Ad Hoc Commentary – Has the world reached its credit limit? No. The SPX looks like a good buy.
Today yours truly listened to a cogent presentation postulating that the world had reached its credit limit. Let us quote George Soros who was humbled by a similar prediction he made years ago:
“Indeed, I made that [credit conditions have been relaxed to such an extent that it is difficult to see how they could be relaxed any further] argument in The Crisis of Global Capitalism at the time of the emerging market crisis of 1997, and I was proven wrong. One cannot predict what new methods of credit creation may be invented and what new sources of funds may be discovered.”
Page 101, The Crash of 2008 and what it Means: The New Paradigm for Financial Markets, George Soros, 2009
With the wisdom of Soros, we probably should not be too bearish markets here. In fact, we probably should be bullish developed market equities now, our favorite S&P500 is probably a buy here.
With all due respect to the bears, we hear your persuasive explanations on growth and credit but remain unconvinced with the conclusions:
1. We see a significant slowdown in growth.
2. The marginal GDP growth due to credit expansion is eroding. One dollar of credit expansion is not leading to one dollar of GDP growth.
3. Most of the credit creation had been in EM, thus the EM growth story of the previous few years. This FDI inflows and to a lesser extent market inflows is stalling and reversing.
4. There are no willing borrower/willing lender in developed markets to give us growth.
5. QE money found its way into EM credit boom. More QE is unlikely unless we see significant economic deterioration.
6. New EM credit growth is blowing asset price bubbles as opposed to making good investments.
7. Energy and materials investments are being cut back.
8. Domestic EM outflows are significant, probably paying back USD denominated loans.
9. Growth prospects in EM is probably just a bunch of asset price bubbles.
10. We risk Richard Koo’s type of balance sheet recession.
And we are heading towards a crash of epic proportions? We probably are in some EM. And US dollar strength is probably only just the beginning.
However, S&P500 is more than just growth and credit, it is also about US dollar strength and share buybacks (and everything else you do when you don’t know what to do with your corporate cash hoard). Sometimes in life, you don’t have a choice but to choose when you have to choose. The S&P500 is prettiest among ugly. Our fixed income friends will probably ask what about US Treasuries. Well, yours truly holds on to his view that 2012 is the multi-decade low on yields. For one thing, US Treasuries will need to get through the headwinds of Asian central bankers digging into their savings to save their currencies and their own sovereign debt.
Let’s go back to basics. First, we had the dot com boom. Then we had the mortgage boom. And now we have the sovereign boom. This is a sovereign debt crisis that we are heading into. So, the sector that matters are the sovereigns. Look at countries that are overextended. These will be the weakest link of this cycle. The sign of the times are evident in the US10y swap spread that had recently turned negative (USSP10 on your Bloomberg terminals). There are many reasons offered by the pundits:
However, in yours truly mind, it is simply a sign that smart money is finally realizing that we are heading into a sovereign debt maelstrom. They are afraid to park long term money in government bonds – even seeing it as riskier than swap rates. Smart money are likely in short term bills and are playing a wait and see game.
What we need is probably governments to come together and bail themselves out. An infrastructure asset class would likely work. However, years had passed and the bureaucracy had only recently realized that it needs to move from billions to trillions in Addis Ababa. We should never underestimate the bureaucracy. When it needs to move, it can do so very quickly. However, until then, those in the markets would have to make do with whatever investable asset class they are presented with at the moment. At this moment, the S&P500 look increasingly like a good buy.
Good luck in the markets.