three reasons to worry about deflation, two on the demand side and one on the supply side.

3. “Welcome to the Recovery” – more administration folly this time from Tim Geithner.

4. “No need for a panicked fiscal surge” – attached by Kenneth Rogoff writing in the FT.

5. Are you an Austerati or a Stimulati? Compare and contrast two opposing views….Paul Krugman vs Niall Ferguson (watch part 1 and 2 of both).

6. Raoul Pal, who retired from managing money at the age of 36, after co-managing GLG's Global Macro Fund, and the hedge fund sales business in equities and equity derivatives at Goldman among others, has been publishing the his Global Macro Report since and has just come out with the most condensed version of truth about our economic reality. The attached report provides the most in depth observation on the "future recession in an ongoing depression" which is arguably the best way to describe the current economic predicament. I found it quite interesting he writes a paragraph on a book I’ve just started reading: “If you’ve read the book The Fourth Turning by William Strauss and Neil Howe, you’ll note that this is almost exactly as they predicted. At the end of The Fourth Turning, we start the entire process again, returning to where the super-cycle began. In this case we would be returning to a society much more like the 1950’s which was a time of economic and social conservatism, economic isolationism and a whole heap of insecurity and paranoia”. Excellent data here on UK and Hungarian economies too. Send me your email address if you want this large attachment.

7. “Uncertainty changing investment landscape” – attached by Richard Clarida and Mohamed El-Erian: “We should all feel sorry for policymakers who face such distributions. The probability of a policy mistake is materially higher, especially as policy measures are subject to lags. What is less appreciated is the extent to which this changing shape of distributions affects conventional wisdom in the investment world, together with the rules of thumb that many investors have come to rely on. We can think of five implications”.

8. Felix W. Zulauf has worked in the financial markets for almost 40 years, starting his investment career as a trader for Swiss Bank, then training in research and portfolio management in New York, Zurich and in Paris.In 1977, Felix joined Union Bank of Switzerland (UBS), Zurich, managing global mutual funds, heading the institutional portfolio management unit and being global strategist for the UBS Group. He founded his wholly owned Zulauf Asset Management AG in 1990, allowing him to independently practice his own individual investment philosophy. Here is an interview with him.

9. “Why Today’s Deflation Won’t Kill Gold” – from Peak Theories research: a) Gold’s primary trend is up b) Today’s deflation will bleed into hyperinflation c) Ultimate hoarding vehicle d) Untarnished credit quality.

10. “The Farce Is Complete: S&P Downgrades Moody's To BBB+ From A-2”.