Grantham's Night Of The Living Fed!

Here is a great editorial.

http://www.gmo.com/websitecontent/JGLetter_NightofLivingFed_3Q10.pdf

• To Summarize
  
  1) Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.
  
  2) Therefore, lowering rates to encourage more debt is useless at the second derivative level.
  
  3) Lower rates, however, certainly do encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.
  
  4) Our new Presidential Cycle data also shows no measurable economic benefi ts in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.
  
  5) It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a benefi cial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.
  
  6) It seems certain that the Fed uses this type of stimulus to help the recovery from even mild recessions, which might be healthier in the long-term for the economy to accept.
  
  7) The Fed, both now and under Greenspan, expressed no concern with the later stages of investment bubbles. This sets up a much-increased probability of bubbles forming and breaking, always dangerous events. Even as much of the rest of the world expresses concern with asset bubbles, Bernanke expresses none. (Yellen to the rescue?)
  
  8) The economic stimulus of higher asset prices, mild in the case of stocks and intense in the case of houses, is in any case all given back with interest as bubbles break and even overcorrect, causing intense fi nancial and economic pain.
  
  9) Persistently over-stimulated asset prices seduce states, municipalities, endowments, and pension funds into assuming unrealistic return assumptions, which can and have caused fi nancial crises as asset prices revert back to replacement cost or below.
  
  10) Artifi cially high asset prices also encourage misallocation of resources, as epitomized in the dotcom and fi ber optic cable booms of 1999, and the overbuilding of houses from 2005 through 2007.
  
  11) Housing is much more dangerous to mess with than stocks, as houses are more broadly owned, more easily borrowed against, and seen as a more stable asset. Consequently, the wealth effect is greater.
  
  12) More importantly, house prices, unlike equities, have a direct effect on the economy by stimulating overbuilding. By 2007, overbuilding employed about 1 million additional, mostly lightly skilled, people, not counting the associated stimulus from housingrelated purchases.
  
  13) This increment of employment probably masked a structural increase in unemployment between 2002 and 2007, which was likely caused by global trade developments. With the housing bust, construction fell below normal and revealed this large increment in structural unemployment. Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.
  
  14) Housing busts also help to partly freeze the movement of labor; people are reluctant to move if they have negative house equity. The lesson here is: Do not mess with housing!
  
  15) Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the fi nancial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefi ts are reduced. It is likely that there is no net benefi t to artifi cially low rates.
  
  16) Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing infl ation fears, this easing has sent the dollar down and commodity prices up.
  
  17) Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
  
  18) In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

Grantham's view on emerging markets

• 3) How far can emerging equities go?
  
  I have been showing late-career tendencies to wander off the reservation of pure historical value. The “Emerging Emerging Bubble” thesis of 2½ years ago (1Q 2008 Quarterly Letter) is in splendid shape. The idea is that within a few more years, emerging equities will sell at a substantial premium P/E because their much higher GDP growth (6% compared to2%) will give a powerful impression of greater value. Everyone and his dog are now overweight emerging equities, and most stated intentions are to go higher and higher. Emerging markets are admittedly fully priced, but they still sell at a decent discount to the 75% of the S&P 500 that are not quality stocks – a particularly strange quirk in a strange market. With their high commodity exposure, their strong fi nances, and their strong GDP growth especially, I believe that they will sell at a premium to the S&P, perhaps a big one. How much of this premium to go for depends on an investor’s commitment to pure value relative to the weight that is placed on behavioralism – the way investors really behave versus the way they should behave. This gives us quite a wide range for investing in emerging that might be considered reasonable. GMO will make its own decision on how “friendly” to be toward emerging market equities as a category. You must make yours.

His recommendations

• Very Brief Recommendations
  
  1) Emphasize U.S. quality companies, which are still cheap in an overpriced world.
  
  2) Moderately overweight emerging market equities.
  
  3) Moderately underweight the balance of global equities.
  
  4) Heavily underweight lower quality U.S. companies.
  
  5) Carry extra cash reserves for a volatile market with insecure fundamentals.
  
  6) For the very long term (20 years) overweight resources, particularly if they have a sharp decline. (This is my personal view rather than that of GMO, which on this topic is agnostic.)

Mobius Positive On Malaysia But Says Stocks Are Not Cheap

On Business Times:

• Mobius positive on Malaysia's growth
  
  By Adeline Paul RajPublished: 2010/10/13
  
  EMERGING markets (EMs) investment guru Mark Mobius is positive on the Malaysian market, but says its stocks are not as cheap and dividend yields not as high as in other EMs.
  
  For that reason, Malaysia, with its average price-earnings ratio of 15 times, is not among his top picks of EMs.
  
  He prefers Brazil, Russia, India, China, Thailand and Turkey. And, among "frontier" EMs, he likes Vietnam, Ukraine, Qatar, Dubai and Kazakhstan best.
  
  "The key is value. We're looking for bargains. We continue to invest in Malaysia, but valuations tend to be a little higher here so it's more difficult for us to find the bargains," Mobius, the executive chairman of fund management firm Templeton Emerging Markets Group (TEMG), said at a media briefing in Kuala Lumpur yesterday.
  
  TEMG currently has assets under management of US$48 billion (RM149 billion), of which about 1 per cent is invested in Malaysia.
  
  Mobius likes commodity and consumer stocks here.
  
  "You can't say that Malaysia is a screaming bargain compared to other EMs, but it's definitely been doing very well," he remarked.
  
  The stock market's key benchmark index has gained about 17 per cent so far this year, trailing Indonesia's 40 per cent and Thailand's 33 per cent growth.
  
  The FBM KLCI has risen to new highs of late, helped by a strong inflow of foreign funds. On Monday, it rose to a fresh 33-month high of 1,487.41, but eased slightly to 1,486.57 yesterday.
  
  Mobius said the current bull run in EMs, including Malaysia, can be sustained, but cautioned that there could be "sizeable" corrections along the way, possibly to the tune of 15-20 per cent.
  
  "You've got to be ready for corrections. These corrections can be quite sizeable and they will look like bear markets, but they won't be bear markets.
  
  "With derivatives being so big these days and the leveraging that you have in these markets, and with hedge funds playing these markets, they can create an incredible decrease in prices at very short notice," he said.
  
  Investors should not panic easily during corrections, he said, pointing out that bull markets tend to last longer than bear markets.
  
  Mobius expects Malaysia to have good growth this year and the next.
  
  On the ringgit, he said it was undervalued by about 8 per cent, but it was "coming back up".
  
  The ringgit closed 3.108 against the US dollar yesterday.

Past postings on Mark Mobius:

1. 18 April 2008: Some Rather Bullish Comments On the Malaysian Markets
2. 19 Jan 2009: Templeton's Mark Mobius Is Bullish On Emerging Markets
3. 4 May 2009: Mobius Says Emerging Markets Base Building For Next Bull Market!
4. 8 July 2009: Market Outlook For Emerging Markets
   

Market Outlook For Emerging Markets

On the Edge Financial Daily: Mobius: Outlook for emerging markets remains positive

• KUALA LUMPUR: The outlook for emerging markets remains positive to their relatively strong fundamental characteristics and faster growth than their developed counterparts, says Mark Mobius.
  
  Mobius, who is Templeton Asset Management Ltd executive chairman, said on July 8 while some emerging economies contracted in early 2009, most are expected to return to positive growth by end-2009 or 2010.
  
  “In the face of the global economic slowdown, the major markets of China and India continue to record exceptionally robust growth rates. China and India are expected to grow by 8% and 6%, respectively, in 2009,” he said.
  
  Emerging economies are in a much stronger position to weather external shocks following the accumulation of foreign exchange reserves.
  
  The growing middle class in emerging markets is an important and strong contributor to growth, he added. Emerging markets account for more than 80% of the world’s population, providing them with a strong purchasing power and the ability to spend their way into growth. At the forefront are markets such as China, India and Brazil.
  
  Another area that is poised to support economic growth in emerging markets is investment, particularly in infrastructure.
  
  “This is another area in which we have seen governments boost public spending in markets such as China and India. More importantly, the current valuations of emerging markets remain attractive,” he said.
  
  In his assessment of the second quarter of 2009, he said emerging markets surged with the MSCI Emerging Markets index returning 34.8% in US dollar terms.
  
  Mobius said part of this return was due to weakness in the US dollar. A return of confidence in emerging markets, the desire for higher returns and the search for undervalued companies support the markets’ uptrend.
  
  Latin American and Eastern European markets were among the strongest performers during the quarter while most Asian markets also recorded strong double-digit returns.
  
  A rebound in commodity prices and stronger domestic currencies supported markets in Latin America. Asian markets continued to attract significant portfolio inflows allowing markets such as China, India and Thailand to outperform their regional counterparts.
  
  In Eastern Europe, Hungary returned 69.7% in US dollar terms in part due to a strong Forint. Poland returned 37.0% in US dollar terms, while Russia ended the quarter up 37.8%.
  
  Turkey was among the top emerging market performers with a return of 57.2% in US dollar terms. A stronger Rand led the South African market to end the three-month period with a 31.3% gain in US dollar terms.

Chart of EEM.

From Apollo Investment Management, Claire Barnes were rather cautious in her 2Q report despite her stellar fund performance. Here is a snippet from her comments.

• Three months ago we reported an abundance of quality/growth options at attractive prices. Many of the more promising participated fully in the market's surge. By end-June, we had net gains of 36%, 99% and 164% on the three stocks which we added in 1Q. Several leading companies report that they see no signs of green shoots, but have anyway doubled in price. Valuations are now much less compelling. We are back to carefully weighing the relative resilience and prospects of businesses for the long haul, against a backdrop of economic turbulence which we expect to continue, and possibly to intensify.

LOL!

How very true! Have we not seen it here? Despite the no signs of green shoots, some of them shares simply rocketed to the moon!

• Governments, disappointingly, have 'wasted a good crisis'. Not only have they thrown away unimaginable amounts of taxpayers' money, postponing necessary adjustments, and impoverishing future generations. Not only have they missed opportunities for intelligent reform and appeared to be victims of 'regulatory capture'. Not only have they flouted the established hierarchy of creditors, imposing unwarranted losses on the prudent, and distorted the allocation of capital. They have also failed to seize the opportunity to reexamine market fundamentalism, to lead intelligent debate on the appropriate goals of societies, and to forge a new consensus on effective moves towards a more sustainable future.
  
  Perhaps such leadership takes longer, and will emerge in due course, as adrenaline-fired weekly panics give way to consideration of the longer-term issues. The 2009 Reith lectures offered a worthy start to a necessary debate.
  
  We mentioned that the economic crisis may intensify. Papering over cracks serves only to obscure the necessity of remedial action while the problem gets worse. The patchwork of quick fixes will have unintended consequences. Crises in pensions, insurance, government finances, housing foreclosures, etc, may be visible long after their worsening becomes inevitable, long after they become impossible to avert - but long before they reach bottom. The same will at some stage prove true of energy resources, and environmental damage. The timetable for these is less forecastable: they could be decades away, but the possibility that they may intensify suddenly should be borne in mind. Planetary and bureaucratic overload, like military blowback, lend themselves to the models of catastrophe theory, and may reach tipping points with little warning.
  
  How to plan for energy and environmental contingencies, we are not at all sure. Fortunately, it seems likely that there will be better times to act. The stampede for inflation hedges may be premature (forced and voluntary deleveraging may outpace the printing presses for a while). Exchange-traded funds have made the establishment of long positions in commodities more convenient for many, and more investors now seem to be viewing commodities as appropriate for large asset allocations, changing historic price relationships. In John Hussman's phrase, it may be 'hard for investors to sustain a durable sense of doom about inflation risk', if we have a period of subdued prices or deflation meanwhile. Likewise for resource shortages: some 1970s analysis still reads well, but many market participants would regard three decades 'too early' (even if intended as a warning) as tantamount to being wrong. However, early warnings are valuable. Investor views on appropriate long-term strategies would be welcome.
  
  Meanwhile, the attempt to recreate the market economy of 2007 seems both doomed and foolhardy. Many industries will not quickly return to 2007 levels: some will never be the same again. We are wary of future predictions for most 'luxury', several types of retail and consumer goods (spending patterns may change for decades), the auto industry, many types of capital machinery, and construction equipment... among others. We nevertheless hold some shares in these sectors, if the risk-reward proposition remains reasonable, but many of our holdings are in other sectors where business is relatively predictable - supermarkets, fast food, consumer finance, aircraft maintenance, basic telecommunications - and life, for the time being, goes on.

Mobius Says Emerging Markets Base Building For Next Bull Market!

On Bloomberg News: Emerging-Market Stocks May ‘Break Out’ by Year-End, Mobius Says

• May 4 (Bloomberg) -- Emerging-market stocks may “break out” into a bull market at the end of the year as falling interest rates and easing inflation make equities more attractive, Templeton Asset Management Ltd.’s Mark Mobius said.
  
  Mobius reiterated that emerging markets are “building a base” for the next rally. Chrysler LLC’s bankruptcy filing and other “short-term risks” may hold back the rally, while speculators may bet stocks will fall, he said.
  
  “We are at the base building period for the next bull market,” Mobius, who helps oversee $20 billion in emerging- market assets at San Mateo, California-based Templeton, said yesterday in an interview in Bali, Indonesia, where he’s attending a conference. “What I see happening is perhaps this continuing till the end of the year, and then a break out.”
  
  Developing markets made up all 10 of the best-performing stock indexes in 2009, led by Peru and China. The MSCI Emerging Markets Index has jumped 17 percent this year, compared with a 2.6 percent retreat in the MSCI World Index.
  
  Since Mobius said on March 23 that the base for the rally is being built, the emerging-market gauge rose 20 percent, outpacing the global measure’s 13 percent advance.
  
  Government stimulus programs from the U.S. to China have prompted Federal Reserve Chairman Ben S. Bernanke to say there’s evidence of “green shoots” in some markets. Reports on consumer confidence and manufacturing in the world’s largest economy last week spurred optimism the worst of the recession may be over.
  
  Growth Outlook
  
  The International Monetary Fund, the Washington-based lender with 185 member nations, said last month the world economy may shrink 1.3 percent this year, compared with its January prediction of 0.5 percent growth.
  
  Short sellers are increasing bets against developing-nation stocks by the most since March 2007, a signal the biggest rally in 16 years may fizzle as profits plunge.
  
  Short interest in the iShares MSCI Emerging Markets Index fund, which tracks equities in 23 developing nations, climbed 51 percent in March, the biggest jump in two years, according to New York Stock Exchange data compiled by Bloomberg. The growth in short sales, where investors borrow stock and sell it on the expectation prices will fall, marks a shift from the last three rebounds in emerging-market stocks. In those cases, traders closed out their bets.
  
  Chrysler, based in Auburn Hills, Michigan, is the latest U.S. company to file for bankruptcy after a group of 20 secured lenders rejected an offer by the government that would have paid them $2.25 billion for $6.9 billion of debt, or 33 cents on the dollar.
  
  ‘Green Shoots’
  
  “There are green shoots in the American economy,” Mobius said. “Some companies will declare lower earnings but there are still companies posting rising earnings.”
  
  BNP Paribas Asset Management was also upbeat about the recovery of emerging-market stocks, saying shares in Brazil, Russia, India and China present the best combination for a recovery in economic growth amid continued volatility.
  
  The investment firm turned positive on Russia in March and now holds more shares in the four so-called BRIC markets than benchmark indexes suggest, Martial Godet, who helps oversee the equivalent of $44 billion of assets as Paris-based head of investment management for new markets at BNP Paribas, said in an April 30 interview in Singapore. He said he expects the “outperformance” of the four markets to continue.
  
  Even after the rebound this year, the emerging-market index is valued at 1.58 times book value, lower than its five-year average of 2.1 times. Based on estimated earnings, the measure has a multiple of 13 times.
  
  ‘Pretty Cheap’
  
  “If you look at price-to-book value, you see that it’s below the average that we’ve seen for a number of years,” Mobius said. “We are not buying stocks that have a price- earnings ratio of over 10, by and large, with some exceptions, and we look at a five year time frame. Looking five years out, things look pretty cheap.”
  
  Hong Kong-listed Chinese companies will be the best bet when the emerging markets embark on the bull market, with companies that supply commodities and cater to consumers benefiting the most, Mobius said. He also favors shares in Turkey, South Africa and Brazil, he added.

Templeton's Mark Mobius Is Bullish On Emerging Markets

Posted on Star Business, Templeton to invest more in emerging markets

• Monday January 19, 2009
  Templeton to invest more in emerging markets
  By FINTAN NG
  
  It intends to buy shares in consumer and commodities firms
  
  TEMPLETON Asset Management Ltd plans to acquire more shares in consumer and commodities companies in emerging markets due to their attractive valuations and the recovery these markets will make this year.
  
  The asset manager, which is part of San Mateo, California-based Franklin Templeton Investments, manages US$26bil in emerging market stocks.
  
  Templeton Asset Management executive chairman Mark Mobius said the build-up of foreign reserves and increase in money supply, which was “quite dramatic”, would drive the recovery of bourses in emerging markets.
  
  “Banks have been hoarding, inflation is down, interest rates are down … this is unsustainable and will eventually lead to more lending, which means more business actitivities,” he said, adding that stock markets would continue to be volatile in the short term.
  
  Mobius told a media briefing on Saturday that stock markets usually led economies and the economic recovery would only happen next year.
  
  He said China has the wherewithal for economic growth and Brazil, India, South Africa and Turkey were good investment opportunities.
  
  On Malaysia, Mobius said the local stock market tended to be steady but felt that stocks here were not as cheap compared to the region. “We don’t have any plans to increase our holdings but we’re constantly on the lookout,” he said.
  
  Mobius said the focus on consumer stocks was due to the rising spending of consumers in China and India driven by rising per capita income. “Basic consumer products will continue to be sold and companies will continue to be profitable,” he said.
  
  Mobius said commodity prices had “gone too far in both directions” and were too high last year and too low this year. For commodity stocks, he preferred mining-based companies such as those involved in the production of nickel, palladium, platinum and gold.
  
  “We like the food-producing companies to some extent but it is difficult to get a pure exposure to it, even Sime Darby is diversified,” Mobius said.
  
  He said the recent spate of accounting scandals like the one plaguing Satyam Computer Services Ltd would not deter him from investing in India. Templeton exited Satyam without making a loss after its analysts warned it of the company’s suspicious business activities.
  
  “You can’t throw the baby out with the bathwater, there are other companies that are profitable and with good management,” Mobius said.
  
  He said these scandals, including the one involving Bernard Madoff, meant that investors had to be cautious, vigilant and diversified.
  
  “Corporate governance will not be solved by government oversight alone, but we must not be so negative that we don’t invest,” Mobius said.