While catching up on my reading over the weekend and this morning several thoughts came to mind (it does happen from time to time):
1) It seems to me that market performance over the last quarter has been driven by the weakening dollar rather than by expectations for economic performance. That is equity market performance has been driven by liquidity rather than fundamentals (someone else's phrase but fitting just the same). This is disconcerting as it suggests to me that a real correction is possible - greater than the 10-15% or so I have been assuming for awhile. I don't think it will happen in the next 5 weeks, though some suggest a sell-off is possible in late December as active investors lock in gains and reduce risk to ensure year-end bonuses. More likely it'll occur in the early part of 2010. I'm a strong advocate for constructing portfolios that are more conservative than an investor's risk tolerance. Such a portfolio pays an "insurance premium" to reduce volatility and hopefully hedge downside risk. If you haven't done so, give this some thought heading into year-end.
2) I went to grad school in the early 90's and Monetarism was favored over Keynesianism. I favor less government and more private enterprise but acknowledge that the government has a role in providing services private participants are unwilling to provide. However, these services should be provided in relationship to the government's ability to pay for them. This link is to a new study by two Harvard economists that finds that "Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions." I'm biased in this direction but it is nice to see new evidence that supports tax cuts over spending. Policies favoring increasing spending, increasing debt and increasing taxes are not good for investors. Which leads to point 3.
3)
Source: Mark Perry
The emerging markets, particularly Asia, despite recent equity market run-ups continue to look attractive. As this chart shows the Asian countries have significantly increased their contribution to global GDP and at the expense of the EU15. The dip in the late 90s is likely attributable to the currency crisis in 97 and the Russian default/LTCC debacle in 98. Lessons were learned at that time that helped in 2007-2008. Per the IMF, advanced economics (largely the EU, US, Japan) had a current account balance of (.66)% of GDP for 2009 and are forecast to only reduce that to (0.33)% by 2014. Emerging and developing countries, by comparison, had a current account balance of 2.02% for 2009 and are forecast to increase that to 3.5% by 2014. Additionally, gross national savings for advanced countries is forecast to 17.5% of GDP in 2010 but 33.5% for developing and emerging countries. Stronger balance sheets and higher savings rates lead to improvements in net worth (standard of living) and to better investment returns. Continue to consider emerging markets for your portfolios at the expense of the U.S. and other developed markets. This isn't to say eliminate developed markets just be skeptical of equity market returns in the near term.
