Tuesday, November 2, 2010

Bloomberg: Dot Com Bears Lead Emerging Market Bulls Buying Latest Bulls

Among a litany of ill effects, the serial bubble creation (otherwise known as "fixing the problem" in the near term) at the Federal Reserve has created all sorts of moral hazard in markets.  In the following Bloomberg story, the phrases could have been ripped off something I said just yesterday (and quite a few times before) - essentially, all you can do nowadays is play the next bubble, and hope to be part of the group that is smart enough to escape the damage from the terminal velocity (down) stage.

As money managers, in an environment characterized by bubbles and busts the past 15 years, it has become very important to now figure out where the Federal Reserve will create the next bubble to try to make money (and then try to escape the market, before it all caves in). I proposed a while back the obvious choices would be emerging markets and commodities.... and this indeed appears to be where the capital flows are going.

Of course every professional thinks they will be able to manage this, but there is something called a bell curve and in the end it's a zero sum game.

Of course this discussion is not touching on the mom and pop investor whose savings has been milked quite nicely (talk about "transfer of wealth") by the Fed's actions, the past 2 decades... and who surely will see both wealth and confidence destroyed (yet again) by the latest "can't miss" investment.  While domestic mutual funds face outflows week after week, month after month, quarter after quarter - not so emerging market funds!  Because as we all know, the "internet will change our lives" (which was true), and "real estate has never fallen nationally in the U.S." (not so much), hence "1.5 billion people entering the middle class in developing Asia" surely will work out as an investment for us all in the end.  All good bubbles are based on a valid thesis.... taken to extreme.... and now Ben has us repeating exactly as Alan did; only bigger.  Where once bubbles happened every 40-60 years, we now get them every 5-7.  (no one asks why of course, because the cause of said events is busy telling us they are saving us ... and need more power by the way)  Who wants to sit on the sideline and be intellectually correct about the eventual doom this will cause again, when we can all party like its 1999? (or 2006)

Long time readers will not forget - the whole world now has caught onto the game plan....[Sep 1, 2009: China Sovereign Wealth Fund Chairman with Quote of the Year 2009]

It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose.

Via Bloomberg:

  • Barton Biggs warned of a U.S. stock- market bubble as early as January 1997 and stayed bearish for most of the following three years as the Standard & Poor’s 500 Index surged more than 90 percent to a record.  A decade later, Biggs says another bubble is beginning in emerging-market shares. This time, he’s bullish.
  • We’re only halfway along the way to a gigantic eventual bubble in the emerging markets,” Biggs, the managing partner of New York-based hedge-fund firm Traxis Partners LLC and former chairman of Morgan Stanley Asset Management. “The emerging markets, particularly Asia, are a place where I want to have a really major representation.”
  • Biggs’s view is shared by Jeremy Grantham, whose investment firm had its assets under management shrink 45 percent in the late 1990s as his pessimistic outlook for high-priced technologystocks spurred clients to buy better-performing mutual funds. The chief strategist at Grantham Mayo Van Otterloo & Co. wrote on Oct. 26 that his forecast for an “emerging emerging bubble” was in “splendid shape” after the MSCI Emerging Markets Index soared 146 percent in the past two years.
Boo yah!

  • Everyone and his dog are now overweight emerging equities, and most stated intentions are to go higher and higher,” Grantham, who helps oversee about $104 billion, wrote in his quarterly letter to clients posted on the firm’s website. Developing nations’ faster expansion “will give a powerful impression of greater value,” he said.
  • While the 49 percent plunge in the S&P 500 from March 2000 to October 2002 proved Biggs, 77, and Grantham, 72, were right to warn of overvalued U.S. shares, their strategy now in emerging markets shows investors are increasingly seeking to profit from bubbles as the U.S. Federal Reserve increases its unprecedented monetary stimulus.
  • The MSCI emerging-market index’s 13 percent advance this year has lifted its price to 2.1 times net assets, a record relative to the MSCI World Index of developed-market shares, which trades at a ratio of 1.8

  • Investment strategists at Bank of America Corp., Credit Suisse Group AG and Societe Generale SA have all said in the past two weeks that emerging-market stocks may climb above levels justified by companies’ assets and earnings because of surging economic growth and the Fed’s efforts to reduce yields on debt securities.
  • Stocks, bonds and currencies in developing nations are likely to climb to bubble levels as the Fed announces another round of bond purchases this week, Michael Hartnett, Bank of America’s chief global equity strategist, wrote in an Oct. 21 report.
  • Credit Suisse’s Andrew Garthwaite says the combination of high savings rates, negative real interest rates and rising asset prices has made emerging-market countries including China and India vulnerable to speculative inflows.  “If ever the stage were set for an emerging-market bubble, we think it is now,” Garthwaite, Credit Suisse’s London-based global equity strategist, wrote in an Oct. 27 research report.
  • Stocks in the biggest developing nations may double as the Fed’s stimulus sends valuations back to their 2008 peak, Dylan Grice, a global strategist at Societe Generale, wrote in a research report e-mailed Oct. 22. Buying call options on emerging-market equities may be a cheap way to profit from a “nascent” bubble, Grice wrote.
  • Emerging-market asset prices “may be running ahead of economic fundamentals” as “herding behavior” prolongs the rally, Nouriel Roubini, the New York University professor who predicted the global financial crisis.
  • Investors poured more than $60 billion into emerging-market stock mutual funds in 2010; professional investors are more bullish on emerging markets than any region, according to a Bank of America survey last month of money managers overseeing $492 billion.
  • Valuations are the “most stretched” in emerging markets, making them vulnerable to a selloff should global growth disappoint investors, Bob Janjuah, the co-head of cross-asset allocation strategy at Nomura International Plc
  • The S&P 500’s price-to-book ratio climbed as high as 5.3 in March 2000 as technology companies including Cisco Systems Inc. and Microsoft Corp. surged on speculation that widespread use of the Internet would cause earnings to soar. Stocks plunged in the next two years..
  • This year’s best-performing equity benchmark index among major developing nations, Indonesia’s Jakarta Composite Index, has climbed 44 percent and trades for 3.4 times book value, 48 percent more than the average ratio since Bloomberg began compiling the data in September 2001.
  • “The headache posed by bubbles depends on the asset managers’ perspective,” wrote Grice, who is based in London and was ranked the No. 2 strategist behind SocGen’s Albert Edwards inThomson Extel’s Pan-Europe 2010 survey. “For skeptics the pain is on the way up, for true believers it’s on the way down.”

Insanity: doing the same thing over and over again and expecting different results. - Albert Einstein


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