Monday, November 30, 2009

3 Fund Manager Viewpoints: Doom; Gloom; & Extreme Caution

Recently I read the most disturbing economic description I've seen for a while. It's been a month since I've seen anything this gloomy. It's an 11-20-2009 article in the Business Intelligence-Middle East covering a talk given by Dr Mark Faber, a Swiss fund manager, and was posted by Mike Shedlock (Mish). Mish created a faux discussion using points from the article on Faber and responding to them seperately. It shows where Mish and Faber agree and not. These are two well informed financial mind's. Later, I'll cover another interesting mind to see another point of view, and possibly more. Here is a link to Mish's post. ( .

To give you a flavor of the message in the article on Dr Faber, here is a piece describing his point of view.

Faber has been warning about a collapse of the capitalistic system 'as we know it today,' massive government debt defaults and the impoverishment of large segments of Western society.

In a May interview with CNBC, he said central banks will continue to print money at full speed, but long-term this strategy will lead to a fall in purchasing power and living standards, especially in developed countries.

The years 2006 and 2007 were "the peak of prosperity" and the world economy is not likely to return soon to that level, he added.

Unless the system is cleaned out of losses, "the way communism collapsed, capitalism will collapse," according to Faber. "The best way to deal with any economic problem is to let the market work it through."

"I repeat what I have said in the past," Faber said. “No decent citizen should trust the Federal Reserve for one second. It’s very important that everyone own some gold because the government will make the dollar (in the long term) useless."

Next let's look into another point of view, one that shares some of the deflation concerns of Dr Faber and Mish. This comes from the writing of Doug Noland, also a mutual fund portfolio manager, in an article titled "Reflation Issues Heat Up". You'll find his article at the end of a long series of financial data he publishes, keep scrolling, until you see the headline a second time. ( .

Here is the flavor of his perspective.

It is my thesis that there is no alternative than a major transformation of the underlying structure of the U.S. economy. In simplest terms, we must produce much more, consume much less and do it with a lot less Credit creation. The objective of current policymaking, however, is to quickly rejuvenate housing and asset prices with the intention of sustaining the legacy economic structure. Zero interest-rate policy is key to this strategy. The objective is to push savers out to the risk asset markets, as well as to transfer returns on savings from the savers to be used instead to recapitalize the banking/financial system. If this reflation is unsuccessful, the household sector will find itself with only greater exposure to risky assets.

No only is the current course of policymaking unjust, I believe it is flawed. The nation’s housing markets will remain rather impervious to low rates, while the household sector is punished with near zero returns on its savings. At the same time, monetary policy will continue to play a major role in dollar devaluation and higher consumer prices for energy and imports. Financial sector profits have already bounced back strongly, but there is little market incentive to direct new finance in a manner that would fund any semblance of economic transformation. The focus remains on financing the old structure. Indeed, I would argue that the current course of policymaking and market interventions only work to delay the unavoidable economic adjustment process.

I believe the unfolding risks to the U.S. and global economy are enormous. Most seem rather oblivious to the risks, believing both that our asset markets are not overvalued and that economic recovery is only a matter of time. But we are taking an economy that had become dependent on massive mortgage Credit and housing inflation and making it equally addicted to zero interest rates, massive federal deficits, and tenuous global reflationary dynamics. Or let’s look at it from a different angle. From the perspective of stock market valuation - massive Credit growth, the resulting flow of finance, and the course of policymaking basically created no additional wealth over the past ten years. We now appear determined to repeat this dismal performance over the next decade. Repeating what I wrote above, I believe the costs associated with prolonged zero rates are much greater than the benefits.

Now let's hear from a somewhat more upbeat voice on the economy, Paul McCulley, another mutual fund manager. He's written at length in his analysis that the committed policy of the Fed has provided emotional support for risk assets that otherwise would not be supported to the same level. This is a more short-term analysis than the ones above. Here is a link to his 10-28-2009 article

And here is the conclusion to the article...

Bottom Line

Fiscal and monetary authorities around the world have done exactly that over the last year, and since April, in the words of the G-20, it has “worked.” Well, at least on Wall Street, where risk appetite is in full bloom. Whether or not that renewed risk appetite finds its way to Main Street is the key question beyond the immediate horizon.

We here at PIMCO think it will, but only in a muted way, not a big-V way. We also recognize, however, that markets can stray quite far from “fundamentally justified” values, if there is a strong belief in a friendly convention, one with staying power. And right now, that convention is a strong belief in a very friendly Fed for an extended period. Thus, the strongest case for risk assets holding their ground is, ironically, that the big-V doesn’t unfold, because if it were to unfold, it would break the comforting conventional presumption of an extended friendly Fed.

Simply put, big-V’ers should be wary of what they wish for. U’ers, meanwhile, must be mindful of just how bubbly risk asset valuations can get, as long as non-big-V data unfold, keeping the Fed friendly. But that’s no reason, in our view, to chase risk assets from currently lofty valuations. To the contrary, the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace.

My conclusion from reading these points of view is that the time for risk taking by investing in stock assets,  low grade bonds, and including commodities (except metals and miners((depending on the price of energy))) and foreign bonds is close to the end. Only investors with moderately aggressive and aggressive risk profiles should be maintaining their exposures to risk assets here, and should have a finger on the switch constantly. Everyone else should have scaled back or hedged their exposures by now.