Dear Diary,
The Fed’s QE isn’t dead. But it’s off the job. For now.
ZIRP (zero-interest-rate policy) is still at work. The Fed says it will keep short-term interest rates near zero for “considerable time.”
Stocks didn’t crash. The Dow fell only 31 points. Does this mean that the economy is stronger than we think… and that the Fed can take away the punchbowl without shutting down the party?
We wait to find out… safely on the sidelines.
Yesterday, we picked up an issue of the Financial Times – the so-called pink paper due to its distinctive color. We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
Choirmaster to the Economic Elite
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance… or to an investment bank… or to a think tank – there’s the salmon-pink newspaper.
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
Too bad… because it has more bad economic ideas per square inch than a Hillary Clinton speech.
It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
He says it would be a “free lunch,” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself… and yield a profit.
Yo, Larry, Earth calling… Have you ever been to New Jersey?
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money… when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit… and no idea what they are doing.
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
What kind of return do you think you would really get?
We don’t know, but we’d put a minus sign in front of it.
But the fantasy of borrowing for “public investment” soaks the FT.
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand.”
How do you stimulate demand?
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
On page 9 of yesterday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
The question […] is how to achieve higher demand growth in the euro zone and creditor countries. [T]he euro zone lacks a credible strategy for reigniting demand [aka debt].
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments… and their august advisers on the FT editorial page… need a “strategy.”
The Digital Divide
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide.”
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the Internet on poor families is unknown.
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
Nobody knows. But a serious paper would at least ask.
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
But the FT does none of that.
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
Regards,
Bill
Emerging Market Pain Spells Opportunity
One of the funny things about investing is that everyone wants to be a contrarian when it’s popular.
For instance, everyone was comfortable with the narrative that emerging markets held the keys to the future of global growth when the market was reinforcing that narrative with higher stock prices.
But as our friend Rick Rule puts it, that’s not being a contrarian. It’s being a victim.
As Rick, a hugely successful natural resource investor, told the folks at Casey Research recently:
You are either a contrarian or you are a victim. To buy low, you have to buy in markets that don’t have competition. To sell high, you have to be a seller in markets where other people are greedy. It’s that simple.
Right now, the emerging market stocks don’t have competition. Prices are low. But nobody wants to buy emerging market stocks at lower prices.
Over the last five years, the iShares MSCI Emerging Markets Index ETF (NYSE:EEM), which tracks the performance of stocks in global emerging markets, is up 11.2%. Over the same period, the SPDR S&P 500 ETF Trust (NYSE:SPY), which tracks the S&P 500, is up 91.4%.
An investment in the emerging markets has been profitable in absolute terms. But on a relative basis, it’s been a painful period of underperformance.
But what about the future?
Rob Arnott of Research Affiliates sheds some light on the subject.
As he points out, two levers move stock market returns: earnings and the multiples investors are willing to pay for them (most often expressed as price-to-earnings ratios).
Earnings are mean reverting. This means that the more they move away from their long-run averages, the more they get pulled back toward the “mean,” or average.
This, says Arnott, favors emerging markets over the US right now. That’s because real earnings per share (EPS) show that profits in the US are about 50% above their long-term trend. Profits in the emerging markets, on the other hand, are 10% below trend.
Earnings multiples also favor the emerging markets over the US. As of the end of last month the Shiller P/E (which looks at the average 10 years of inflation-adjusted earnings to give a better picture of value) for the US market was 26.6. The Shiller P/E for the emerging markets was just 14.8.
The emerging markets are cheap compared with the US, in other words.
None of this makes it any easier to invest in stocks that the crowd is selling. But as Arnott asks:
What is more likely to have a positive surprise: a market with high valuations, above trend profits, and high expectations, or a market with dirt cheap valuations, below average profits that can revert to the mean, and overwhelmingly negative sentiment?
Our view remains the same: For investors with plenty of patience and an ability to go against the crowd, emerging market stocks look set to outperform the US market over the long term.