Friday brought news that the Royal Bank of Scotland was looking to raise another $10 billion. This came amid news that the City (London’s Wall Street district) faced its “blackest day in almost 20 years,” according to the Daily Telegraph, and would lose 3,500 jobs. Which just goes to show how sunny the financial business has been for the last two decades. A little rain would do it good, in our opinion.
Meanwhile, over on the other bank of the Atlantic, Citigroup has issued storm warnings and Merrill Lynch says that it is reconsidering. Citi says it has about 9,000 employees too many; it says a flurry of layoff notices is about to go out. As for Merrill Lynch, the company went on record saying it needed no additional capital. But that was before announcing another $10 billion write-down of subprime debt. Now, the bank says it is “open to” further capital raising.
The price of oil hit a new high of $116 on Friday. The dollar stuck at $1.57 per euro. Gold got whacked – down to $915.
As we mentioned last week, there is a whole lot of flation goin’ on. Our guess is that it will inflate prices of commodities and gold…and that it will deflate (if only relatively) prices for stocks and houses. But you couldn’t prove it based on last week’s market action.
Friday, the Dow rose another 228 points. The stock market is said to ‘look ahead’ and see things that we mortals can’t see. The index went down about 10% since last October, but lately seems to want to go up. What does it see?
We think it sees inflation. But the conventional thinking is that it sees a boom. ‘The negativity has been severely over-done,’ goes the gist of popular opinion. Finance has bottomed out…homebuilding has bottomed out…the dollar has bottomed out. What’s more, the authorities have taken quick and resolute action to cure whatever was bothering the markets. Central banks have injected hundreds of billions into the banking system. The Fed has cut rates sharply. Congress is considering measures to help out homeowners…and here comes the Bank of England, which (according to the BBC) is preparing a $50 billion mortgage bailout plan. Well, that settles it as far as we’re concerned. It should be onwards and upwards from here on out!
As we pointed out last week, the newspaper headlines may be negative, but sentiment is not. Most people think this is a good time to buy a house – meaning, they still think ‘you can’t go wrong in property.’ And stocks at 20 times earnings are no bargains. At real bottoms, you can buy stocks at 5 to 8 times earnings.
At real bottoms, people have stopped looking for bottoms. Our old friend Marc Faber sent a convenient list of quotations from the crash of ’29. A chart of the market action looks like a mountainside, with ledges…followed by more sharp downturns. But on each ledge…at each pause on the way down…there was some notable figure telling the world that it was over:
“This is the time to buy stocks,” said R.W. McNeal in the New York Herald Tribune after the first leg of the crash. “This is the time to recall the words of the late J.P.Morgan…that any man who is bearish on America will go broke.”
It is the “long slope of hope,” says Marc.
As it turned out, anyone who was bullish on America in October of 1929 went broke. Stocks did not return to their ’29 high until the 1950s – after more than 1,000 banks had gone bust…a quarter of the workforce had lost its jobs…and the Dow had given up 89% of its value.
And now, dear reader…the press may talk about depressions, bear markets and credit crises, but we ain’t seen nothing yet. When we get a real bottom, they won’t be talking at all – they will have lost interest. That’s what happens. When we get a real bottom, people won’t be interested in buying stocks; they’ll come to regard stocks as a rich man’s game. And they will once again view houses as a consumer item, not an asset class. As for depression…they won’t need the newspapers to tell them how bad things are.
We think that day is coming. How far out it is, we don’t know. As we often say, we don’t have a crystal ball.
*** More and more indications suggest that there is a kind of decoupling happening. That is, the new economy of the Far East (and to a lesser extent Latin America and Africa) is separating itself from the old economy of Europe and North America.
Prudential Insurance, Britain’s largest insurer, says that Asian sales are now more than half its business. The company can grow, it points out, even with falling revenues from Europe and North America.
Meanwhile, colleague Manraaj Singh tells us that China’s latest growth announcement masked an even more important detail. The headline number – GDP growth over 10% – is breathtaking. But what is more interesting about it is that it is happening while exports to the developed world are actually going soft. That is, the growth is being fueled by domestic demand not foreign buying. This is not to say that emerging markets no longer need their Old World customers. Just that they don’t need them as much as before.
*** Our India expert, Ajit Dayal, paid us a visit last week in London. In the first two and a half months of this year, the Indian stock market got hit hard – the BSE 200 lost 32% of its value. We checked Ajit’s wrists for signs of slash marks and found none.
“I’m not the least bit worried,” he told us. “The India Thesis still stands. Indian GDP should post average growth of 6% per year for the next 10 years. Our stocks will give investors a risk-adjusted return of 15% to 20% per annum. That will make it possible for an investor to multiply his investment 4 to 6 times over the 10 year period.”
Ajit points out that while Indian stocks dropped sharply, they were coming down from a crazy high. A big rush of foreign money in 2007 had sent the BSE skyward. Even after correcting by 30%, Indian stocks are still ahead for the 12 months ending March 19th by 45%.
“Look around your house,” Ajit suggests. “You will find few things labeled ‘made in India.’ India gained little from the housing boom in America. And it will suffer little from the housing bust.”
What does affect Indian equities, though, is the movement of foreign capital. But foreign investors are generally light on Indian shares, while local investors – especially mutual funds – are taking bigger and bigger positions.
Markets and Money