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8/9/2019 Volume 2.4 Still Bullish Apr 13 2010
1/12
BoeckhInvestmentsInc.,17501002SherbrookeStreetWest,Montreal,Quebec.H3A3L6Tel.5149040551,[email protected]
Volume 2.4April 13, 2010
StillBullishInthisissuewetouchonfournewdevelopmentsthatsupportacontinuedbullish
stanceonriskassets. However,westillhavelongtermconcernswhichrelatetothe
potentialunwindingoftheprivatedebtsupercycleanditsreplacementwithanewpublic
sectordebtsupercycle. Inaddition,unwindingthegreatreflationinanorderlymannerwill
remainaseriousglobalchallenge. Surprisesarelikely;volatilityanduncertaintyarealmost
certainlygoingtorise.
Thepowerofliquiditytodrivemarketsinthefaceofmacroeconomicconcernshas
onceagainbeenclearlydemonstratedoverthepast13months. Theliquidityenvironment
continuestobepositiveforriskassets,marketpricesarelikelytoremainonanupward
trend,mergersandacquisitionswillincreaseandinvestmentfundswillcontinuetoseek
outgoodvalue.
1. TheEconomyBrighterheadlinenewsontheeconomyandprofitshasliftedconfidence.
Unquestionably,theeconomicnewsisbetter,inparticularprofitsandcorporate
liquidity,as
we
discussed
in
the
February
25th
2010
Letter
(volume
2.2).
However,thebigdangerintheshortrunisarecoverythatistoostrong,causing
arekindlingofprivateborrowingandhouseholdspending,whichwouldclash
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withburgeoningpublicsectorborrowing. Thefactisthatmuchoftherecent
economicstrengthisalaggedeffectofthestimulusprogram. Inaddition,
comparisonsarebeingmadewithverydepressedyearagonumbers. Ourview,
whichwillbedevelopedmorefullyinthenextissue,isthattheunderlying
economyisstillprettyweakandwillgravitatetowardsverysubparrecovery
growthofaround2%. Thatisfarbelowtheusualpostrecessionreboundsofthe
past. Twohugeimpedimentstogrowtharehouseholddeleveragingandaheavy
fiscaldrag.
Recent
data
on
consumer
debt
is
consistent
with
this
view
as
Februarydatashowsanearly6%decline. TheCongressionalBudgetOffice(CBO)
hasprojectedthestructuralcomponentofthefiscaldeficittocontractbyalmost
4.5%ofGDPinthenexttwoyears,ahugehittotheeconomy. Inaddition,state
andlocalgovernmentsareattemptingtoslashdeficitsbycuttingexpenditures
andraising
taxes,
creating
additional
fiscal
drag.
A2%growthscenariowouldbebullishforfinancialmarkets.Itwould
allowprofitsandproductivitytokeeprising,holdpriceinflationincheck,support
furtherglobalrebalancing,andallowtheFedtokeeprateslowandliquidity
plentiful. Thiswouldcontinuetoanchorlongratesatclosetocurrentlevels.
Fiscalrestraintwouldhelptodissipatefearsofrunawaygovernmentdebt:GDP
ratios.
However,itmustberecognizedthatprobablyneverinthepostwar
periodhastherebeensuchawidedispersionofeconomicviews.Theyrange
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fromtherecessiondoubledipperstotherunawayboomers,andeverythingin
between.Therealityisthatinvestorshavezeroconfidenceinanyparticular
economicviewandshouldtreatforecastswithmuchmorescepticismthanever,
includingourown. Itisafactoflifethatwehavetoremainpragmaticand
flexibleinourviewsandwatchcarefullyforthekeybenchmarksthatwould
requireachangeinview.
2. ChinaandthefloatingoftheRMBTheU.S.Chinabackdoordealhasyettoberevealedinfull,butthe
outlineisclear. Bluffmanshiponbothsidesworked;theU.S.gotafacesaving
dealontheRMBandcalledoffthecurrencymanipulationthreat. Chinagota
protectionistCongressoffitsbackforthetimebeing.Thekeypartofthedeal,
wewould
guess,
is
that
China
will
continue
to
support
the
U.S.
dollar
and
U.S.
Treasurybonds,somethingitwouldhavetodoanyway.Thewolfissatisfiedand
thesheepisintact.
TheChinesewillwidentheRMBrangearoundthedollarpegandwill
allowacontrolledupwardfloataswasthecasebefore2008.Thiswillmakelittle
ornorealdifferenceunlessthemoveishuge,whichisveryunlikely.Chinas
productivitygrowthinitsmodern,manufacturing,exportorientedsectoris
about15%peryear,wagegrowthmaybe10%,probablyless.Therefore,thesolid
pegagainstthedollarsince2008meantabouta5%realeffectiveexchangerate
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THEBOECKHINVESTMENTLETTER WWW.BOECKHINVESTMENTLETTER.COM 4
devaluationannuallyagainstthedollarandamuchbiggerdevaluationagainst
currenciesthatroseagainstthedollar.Floatingupat5%peryearwouldmeana
stableandstillgrosslyundervaluedRMBagainstthedollar.FredBergstenofThe
PetersonInstituteestimatestheundervaluationataround40%.Thiswillbeonly
partiallyreduced,andveryslowlyatthat.Chinawillcontinuetorunhugecurrent
accountsurplusesandgrowrapidly.
Theupwardcrawlingpegwillcreateexpectationsoffurtherrisesand
hencecapital
inflows
and
liquidity
in
China
will
likely
increase.
Asset
price
gains
mayaccelerate.TheChinesestockmarketisstillabout10%belowtherecovery
highoflastsummerandisnotabubble. Itappearsreadytobreakouttothe
upsidesoinvestorsshouldstaylongChinaandignorethebubbleworriesunless
thingsgetreallyfrothy.
3.GreeceandthePutativeBailoutMarketforcesonceagainforcedthehandoftheEUauthoritiesasGreek
bondyieldsblewouttoarecordhighvisvisGermanyieldslastweek. Fitch,
thebondratingagency,sharplydowngradedGreece(afterthemarketsspoke,as
isalwaysthecase).Therenowappearstobea45billionloanpackageonthe
table(detailslackingasusual)todeterspeculators,theusualscapegoated
villains.Fortunately,theIMFappears,finally,tobeinonthepackage.Ifthereis
clear,transparentfollowthrough,thiswouldmakeitfarmoreconvincing.Left
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ontheirown,theEUauthoritiesfailedmiserablytoconvinceanyonethatthey
wereuptothejobofsalvagingGreecescatastrophicfinances.Assumingthis
dealgetsdone,theGreekeconomywillgothroughtheringerforthenextfew
years.Sovereignspreadsofhighriskcountrieswillnarrow,butonlyforawhile
becausetheGreeksagawillreappear. Inthemeantime,thebailoutisbullishfor
theU.S.bondmarketintheshortterm,inthatitwilltendtodampenupward
pressureonratesandgreatlydiminishthethreatthattheFedwouldhaveto
tightenprematurely
for
purely
financial
reasons
(dollar
selling
and
fear
driven
dumpingofU.S.bonds)andallowittokeepliquidityplentifulandshortrates
low.Thisis,naturally,bullishforU.S.stocks.
ItalsoneedstobeemphasizedthatGreeceis,infact,thecanaryinthe
coalmine.Itisaclassiccaseofacountrythathashitthefinancialwall.Itsdeficit
anddebt
levels
at
13%
and
120%
of
GDP
respectively
are
appalling
in
their
own
right.Thecountrysborrowingcostsarefaraboveanypossiblegrowthrateand
thecountryisinahugeprimary(i.e.excludinginterestpayments)deficit
position.Inaddition,Greecessavingshavebeensolowforsolongthatithas
hadtorelyonheavyforeigncapitalinflows(U.S.watchers:doesthissound
familiar?).Thus,foreigndebthasskyrocketed.Withoutadevaluationoption,it
mustreducelivingstandardsbymassiveinternaldeflation.Strikeswillbecome
endemicandthatwillpoisonthetouristindustry,oneoftheprimaryexport
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earners. ItisfarfromclearthatGreecewillmakeit,sodontbetonGreek/EU
stabilitylastingverylong.
ThegoodnewsoutoftheGreektragedyisthatmanyothergovernments
havewatchedthecanarygetverysickandhavetaken,orwillsoontake,drastic
actiontoslashdeficits.Thisincludesmanystateandlocalgovernmentsinthe
U.S. Fiscaldrag(declineinstructuraldeficits)onaglobalscalewillbemassivein
thenextfewyearsandhencefearsoverawidespreadsovereigndebtcrisismay
havetriggered
aconstructive
reaction
of
meaningful
fiscal
restraint.
If
so,
it
will
begoodforbondyields,butnotsogoodforgrowth.
4.CommodityPricesandtheDollarRecentbreakoutstonewhighsinthebellweathercopper,aluminum
andcrude
oil
markets,
better
action
in
the
gold
market
and
general
commodity
indexesreinforcetheviewthattheglobaleconomicrecovery,onbalance,
remainsintactandcouldstrengthenforawhile.However,someareas,notably
theEU,remainweak.Manypartsoftheworldforexample,China,South
America,Canada,Australiaaresurprisinglystrong,showingthebenefitsofnearly
freemoneyandthelaggedeffectoffiscalstimulus.However,somecoolingis
neededifatighteningofmonetarypolicyinthestrongareasistobeavoided.
Whilepotentiallypainfulinthenearterm,itwouldbeconducivetolongterm
stability. Fortunately,thatislikelytohappen.
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TheU.S.tradeweighteddollarhasbeenfirmsinceDecember,drivenin
goodpartbyweaknessintheGreekdamagedeuro. Theyenhasalsobeenvery
softandhasbrokendowntoanewlowagainstthedollarinrecentweeks.Gold
hasbeenthemirrorimageofthetradeweighteddollarforthepastyear(and
mostofthetimehistorically). Recently,goldhasbeguntofirmupwithoutthe
dollargoingtonewlows.Thiscouldbethebeginningofadecouplingor,possibly
animpliedforecastofaweakerdollarahead.Eitherway,itisarelativetrend
thatneeds
to
be
monitored
closely
by
investors,
as
gold
looks
to
be
heading
higher,drivenbyanevolvingpeakgoldthesisandlongertermfearsof
monetarydebauchery.
Tosummarize,weremainbullishonU.S.equitiesandtheequitiesofcountriessuchas
Canadaand
Australia
that
are
beneficiaries
of
the
world
recovery.
Emerging
market
equities
haveoutperformeddevelopedcountrymarketsandtheyarelikelytoremainstrong.Chinain
particular,lookssettomovehigher.
Thekeybenchmarksforinvestorsthatwehavepointedtoasagaugeofpotentialrisk
U.S.Treasuryyields,corporatespreadsandthedollarallremainrelativelystable.U.S.bond
yieldshavedriftedhigherasweexpected.Thisisnotyetacauseforworrysolongasthedollar,
U.S.stockmarketandprofitsremainstabletorising.
Wealsowanttoemphasizethatourlongheldviewontheimportanceofwealth
preservationremainsintact.Thefinancialworldisstillfragile,therecoveryartificialinmany
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8/9/2019 Volume 2.4 Still Bullish Apr 13 2010
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Commodities
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8/9/2019 Volume 2.4 Still Bullish Apr 13 2010
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InterestRates
THEBOECKHINVESTMENTLETTER WWW.BOECKHINVESTMENTLETTER.COM
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