Sure spreads on junk and (structured junk) are high, and loans to float them hard to come buy. But equities are back to pre-panic levels, high quality cp and debt is being sold in torrents, the dollar is still alive and kicking, and what? Still no rate cut? Hedge funds, real money buyers, and Buffet are lining up to buy the wreckage, and still waiting. What happened to the crisis?
Stephen Roach, apparently at the mercy of the Morgan Stanley mail pouch out there in Asia, rails against events today that seem months old to m* by now. And that was precisely the point behind Roach's promotion one half suspects. It's good to see him though on Bloomberg TV, fighting mad over Central Banks' "antiquated approach to monetary policy" (inflation targeting - antiquated?) that creates serial bubbles and "asset dependent real economies," "vulnerable to systemic risk" worldwide. Don't ever change Steve.
Like SR's bearishness, something else that never seems to change (they are connected no?) is the equity market's bullishness. Financial sector got you down bub? Worried over "book" value with all those rating dependent structured debt products and LBO commitments weighing on your balance sheets? Well look on the bright side bub. Global growth and decoupling will drive technology, industrials, and energy on to new highs, taking the market along with them. Or so the street mavens in the latest Barrons poll would have you believe. Throw in a rate cut or two plus the surge in foreign buying and a liquidity driven Q3 rally may not be as crazy as it sounds if it's not too late to even talk about it? Beyond the rebound, the path of least resistance seems to be higher still.
But what about all that recession talk, and the justification for those anticipated rate cuts? And what does that do to earnings forecasts? Isn't there a disconnect someplace? m* is going to go out on a limb here and say yes, but also maybe not, just not the way those mavens are thinking about it. First of all, recession probabilities aside for the moment, consider this chart from the excellent Gerard Minack of Morgan Stanley Australia, (he's obviously not dependent on the mail pouch). Here he presents real S&P earnings versus trend since 1980.
There is no question that earnings growth has been extraordinary during this period of rapid globalization but the peak-ness of those earnings (unless one believes that jazz from Lombard) is hard to ignore when presented in this fashion. Just once m* would like to hear, when bull-of-the-hour says equities are cheap on a p/e basis, if he/she is willing to buy the continuation of this deviation from trend. No really, it is different this time...
When one considers the extraordinary expansions over this period in credit (used to generate sales but also to re-purchase stock), and margins, reduction in corporate taxes, and the extraordinarily low reserves for bad debts (in the case of the not inconsiderable bank sector), it seems likely that corporate profits overall have benefited from an incredibly propitious period that, if recessionary fears are correct and tighter credit conditions are a fact, is now over.
The maybe not part? Inflation. How much faith does m* have in the CPI as an even approximate nominal price deflator? Not much. Deflated with a more real world price index, (oil, gold, renminbi, UK CPI?) those earnings may actually be much closer to trend than they appear.
But to m*'s thinking, earnings are only a part of the story. Purchasing power is the real issue. In a continuing environment of stealth inflation (or dollar devaluation if you prefer) US equities nominal earnings growth, dividend growth really, (of almost any rate) is a safety trade.
And as a foreign investor, keen to avoid overpriced US government debt in a deflating currency, purchasing equities of US companies producing things the rest of the world continues to show interest in buying makes a great deal of sense, slowdown or not. One can debate the relative skill (or lack thereof) of foreign investors' timing for sure, but the new players on the field - or soon to be anyway - have a timeframe measured in decades rather than quarters. Growth at a reasonable price can take a back seat to just maintaining purchasing power.
Think of it as the next stage in the vendor financing cycle, repossession.
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