Email of the day (3)
Comment of the Day

January 23 2012

Commentary by David Fuller

Email of the day (3)

On economic concerns:
"I wanted to comment on a couple of items in last week's FullerMoney. First, I wanted to say that Tim Price is a brilliant writer and his latest was one of his best. His conclusion is somewhat frightening, in that he is basically saying that a severe recession or depression is inevitable. It's a "you can pay me now or pay me later" scenario. This is supported by numerous sound money advocates. However, there is no way that a Warren Harding "government stay out" policy will come to be, at least through this year's U.S. elections. Especially with some decent economic numbers coming out in the last few weeks. By the way, Harding's hands off approach was successful in the early 1920s, as the market cleared and a significant recession was short lived.

"My other comment deals with the individual who said they would not add any new money into this market environment. I realize we are all a bit burned out about the Euromess. But it still is dead center and a tremendous headwind for the global economy. I see no ideas or action that will be able to fix the problem without significant structural damage being done. Yet, our memory span seems to be about 24 hours. I find the level of bullishness amazing in an environment that has so many headwinds ((How China handles the property bubble may be the real wildcard--sound familiar?) and a market that is overvalued. On the old risk-reward line, I see very limited upside potential and plenty of downside.

"Many argue that at 13X forward earnings, the market is not overvalued, but at a very tempting valuation. My opinion is that we are in the process of mean reversion on many levels, including a true restoration of value in the markets. Forward earnings can be a dangerous way to look at valuation. They are based on estimates that can suddenly turn down dramatically.

"There is one rarely used valuation metric that truly gives me pause. That is the ratio of Market Cap (NYSE) to GDP. The historical ratio is 60%. In 2000 it had gone over 150% and we know what happened. By 2003, it was still 130% and we know what happened in 2008, after it climbed to over 150% again. Currently it is still very overvalued at 120%. I know there are counter arguments such as a proliferation of IPOs and globalization which has increased non U.S. sales, earnings and market cap for many U.S. Multinationals. But that is still double the historical norm, and reversion to the mean almost always eventually occurs.

"Personally, as long as the technical action is supportive, I am not selling and even have added positions from time to time. But I keep some favorite quotes on my desk. One is a recent opening from GMO's quarterly letter.

"What a terrible mistake it always is to expect stock markets to reflect economic reality in the short term......The market has this always disturbing habit of ignoring the obvious and ignoring it some more, until, in the blink of an eye, it doesn't."

"Thank you, David and Eoin, for another year of excellent newsletters and audios. I would love to catch up with Eoin somehow when he is in Southern California. Perhaps, I will contact him regarding that.

David Fuller's view Thanks for your thoughts.

I am reminded of a favourite quote:

"Prediction is very difficult, especially about the future."
Mark Twain

Everyone has an opinion and many that we read or hear on financial programmes are either fear based ('the depression is nigh') or faith based ('gold will soar above your wildest dreams of avarice').

In looking for answers to the market's riddles, the best that Eoin and I can do is to follow the flow of money. We do this with price charts, as you know, and I am pleased to see that you are also guided by the technical action.

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