The market was up a lot on Thursday, flat on Friday and up a little today. This may or may not be important but regardless there are some big themes that should not be forgotten as the market does whatever it will do for the rest of the year and in 2007.
If you read the Barron's interview with Ned Davis this will look familiar as it is his comments that are behind this post.
Demand for oil is growing faster than new supply. In the interview, Davis cites similar per capita numbers that I have cited in the past that I got from Puru Saxena interviews on CNBC Asia. Per Davis, and similar to Saxena, the US uses 25.8 barrels of oil per year, China 1.8 and India 0.8. Is there any doubt that those last two numbers will go up?
This guarantees nothing but creates a clear path. Keep in mind this opinion has nothing to do with this year's driving season or hurricane season. This is a multi year theme that I first realized a few years ago and will likely continue for quite a while longer, think years.
The various US deficits and imbalances are large and getting larger. Last I heard, Bush plans to cut the budget deficit in half by 2009. Every economic thing he has tried to do has fallen short of his expectations and I can't see why this would be different. This is not to say his policies have not helped, just that they have done less than what was expected.
Growing deficits create a clear path to a weaker dollar over the next few years. It is in no one's interest, globally, for the dollar to crash but weakness for the rest of the decade without a crash might be a different story.
The period of super easy money is over. There are consequences for big changes in global liquidity. The US started going back to normal a while ago and Japan is just starting now. Money is/will become more expensive. This should cause (perhaps this has started already) capital to move around. I think this means surplus and commodity countries would benefit.
None of the thoughts here are new. In a big picture sense, these are important themes. This helps lay out some of the obstacles faced in the years ahead. The US stock market could do very well in the face of this of course but great returns probably means overcoming high oil prices, higher interest rates and a weak dollar. And let's be clear, great returns are possible.
Some exposure to things that benefit from higher oil, a weaker dollar and a reduction in global liquidity seems like a good idea for the rest of the decade regardless of what happens this summer.
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18 comments:
I'm sorry this doesn't fit
the subject matter, but is
an interesting article on
STO. Do this change your
opinion on STO? I love your blog. Annon.
you did not leave a link so I am not sure what you are referring to? If it is their business in Iran, no it does not change my view.
Sorry about that (on STO)
hope link carries:
http://yahoo.businessweek.com/investor/content/jun2006/pi20060629_933398.htm
annon.....
this is not new. Their proximity to Russia makes them favored (but not guaranteed) to participate in Joint ventures. The Jyske Bank web site has a lot about this in their archives.
With no new projects, which no company allows to happen, Statoil has problems next decade (as I have read) with reduced production.
http://stockcharts.com/h-sc/ui?s=$w2bsc:xlb&p=W&yr=3&mn=0&dy=0&id=p45030624901
Roger, greatly agree with you for pointing us in the direction of foreign materials sector...if I read you right. The above link is to a relative strength chart between foreign and domestic materials sector. What do you think would be an effecient play on this development, which looks like it could have legs.As you point out, commodity rich countries...which ones do you like...any other type of choices?
Roger:
Like your approach. Understand concepts associated with higher oil and weaker dollar, but what about the liquidity element. What types of equities would you add to take advantage of that trend
S
good questions. I will post tomorrow to try to answer. holiday obligations for the rest of the day.
good questions. I will post tomorrow to try to answer. holiday obligations for the rest of the day.
I'm sorry, but Bush said that he would cut the budget deficit in half relative to the GDP. That's a huge difference.
good clarification.
Can he do that? Cut it in half relative to GDP, assuming the comment is correct.
to answer a couple of the specific questions left on this post.
Countries that should benefit (in the context of this post) in no particular order IMO.
Commodity Countries;
Canada, Norway, Australia, Chile, Brazil, South Africa (maybe, this one is more complicated)
Current Account countries (that I know of);
Singapore, Malaysia, China, Norway, Sweden, (I think Canada, Brazil and Switzerland but double check these if a surplus is the only reason you are buying).
Countries with their own problems that will improve one way or another over time:
NZ, Hungary, Turkey, Iceland.
I have a small position personally and for a couple of clients in the Vietnam Opportunity Fund. Vietnam is kind of like China and India in that a lot of things are starting to happen that should make its role in the world economic much more important.
Sectors with inelastic demand;
Healthcare and staples
Assuming the comment is correct -- that Bush plans to cut the deficit in half relative to GDP -- then it would appear that at least two of three things need to happen: (a) raise taxes, (b) significantly cut spending, and (c) significantly increase GDP. The first two Bush has some control over but we know he won't do (a) therefore that leaves (b) but Bush and the Republican congress have shown little inclination in that direction either; even recently it's strictly been nickles and dimes (relatively speaking).
Frankly it's not clear that the sort of spending cuts required could even be accomplished; I mean we're talking close to half a trillion bucks here aren't we?
Conclusion: Bush and the Republican congress will and/or can do nothing leaving (c). Anyone here see a significant increase in GDP on the 1-2 year horizon? I sure don't.
PS: I think I'd add Austria to that list too Roger; assuming my info is still good, they have a surplus and Eastern Europe still relies on the Austrian banks for a lot of financing AFAIK. I'm uncertain of Brazil from a current account standpoint but commodity strength would carry them through I think.
hey RW,
you are on point. I think it can be reduced but just come up short of his target.
Things in Hungary may get worse before they get better which could be a drag on austria?
Hmmm ...exposure to Hungary might be more bank specific (which suggests a look at a bank's loan portfolio of one is looking at individual bank stocks) but I wouldn't mind knowing, even in a rough way, how exposed Austria was to Hungary generally. I'd guess the exposure wasn't out of line given how much else of Eastern Europe there is to work with but guessing's not knowing.
R W,
How will raising taxes cut the deficit relative to GDP? Doesn't raising taxes hurt the GDP? Tom in Indy
I'm no economist Tom so take this with a grain of salt. I think the answer depends on what the focus is. If the focus is increasing government debt (accumulated year over year deficit spending) then increasing government revenue while holding spending constant (or at least not spending as much) would lower that virtually be definition. It seems fairly clear at this point that the Bush tax cuts did not increase government revenues as much as predicted and congress's failure to hold spending down made even that point moot, guaranteeing the deficit would balloon as indeed it did. Don't think there's much left in the tactical arsenal for Bush or the congress to work with now.
Based on the classic equation where GDP = consumption + investment + government spending + (exports - imports), where investment ("I") is understood to mean business investment in capital, one could assume that whatever loss to private consumption there might be from higher taxes would be offset by government spending but matters are doubtless more complex than that and I am not economist enough to parse all the variables. That said, taxes are not included in the formula so presumably their impact would be indirect.
For example, how government spending is financed -- sell more debt as is happening now or raise taxes -- may indeed have an impact on current year GDP because the former would presumably have a more immediate effect on, say, consumption because consumers will presumably have less to spend all other things being equal (which they never are) and the latter would presumably have a more delayed effect because the government will be competing for money which usually makes money more expensive in the longer run (e.g., interest rates go up). Presumably our interest rates should be higher but foreigners have been extending us credit by buying our bonds in sufficient numbers (at least until recently).
So raising taxes might not have a beneficial effect on GDP, might even lower it slightly based on that formula if there is a concomitant decrease in consumption (I've never seen research that confirmed that 'common sense' article of faith though), but if the government borrows then GDP does indeed increase because, in effect, new money is being created. That's not what I would call real wealth creation but that's what the formula says so I need to revise one thing I said in my previous ms: Bush could effect (c) depending on how much influence he has with Bernanke and the Fed; i.e., sell even more debt and GDP goes up (all other things being equal, which they won't be).
Frankly this stuff makes my head hurt but regardless we eventually arrive where we are now: money becoming relatively more expensive and international credit generation (some might call it a bubble), particularly to us, showing signs of flagging. The real concern is frankly not next year's GDP, it is the sustainability of the entire deal.
Silly me, there is of course a fourth way Bush could achieve his goal, he could (d) 'cheat' by using the Unified Budget deficit (which includes the SS trust fund) rather than the General Fund deficit for calculating the deficit to GDP ratio; see http://tinyurl.com/o32qz and http://tinyurl.com/mwlka. Nothing illegal about that, after all President Clinton did it when he claimed he removed the deficit and "balanced the budget," but emulating Clinton would seem, well ...I'll just say it seems the wrong thing to do; don't want to start any fights.
Of course, there are many who say GDP is the wrong way to conceptualize the problem altogether. For example one poster at Angry Bear comments "GDP is largely a measure of how much Americans consume in a year. As long as someone ...is willing to extend us credit ...[F]ederal debt to GDP could hit 200% and the economy could still be in good shape ...a better measure would be Federal debt to total market capitalization of U.S. public companies. Federal debt has risen over $2 trillion in the last 5 years to $8.5 trillion while the value of U.S. companies has remained unchanged at around $14 trillion. When this measure hits 100%...we're bankrupt ...". I don't agree with the last phrase but do agree alternative ways of conceptualizing the economic health of the US, or any other country if it comes to that, would be useful. GDP really does seem to have a lot of problems as a measure of a country's growth or overall economic strength.
As for me I still expect the rest of 2006 and somewhat beyond to be rather unpleasant (and not just economically either) and continue to invest accordingly. We will come through it all but I do believe I see some fairly heavy slogging ahead (and wouldn't mind being wrong about that in the least).
Hope everyone had a first-rate Fourth.
RW
Thanks for the explaination. I'll agree with the head hurting part. We seem to be in one mell of a hess. It rained here today (4th) most of the day which kept me from doing anything constructive (lawnwork) or destructive (fireworks). Tom in Indy
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