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Eerie feeling circa 2008


valuecfa
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Does any one else have that eerie feeling that the Europe contagion could develop into something quite substantial and that the market does not seem to fully comprehend its significance yet, but that they will soon enough when the talking heads begin to see its effects? I wonder what growth will be like over the next few years if Europe & China continue to slow down (or pop in China's case), real estate prices in Australia, Canada, and China begin to decrease significantly more, worldwide austerity measures begin to slow growth further, layoffs increase in the public sector as a means to further cut deficits, worldwide deleveraging of assets to maintain above water balance sheets continues, household debts begin to decrease (i.e. save more, spend less). Seems to me that the market may deserve a much lower than normal multiple to historical earnings than the long term average, given the incredible lack of uncertainty in near term (~3-5 years) growth .

 

Yes, the US and rest of the world have been through many devastating things (world wars, hyperinflation, deflation, etc) and will eventually pull through, but how anyone can have a positive macro outlook for growth over the next few years in bewildering to me.  Just rambling i guess. I haven't had a four day weekend in a while, so perhaps i am thinking about it too much. Thoughts/comments?

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In regards to Europe only, i probably should mention that i think they will eventually print in large quantities (or directly or indirectly provide financial guarantees), but best as i can tell they may likely end up doing that only as a last resort due to various reasons. It is the meantime that i am curious about. The moment in between now and then. I don't think the markets yet grasp its significance and seems the politicians may wait only until things get much worse before they react in any substantial degree.

 

This is all forecasting, take it for what it is worth.

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in 2008 corp debt was getting creamed. now it's holding up just fine. investors are far less leveraged today. in 2008 people were forced to sell. today there is no such urgency.

 

Thanks for pointing this out. This is an incredibly important point, and it is the one thing that leads me to believe i may be incorrect in my thinking. The corporate debt markets don't seem that worried, at least not in the investment grade field. Though BIG rates have deteriorated significantly recently. This can turn on a dime as systemic risks come about quickly. However, thanks for pointing that out.

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in 2008 corp debt was getting creamed. now it's holding up just fine. investors are far less leveraged today. in 2008 people were forced to sell. today there is no such urgency.

 

There are a few other differences:

 

- The housing market was also valued about 75-100% higher than it presently is. 

- Financial institutions were leverage 15-1, not including off-balance sheet leverage.

- Consumers were net spenders, now net savers.

- Jobs were leaving the U.S...now they are slowly returning.

- Cash balances within corporations was a fraction of what they hold today.

- Correlated risk between financial institutions was enormous...now somewhat regulated within the U.S.

- Oversight of largest financial institutions in the U.S. is heavily monitored.

 

Lots of issues to be dealt with, but the U.S. is in far better shape than many of its counterparts.  Europe on the other hand is going through exactly what the U.S. went through in 2008, and they work far slower with more hands tied.  They will need to take a lesson from Bernanke, Geithner & Paulson.  Cheers!

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I can't say this is the time but I think its going to get really ugly with Eurozone fears spreading globally. I am a bit agnostic as to which way this goes, but I think its going to get ugly and it could get far worse than 2008. Compared to the US, European banks are much bigger relative to their economies and much harder to bail-out without bankrupting the last solvent countries in Europe. What that means is either systemic collapse in Europe and therefore globally... or a lot, and I mean a lot, of money printing that has to happen. I am not sure how price stability/global currencies can survive that. You can't have the whole developed world overspend for a few decades and not have major major consequences. 2008 ended up being a joke finishing with more bailouts and postponing the day of reckoning. It won't be postponed forever and right now its feeling like the beginning of the endgame - certainly sometime in the next 3 years or so.

 

 

 

 

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The disconnect for me has been the (gov't) bond and stock markets in the US. The (gov't) bond market is saying a second recession is likely while the stock market a couple of weeks ago was looking for a Christmas rally. Oil trading close to $100 also does not look too bearish for the world economy.

 

I am now 30% invested and 70% cash (bought a chunk of WFC & BRK on Friday). I have spent the past couple of months getting my buy list fine tuned should stocks (finally) sell off big time. Financials are mostly at multi-year lows... patiently waiting for the rest of the market to do the same.  ;)

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I think the past year just verifies my view that the stock markets are not (or at the very least, should not be) leading indicators.  Not only the stock market but the commodities market.  First, we see oil going back to $60 a barrel when it seemed like the US was falling into a double dip recession, but then we get some better than expected economic reports (albeit still not good or great) and oil is taking off again like we're back in heady economic times.  The same can be said of the stock market.  I actually can't believe that the Dow Jones was nearing 15-20% off its all-time highs this past year.  It's like it's pricing in the pre-bubble economy when much of the world, including the U.S., is struggling with the aftermath of the financial crisis.  That made no sense to me given the context, but I've learned one key lesson from it: liquidity trumps value.  Regardless, I still believe there will be another huge leg downwards in the equities markets.  If the ECB becomes the lender of last resort, that leg will be pushed off into the future; however, it will come.  At some point, rates will need to rise.  I don't buy the deflationary scenario.  When the entire world starts pumping out the dough, something that has never been done in modern finance, I believe we will see all sorts of distortions in pricing. 

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Viking,

3-

I think by buying Berkshire here you'll do relatively well - its at 9 to 10x earning power (say looking ahead about 14 months).

 

1. A $20 billion acquisition adds at least $1 billion to earnings (ie shifting from say a 3-5% yield to 10% yield in equities) - if that can be done annually that's 5-7% earnings growth maybe right there. I think it can because a) there are a lot of large cap 10% yields right now, and b) Berkshire is earning a run-rate of close to $20 billion a year (do get to this run-rate, I am giving credit for $20 billion deployed into equities over the next 14 months and the extra yield that brings, counting underwriting profits at GEICO, adding look-through earnings over dividends paid on the public equities owned, and maybe some other minor adjustments, for example P&C pricing has to turn up at some point);

2. Next if the economy grows at 3-4% nominally (even if real growth is 1%) that also adds to growth;

3. Underlying all this, I think Berkshire's businesses will grow by at least 1-2% annually better than the S&P 500.

 

So in total, you get a diversified well-run company at 9-10 times earnings growing at 9-13% per year. I can't see how it gets much cheaper RELATIVE to the S&P 500.

 

I am not terribly optimistic on the S&P 500 in terms of real growth but on a relative basis, Berkshire is a solid play in my mind.

 

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