48 th annual contrary opinion forum david fuller 7 th october 2010 two different worlds

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48th Annual Contrary Opinion ForumDavid Fuller 7th October 2010

Two

Different Worlds


The old labels are misleading:

‘old world, new world, developed, developing, emerging…’

What do all economies have in common?

They are either progressing or regressingon an absolute or relative basis.


Progressing Economies Have:

• Superior economic governance

• Relatively strong GDP growth

• Current account surpluses

• Low levels of government debt

• High personal savings rates

• Sound banking sectors

• Young, motivated & educated workers


Regressing Economies Have:

• Poor economic governance

• Relatively weak GDP growth

• Current account deficits

• Increasing government debt

• Low personal savings and high debt

• Weak, dysfunctional banking sectors

• A shortage of skilled workers


How do countries transform from regressing to progressing?

• Governance is everything! It starts with good leadership and is a top-down process.

• Luck helps: climate, water, indu. resources

• Empowerment of women & minorities

• Education and equal opportunity

• A ‘Can Do’ attitude and strategic planning

• Favourable demographics


How do countries go from progressing to regressing?

• A failure of governance: pork, short-termism, CEOs game the system, a morally bankrupt financial sector

• Bad luck: drought, floods, few resources• Deteriorating educational standards • An entitlement mentality - hubris• Impoverishment by military commitments

• Social divisiveness - loss of confidence


Stock market question:

Do two severe bear markets within

eight years make it more or less

likely that another dramatic decline

will occur within a few years?


David, SPX historic, semi-log here

Box and label the valuation contraction cycles

Secular valuation contraction

1967 to 1982

Secular valuation contraction

2000 to 2015?

S&P 500 Index since 1953


Many US economic commentators say that America is in a depression!

We also heard this in 1974, 1987 and 2001.

This crisis is more serious, but…


What we actually have is the worst credit crisis recession since the 1930s.

‘100 years of historyshow that it takes five to seven years

for an economy to recover from acredit crisis recession.’

The US economy has been helped by stronger Asian-led growth.


With the US economy still in trouble why shouldn’t the S&P 500 Index

fall to new lows as many forecast?

“It’s not about the economy, stupid.” Russell Napier of CLSA 10 September 2010

Equity investors buy companies… not the economy.


David, put NDX chart here with comment:

Does this look like a depression or even A bear market to you?

NASDAQ 100 Index(weekly)

Does the action since the Nov 2008 low look like a

depression or even abear market to you?


Bonds or equities?

Baby boomers have been pouring savings into bondsand selling stocks.

“An estimated $179 billion has been put in bond funds this year, while $35 billion has been pulled from stock funds, according to the Investment Company Institute, a trade

group for the mutual fund industry.” 24 Sep 2010

But does this make sense today?


David, put historic US 10-year yield here

Annotate with question:

Does it make sense to buy at these yields?

September 1981

Does it make sense to

buy bonds at these yields?

US 10-Yr Bond Yield


‘Bond markets are taking their cue from the developed economies,

equities from the developing.’Mike Lenhoff of Brewin Dolphin Securities

24 September 2010

This astute observation explains why investors in bonds see little recovery,

unlike investors in equities.


Norfolk Southern in 100-year issue – Financial Times 24 Aug 2010

The company sold $250m in bonds with a yield of just 5.59 percent – an attractive rate for a company rated Baa1 by Moody’s Investors Service.

“We decided to [issue the bonds] because rates are so low and there is strong appetite for 100-year bonds,” said Robin Chapman, a spokesman for Norfolk Southern.

“You are giving a company money for a long period of time with no ability to foresee the conditions in that period of time and for a very low interest rate,” said Jason Brady, a portfolio manager at Thornburg Investment Mgt.

Investors who bought Ford’s century debt at a higher rate in an issue from 1997 saw their bonds fall to less than 15 cents on the dollar when the US car industry was in crisis over the past few years, Mr Brady said. They have since recovered but still trade at less than 90 cents on the dollar. The price of bonds also falls when rates rise.


US equities: Is this irrational pessimism and gratuitous gloom?

Press reports:“death crosses”

“DJIA 400”, says…“Hindenburg Omen”

Meanwhile, progressing markets lead a resumption of the bull trend.


Indonesia (monthly)

Asia’s market leader among larger population counties330m people

Brobdingnagian baseUncoupled from Wall St in June

Due for some reversion towards rising MA mean


ASEAN uncouplingfrom S&P 500 in June


Thailand(monthly)


Singapore (weekly)

The new Switzerland


Shanghai Composite Index(weekly)

Currently undervaluedco-favourite

BRIC

Supply to increasebank reserves


Hong Kong Hang Seng Index(weekly)


Vietnam SE Index (weekly)

shunned due to devaluation

Asia’s lowest valuations


Vietnamese DongUSD/VND (weekly)

devaluation should be nearly over


India BSE Sensex Index (monthly)

Brobdingnagian baseAdvance temporarily overextended

near 2008 peak

Fantastic long-term storyco-favourite BRIC


Bombay Banks Index(weekly)

Contrast this performancewith western banks


Chile General Index(weekly)

Susceptible to temporarymean reversion towards the MA


Brazil Bovespa Index (weekly)

Fullermoney’s 3rd

favourite BRIC


Germany DAX Index (weekly)

exporters leveraged toglobal economy


Canada TSX (weekly)

Completing consolidation


S&P 500 Index(weekly)

Bloomberg: ‘bestSeptember gain

since 1939’


Fiat Currencies

The least bad in this environment:Those of Asia-led growth economies, resources exporters, financial currencies (Swiss franc & Singapore $)

Higher risk:Debtor currencies – US$ appeal mainly as a liquidreserve currency and haven in times of crisis

In the distant future:Chinese Renminbi will be the next global reservecurrency but probably not before 2050


Asian Dollar Index (monthly)

Brobdingnagian base


Singapore Dollar USD/SGD (monthly)the new Swiss Franc


Commodities

Secular bull market, but volatile:‘Supply inelasticity meets rising demand’

Gold has been remonetised in the eyes of investors

Commodity price inflation – an opportunity and also the next big risk


Continuous Commodity Index (Old CRB) since 1954Brobdingnagian base


Gold bullion (monthly)

Secular bull marketsusually end with a dramatic

upward acceleration

Sep ‘03

Sep ‘05

Sep ‘07

Sep ‘09

Sep ‘01


Platinum divided by Gold

Ratio currently 1.27 historic range 0.97 to 2.3

arguably better valuethan gold today


Platinum (weekly)

Has catch-up potential


Palladium (weekly)

rumours that Russianstockpile running out


Copper CMX

China stockpilingnew highs likely in this cycle


Tin LME (weekly)

Leading the way upamong industrial metalscurrently overextended


Uranium (weekly) since 2001

Currently the cheapest metaland bottoming out


Crude oil NYME

The next upside breakoutwill be a warning

All spikes in crude oilhave caused recessions

July 2008


Rogers InternationalAgriculture Commodity Index

Base completion

Food price inflationwould be a problem

Feb 2008


Medium to longer-term risks

• Industrial commodity price inflation• Food price inflation• Progressing economy inflation (current)• Regressing economy stagflation• Higher interest rates• Trade protectionism• Commodity ‘wars’• High frequency trading (another WMD)• Global warming


Current bull points

• Monetary policy is accommodative

• Interest rates are low

• CPI inflation is low

• Progressing economies are healthy

• The West’s recovery is only 15 months old

• Household savings are rising

• Equity valuations are reasonable

• Corporate balance sheets are mostly strong* * (Where leveraged to the global economy)


Fullermoney summary forecasts

• The Asian, resources and tech-led global stock market recovery is resuming

• This cyclical bull market should have several more years to run, provided energy and food prices do not spike higher

• The USA will avoid a double-dip recession with the help of progressing economies

• The three-decade bull market in US government bonds is ending – yields will range higher over the medium to long term


Fullermoney summary forecasts

• Gold’s secular bull market has at least several more years before it is halted by higher rates

• The secular bull for industrial commodities will continue, punctuated by recessions

• Progressing Asian and resources economy stock markets will continue to lead

• US and European multinationals leveraged to the global economy will outperform

• Leading or promising sectors include: technology, healthcare, mining, agriculture, global infrastructure, and dividend increasers


Thank you very much

Fullermoney is aGlobal Strategy Service

produced byDavid Fuller

&Eoin Treacy

We invite you to visit our site

48 th annual contrary opinion forum david fuller 7 th october 2010 two different worlds

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