Gary’s Note:
The money managers all have it wrong. Of course, warns Dan Amoss, they’re
all reading from the same Keynesian playbook. And that’s going to cost the
investors who trust them. Dan has a different point of view and a solution.
|
Economic Misdiagnosis Will Kill
Investors |
By Dan Amoss
October 28, 2009
York, Pennsylvania, U.S.A.
Most money
managers have misdiagnosed what’s currently driving the global economy.
The multiple that investors are willing to pay for next year’s earnings
means more than any sentiment polling.
The forward P/E
multiple on the broad stock market is not nearly as high as it was during
the Internet bubble, but it’s at extreme highs if one accurately
diagnoses the unsustainable stimuli currently driving global economic
activity.
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Just like
low-quality earnings paint a misleading picture of a company’s value, this
low-quality economic activity destroys wealth and promotes a dependence on
sustained fiscal largesse.
Such a diagnosis
would filter out how fiscal and monetary policies are distorting the
efficient allocation of capital. Investors should interpret
government spending as noise and interpret private sector behavior as the
signal. In today’s state-sponsored economy, you cannot totally
separate one from the other, but it’s still important to acknowledge the
distorting influence that stimulus programs have on capital spending and
hiring decisions.
What happens
when the stimulus wears off? Why, we have even more excess
capacity in sectors where stimulus was directed. Exhibit A: cash for
clunkers. Exhibit B: the tax credit for homebuyers that will exacerbate the
structural glut in housing supply. In the financial media, I’ve seen
investor after investor defend these programs as valuable and necessary,
which demonstrates their ignorance of sound economics.
We’re propping
up zombie institutions, throwing good money after bad, and rewarding
incompetence — all at the expense of prudent people’s savings and the
capital that will be needed to fund the industries of the future. Top
investors don’t tolerate low- or negative-return-on-capital decisions by the
executives running their companies, so it’s puzzling to me why so many of
these investors advocate the same type of economic malpractice on the part
of government policymakers.
The latest
sideshow for public consumption — a “paymaster” regulating pay at large
banks — is another example of the government’s misdiagnosis of the problem.
Rather than
regulate pay in the hopes that it discourages risky banking behavior, we
should be phasing out the government guarantees of the banking system’s
liabilities. That, I assure you, would discourage foolish risk-taking among
bankers. Case in point: Goldman Sachs behaved in a much more responsible,
sustainable manner when it was a privately owned partnership without
government guarantees, rather than the high frequency trading, TLGP-hogging,
heavily lobbying institution that it is today.
Like an
addictive drug, today’s fiscal and monetary policies have made everyone feel
better, but have further weakened the structural health and sustainability
of the economy. If you doubt this, just look at the horror in most
investors’ eyes when they are confronted with the prospect of a Fed Funds
rate above, say, 2% — up from today’s range of zero percent. The addiction
to E-Z credit and government support everywhere you look is one of the
clearest reasons that this economic recovery is an elaborate illusion.
Yet we still see
examples of extreme inefficiencies in the valuation of certain stocks. It
feels eerily similar to the tech bubble, with investors behaving as if today
is the last chance they’ll ever get to buy Amazon.com stock at less than 80
times earnings.
Whether it’s the
sky-high multiple on Amazon’s maturing business, which seems to be
discounting that every Chinese citizen will own a Kindle within five years,
or the expectation that banks employing creative accounting have seen the
worst of their credit losses, many investors are putting real money behind
their belief in a super-bullish economic environment.
The reasons to
be cautious and bearish are overwhelming. A market correction back to more
normalized valuations may happen at any point.
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Lastly, I
attended the Value Investing Congress in New York last week, along with
Addison Wiggin and Chris Mayer.
The most
important takeaway for me was the audience’s apparent skepticism towards the
two most bearish presenters: David Einhorn and Eric Sprott. Both hedge fund
managers are bullish on gold and critical of Washington, D.C.’s
wealth-diluting fiscal and monetary policies. The tone of the Q&A sessions
after these presentations tells me that most investors are still very, very
skeptical of investing in gold. That’s good news for gold bulls.
It’s also good
news for stock market bears that so many believe in the Keynesian theories
they read in their college economics textbooks. GDP growth driven by
government spending is misleading, and damaging to capital formation. Much
of today’s top line growth is coming at the expense of future profits — when
mal-investments will be written off.
Regards,
Dan Amoss
P.S.:
If you’re reading Whiskey, odds are you are bullish on gold and not
so optimistic about the stock market. Obviously, neither am I and that’s why
subscribers to my newsletter Strategic Short Report have made 30%
this year on my recommendations. If you were paying attention to my article,
you’d know that they’re going to be making a lot more.
You can join them by clicking here.
 |
Looks like some
of you are willing to make a go at it in Detroit.
A Shooter asks,
“In regards to Detroit, can we put together enough acres to farm?”
Good question!
I have the
notion that all the infill and sprawl between urban cores should have
remained farmland and woods…
But I don’t
think one can so easily return asphalt and concrete to something that would
sustain agriculture. It could take hundreds of generations. And you may not
have anywhere near that long…
If you live long
enough to fix your house…
If you plan to
move to Detroit, better bring a .45 a guard dog and lots of locks nothing
works in a culture of corruption and crime. That’s why they can’t give
away property. You couldn’t pay people to live in most of Detroit.
You probably
couldn’t.
The stories that
abound concerning Detroit are many. Shame most of them are bunk.
Nobody wants to
move into Detroit: Highest property taxes in Michigan; One of only 3
cities in the state to charge income tax; Overzealous and corrupt
government workers; A citizenry that after five decades not only relies on
government handouts, feels entitled to them.
These investors
are going to be in for a shock when their “investments” twice-annual tax
property taxes come due.
Then they will
be shocked when they attempt to rehab the structures, and the thieves
strip them bare at every step.
Finally, they
will be in for a real shock when their tenants quit paying AND destroy the
building.
Yep, just
shocking. Unless you have lived in the area, then expected.
As for the BS
about the defunct auto industry, well they added three casinos and two new
stadiums in the past decade. Billions and billions in new tax revenue to
both the city and state.
And yet, here we
are again. Blight, increasing taxes, increasing corruption and decreasing
standards of living.
Unless you are
one of those blessed with the right union, or connections.
The rest of the
country better wake up and come to see the reality of Detroit and
Michigan. Because it appears that the Obama administration is looking to
our “leaders” for solutions on a national basis. More unions, more perks
for not working, higher taxes and punishing the successful.
I’m sure it will
work out differently for the entire country than it has worked here in
Michigan.
Thanks for
another great email!
And now a note
from a Shooter who has clearly never visited the authors’ online picture
page…
Not only Detroit
is dying...
I live in
Brooklyn, New York and I see this area decaying further and further every
week. It’s mind boggling how this area has transformed over the last 40
years (especially over the last 20 years).
We NEVER saw a
mestizo here until 1991, and then the floodgates opened.
I witness the same in some areas of nearby New Jersey and Long Island.
This doesn’t
look like the United States anymore...
When the Whites
regretfully disappear (due to death, low birth rate, White flight) there
is quick, visible deterioration.
I can’t believe
what the cops and local politicians look like here...
I have no idea
where any of us should go next. It’s a question I ask myself every day. And
every day I end up back at this same desk and I just continue to send you
these little missives. I guess we all just plug along till something gives.
Regards,
Gary Gibson
Managing Editor,
Whiskey & Gunpowder
