Archives for September 2012

hanks for all the bright comments and questions you've contributed lately.

Please, keep them coming.

You can share your own thoughts with me by posting them to the bottom of any article, or emailing them to [email protected].

Okay, who's up first this time?

Q [re: "What I See Ahead for the Economy"]: I generally agree [with your wagon analogy], but allow me to play devil's advocate. If we are so connected, why haven't the U.S. markets been struggling as much as Europe? Sure we have our problems too, but so far equity markets seem to have shrugged off Europe… ~ Dom

A: The U.S. – to use Mohammed El-Erian's phrase – is the cleanest dirty shirt in the laundry.

Corporate earnings have generally been stellar, and that's what drives the market, underneath the macro headwinds. But a lot of those earnings are global revenue streams, accounted for in terms of a weak dollar when they are translated back home into quarterly reports.

The markets also look "cheap" on a relative, historical price/earnings multiple basis. I have argued both fronts. If the dollar strengthens, because global growth weakens and capital flight out of emerging markets (China in particular, not that's it's emerging, it is HERE) heads into the U.S., that would be indicative of weakness where U.S. companies have been shining. Then, when weaker global earnings streams get translated into a more expensive dollar, earnings reports could vastly underperform expectations at first, then quarter over quarter and year over year trends more dangerously.

As far as historic PE multiples, I've argued, empirically, that the old benchmarks don't apply any more. My work says the new normal might be 12 times, not 14 to 15 times. Why? Things like technology's impact on productivity, paradigm shifts as a result of productivity changes due to technology, and volatility dynamics due to a global marketplace. These are just a couple of things we have to watch out for in terms of valuing markets, especially U.S. markets.

Q: One of the only ways the global economy can survive now is [if] the debt reset button is pushed, forcing prices down to real value rather than a notional one. But as this is not going to happen, then I guess it's the cabin in the hills. ~ Alex G.

A: It can't happen on a global scale; the hills would be too denatured of trees for want of so many tiny cabins. It could happen on some rolling basis. But, once that kind of ball starts rolling, it could snowball, and we'd be facing another 2008 look over the abyss. Only the next time could see the precipice collapse from the weight of leveraged sovereigns and overly leveraged central banks.

Come to think of it, where's my little axe?

Q: "Been Down So Long It Looks Like Up To Me" is the name of a book by Richard Farina, published in 1966 – before The Doors plagiarized the phrase in the 1970s. ~ John D.

A: Thanks, John. I always appreciate learning the true origin of the things we think we know about. I never said I was smart, just a smart*$%.