Electoral impact
BEATING THE STREET
| It is weird that a man who's demonstrated his incompetence at tackling recession and terrorism is being re-elected on the grounds that he's been good at handling both! |
| The US has been in recession since the second calendar quarter of 2000 when the dotcom bubble ended. It's taken a long time to deflate. Bush spent his entire first term without doing anything more positive than increasing America's fiscal deficit. His policies have generated neither jobs nor growth. |
| The war on terror has killed thousands without decreasing the daily threat. Afghanistan and Iraq remain twin messes. Crude prices have hit alltime highs and presumably, will remain up for the forseeable future. |
| The Russian economist Nikolai Konradtieff (1892-1938) speculated that capitalist economies went through long 50-60 year cycles. He was sent off to a Siberian labour camp for his pains. But his long cycle theory predicted the 1930s depression and World War II. It also suggested that the early 21st century would see another period of global depression and war. So far, he's been accurate! |
| One thing we do know about Bush; he's consistent and he will follow-through on policies, no matter how disastrous the apparent results. So we can expect more of the same for the next four years. Regardless of the war, his domestic policy will involve expansionary spending and tax-cuts. |
| Loose money has prevented the bubble deflating. US stockmarkets are still priced at average PEs of 18-20. That's insane, with earnings growth estimates of 6-8 per cent. The more prudent US investors have parked money in other markets as hedges. So loose fiscal policy has been reflected in higher global stock-prices. |
| Eventually the world will pay a very high price for eight years of loose US fiscal policy. The US federal debt is running at $6.2 trillion, which is large even given an annual GDP of about $11 trillion. If we factor in corporate and consumer debt, total US indebtedness is around 300 per cent of GDP. |
| That debt will take decades to repay at normal GDP growth. If it's not repaid normally, there will be eventually be a currency implosion. The US has an unusual degree of currency protection since the dollar is the global default currency. But at some stage, the world might switch to the Euro and short the dollar. If that happens, global trade could be impacted in unimaginable ways. |
| What can one do if there's a run on the dollar? There would be some short-term speculative opportunities. But in the long run, value investing is the likeliest way to gain through a long depression. Don't buy companies or markets or currencies unless they are trading below instrinsic value. Use conservative measures such as low price-book-value ratios, low price-turnover ratios, and high dividend yields to make your call. |
| This advice can be acted on only once a slide starts "" right now very few stocks anywhere are trading at below intrinsic value. However, a cautious value-investor might make the call to stay out of equities as a class until the crash. It would be difficult to argue with the logic. |