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48th Annual Contrary Opinion ForumDavid Fuller 7th October 2010
Two
Different Worlds
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The old labels are misleading:
‘old world, new world, developed, developing, emerging…’
What do all economies have in common?
They are either progressing or regressingon an absolute or relative basis.
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Progressing Economies Have:
• Superior economic governance
• Relatively strong GDP growth
• Current account surpluses
• Low levels of government debt
• High personal savings rates
• Sound banking sectors
• Young, motivated & educated workers
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Regressing Economies Have:
• Poor economic governance
• Relatively weak GDP growth
• Current account deficits
• Increasing government debt
• Low personal savings and high debt
• Weak, dysfunctional banking sectors
• A shortage of skilled workers
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How do countries transform from regressing to progressing?
• Governance is everything! It starts with good leadership and is a top-down process.
• Luck helps: climate, water, indu. resources
• Empowerment of women & minorities
• Education and equal opportunity
• A ‘Can Do’ attitude and strategic planning
• Favourable demographics
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How do countries go from progressing to regressing?
• A failure of governance: pork, short-termism, CEOs game the system, a morally bankrupt financial sector
• Bad luck: drought, floods, few resources• Deteriorating educational standards • An entitlement mentality - hubris• Impoverishment by military commitments
• Social divisiveness - loss of confidence
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Stock market question:
Do two severe bear markets within
eight years make it more or less
likely that another dramatic decline
will occur within a few years?
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David, SPX historic, semi-log here
Box and label the valuation contraction cycles
Secular valuation contraction
1967 to 1982
Secular valuation contraction
2000 to 2015?
S&P 500 Index since 1953
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Many US economic commentators say that America is in a depression!
We also heard this in 1974, 1987 and 2001.
This crisis is more serious, but…
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What we actually have is the worst credit crisis recession since the 1930s.
‘100 years of historyshow that it takes five to seven years
for an economy to recover from acredit crisis recession.’
The US economy has been helped by stronger Asian-led growth.
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With the US economy still in trouble why shouldn’t the S&P 500 Index
fall to new lows as many forecast?
“It’s not about the economy, stupid.” Russell Napier of CLSA 10 September 2010
Equity investors buy companies… not the economy.
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David, put NDX chart here with comment:
Does this look like a depression or even A bear market to you?
NASDAQ 100 Index(weekly)
Does the action since the Nov 2008 low look like a
depression or even abear market to you?
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Bonds or equities?
Baby boomers have been pouring savings into bondsand selling stocks.
“An estimated $179 billion has been put in bond funds this year, while $35 billion has been pulled from stock funds, according to the Investment Company Institute, a trade
group for the mutual fund industry.” 24 Sep 2010
But does this make sense today?
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David, put historic US 10-year yield here
Annotate with question:
Does it make sense to buy at these yields?
September 1981
Does it make sense to
buy bonds at these yields?
US 10-Yr Bond Yield
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‘Bond markets are taking their cue from the developed economies,
equities from the developing.’Mike Lenhoff of Brewin Dolphin Securities
24 September 2010
This astute observation explains why investors in bonds see little recovery,
unlike investors in equities.
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Norfolk Southern in 100-year issue – Financial Times 24 Aug 2010
The company sold $250m in bonds with a yield of just 5.59 percent – an attractive rate for a company rated Baa1 by Moody’s Investors Service.
“We decided to [issue the bonds] because rates are so low and there is strong appetite for 100-year bonds,” said Robin Chapman, a spokesman for Norfolk Southern.
“You are giving a company money for a long period of time with no ability to foresee the conditions in that period of time and for a very low interest rate,” said Jason Brady, a portfolio manager at Thornburg Investment Mgt.
Investors who bought Ford’s century debt at a higher rate in an issue from 1997 saw their bonds fall to less than 15 cents on the dollar when the US car industry was in crisis over the past few years, Mr Brady said. They have since recovered but still trade at less than 90 cents on the dollar. The price of bonds also falls when rates rise.
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US equities: Is this irrational pessimism and gratuitous gloom?
Press reports:“death crosses”
“DJIA 400”, says…“Hindenburg Omen”
Meanwhile, progressing markets lead a resumption of the bull trend.
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Indonesia (monthly)
Asia’s market leader among larger population counties330m people
Brobdingnagian baseUncoupled from Wall St in June
Due for some reversion towards rising MA mean
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ASEAN uncouplingfrom S&P 500 in June
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Thailand(monthly)
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Singapore (weekly)
The new Switzerland
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Shanghai Composite Index(weekly)
Currently undervaluedco-favourite
BRIC
Supply to increasebank reserves
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Hong Kong Hang Seng Index(weekly)
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Vietnam SE Index (weekly)
shunned due to devaluation
Asia’s lowest valuations
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Vietnamese DongUSD/VND (weekly)
devaluation should be nearly over
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India BSE Sensex Index (monthly)
Brobdingnagian baseAdvance temporarily overextended
near 2008 peak
Fantastic long-term storyco-favourite BRIC
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Bombay Banks Index(weekly)
Contrast this performancewith western banks
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Chile General Index(weekly)
Susceptible to temporarymean reversion towards the MA
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Brazil Bovespa Index (weekly)
Fullermoney’s 3rd
favourite BRIC
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Germany DAX Index (weekly)
exporters leveraged toglobal economy
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Canada TSX (weekly)
Completing consolidation
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S&P 500 Index(weekly)
Bloomberg: ‘bestSeptember gain
since 1939’
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Fiat Currencies
The least bad in this environment:Those of Asia-led growth economies, resources exporters, financial currencies (Swiss franc & Singapore $)
Higher risk:Debtor currencies – US$ appeal mainly as a liquidreserve currency and haven in times of crisis
In the distant future:Chinese Renminbi will be the next global reservecurrency but probably not before 2050
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Asian Dollar Index (monthly)
Brobdingnagian base
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Singapore Dollar USD/SGD (monthly)the new Swiss Franc
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Commodities
Secular bull market, but volatile:‘Supply inelasticity meets rising demand’
Gold has been remonetised in the eyes of investors
Commodity price inflation – an opportunity and also the next big risk
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Continuous Commodity Index (Old CRB) since 1954Brobdingnagian base
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Gold bullion (monthly)
Secular bull marketsusually end with a dramatic
upward acceleration
Sep ‘03
Sep ‘05
Sep ‘07
Sep ‘09
Sep ‘01
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Platinum divided by Gold
Ratio currently 1.27 historic range 0.97 to 2.3
arguably better valuethan gold today
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Platinum (weekly)
Has catch-up potential
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Palladium (weekly)
rumours that Russianstockpile running out
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Copper CMX
China stockpilingnew highs likely in this cycle
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Tin LME (weekly)
Leading the way upamong industrial metalscurrently overextended
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Uranium (weekly) since 2001
Currently the cheapest metaland bottoming out
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Crude oil NYME
The next upside breakoutwill be a warning
All spikes in crude oilhave caused recessions
July 2008
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Rogers InternationalAgriculture Commodity Index
Base completion
Food price inflationwould be a problem
Feb 2008
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Medium to longer-term risks
• Industrial commodity price inflation• Food price inflation• Progressing economy inflation (current)• Regressing economy stagflation• Higher interest rates• Trade protectionism• Commodity ‘wars’• High frequency trading (another WMD)• Global warming
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Current bull points
• Monetary policy is accommodative
• Interest rates are low
• CPI inflation is low
• Progressing economies are healthy
• The West’s recovery is only 15 months old
• Household savings are rising
• Equity valuations are reasonable
• Corporate balance sheets are mostly strong* * (Where leveraged to the global economy)
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Fullermoney summary forecasts
• The Asian, resources and tech-led global stock market recovery is resuming
• This cyclical bull market should have several more years to run, provided energy and food prices do not spike higher
• The USA will avoid a double-dip recession with the help of progressing economies
• The three-decade bull market in US government bonds is ending – yields will range higher over the medium to long term
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Fullermoney summary forecasts
• Gold’s secular bull market has at least several more years before it is halted by higher rates
• The secular bull for industrial commodities will continue, punctuated by recessions
• Progressing Asian and resources economy stock markets will continue to lead
• US and European multinationals leveraged to the global economy will outperform
• Leading or promising sectors include: technology, healthcare, mining, agriculture, global infrastructure, and dividend increasers
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Thank you very much
Fullermoney is aGlobal Strategy Service
produced byDavid Fuller
&Eoin Treacy
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