Days of the Roundtable

I rely on a variety of resources, including newsletters, blogs, and the mainstream media, to try and figure out what the future holds.

One publication that has always been helpful in this regard is Barron's, the investment weekly, which I've been reading for several decades. Among the features I enjoy are Alan Abelson's Up and Down Wall Street column and the Q&As with experts who, in many cases at least, seem to have been selected because they actually know what they are talking about (unlike many of those who are regularly quoted or profiled elsewhere).

What I especially look forward to, however, are the "Roundtable" issues, which feature articles drawn from moderated discussions between a select group of old hands, many of whom I respect a great deal.

Luckily enough (for those who don't subscribe, at least), the financial weekly seems to be running a promotion whereby some of the material from the January 10th issue, which includes the first installment of the Annual Roundtable discussion, is available for free to nonsubscribers (though I'm not sure how long that will last).

Anyway, here is an excerpt from the article, entitled "Hang on Tight!" which includes a welcome sampling of the always straight-shooting and thought-provoking insights of Marc Faber and Fred Hickey.

Our go-to group of investment experts sees tough times for the economy -- but good fortune for stockpickers.
 
ONCE UPON A TIME, WE LIVED IN A WORLD where asset-price inflation begat leverage, which begat more asset inflation, in a virtuous circle known as the great bull market. We bought bad art, good wine and vacation homes (many), and stocks "on the dips," which made us rich. And geniuses, of course.

Then the big, bad wolves -- greed and excess -- came and popped our bubble, and the markets', and all the pretty assets fell to earth. The fairy god-mother -- bearing a strange name for a godmother, Uncle Sam -- tried to clean up the mess with great gobs of money, but little success. The pain, suffering and deleveraging continued, inflation went bananas, everyone shopped at Wal-Mart and the Hamptons returned to scrub and sand. And no one lived happily ever after -- except for incredibly savvy stockpickers -- at least for a good five years. And that, kids, was the story they told at this year's Barron's Roundtable.

Oh, yes, the details: "They" are the 10 investment experts depicted here, who sat down with the editors of Barron's in New York on Jan. 5 to make sense of the epochal events in the economy and financial markets in 2008, predict what will happen in 2009 and share their investment ideas for the new year, which so far looks much like the old. The day was rife with history lessons and warnings -- and optimism, too, that those who find bargains amid the rubble will reap rich rewards. Or, as Meryl Witmer nicely put it, "It is an exciting time to be a stockpicker."

In the first installment of the 2009 Roundtable, you'll find the unabridged version of our little tale, as well as some first-rate stock picks from Meryl and Fred Hickey. The rest of this illustrious crew will share their wit and wisdom in Installments 2 and 3.

Meryl, general partner at New York's Eagle Capital Management and a value investor in the Buffett mold, brought four names to the 'Table -- an aluminum producer, a utility and two financials, as if she needed to burnish her credentials as a thoughtful contrarian. Fred, who edits the High-Tech Strategist newsletter in Nashua, N.H., made a compelling case for Microsoft and gold.

Want the details? Please read on.

Roundtable Members:
FELIX ZULAUF, founder and president, Zulauf Asset Management, Zug, Switzerland;
MARIO GABELLI, chairman, Gamco Investors, Rye, N.Y.;
ARCHIE MACALLASTER, chairman, MacAllaster, Pitfield, MacKay, New York;
MERYL WITMER, general partner, Eagle Capital Partners, New York;
MARC FABER, managing director, Marc Faber Ltd., Hong Kong;
OSCAR SCHAFER, managing partner, O.S.S. Capital Management, New York;
FRED HICKEY, editor, The High-Tech Strategist, Nashua, N.H.;
SCOTT BLACK, founder and president, Delphi Management, Boston;
BILL GROSS, founder and co-chief investment officer, Pimco, Newport Beach, Calif.;
ABBY JOSEPH COHEN, senior investment strategist and president, Global Markets Institute, Goldman Sachs, New York.

Barron's: Let's forget about 2008 -- and that includes most of your stock picks. With the market down 36% from its highs, the government bailing out everything in sight and a new president coming to town, what is the outlook for 2009? Fred, tell us, please.

Hickey: The government can't cure a disease that has been more than a decade in the making. The U.S has built up gigantic financial imbalances, and debt levels the world has never seen. Massive increases in public debt and spending can't replace the lost private-sector debt and cutbacks in consumer spending, allowing us to go on our merry way. The stock market is experiencing a snap-back rally, similar to what we saw in 1930, after the Crash of 1929.

You don't look that old.

Hickey: I wasn't around. They had a name for it, the "little bull market." It came about after the Federal Reserve slashed interest rates to 3.5% from 6%, and later to 1.5%. President Hoover had ordered federal departments to speed up construction projects, and the state governments to expand public works projects. He went to Congress asking for a huge tax cut and a doubling of spending on public buildings, dams, highways and harbors. That sounds familiar. Hoover predicted the crisis would end in 60 days. He received widespread praise for his intervention.

We see where you're going, but what about today?

Hickey: The market has had its worst crash since the Great Depression, and a new president is promising to pull out all the stops. We'll have massive infrastructure spending on roads and bridges. We'll have more tax rebates, and the government has made bailout commitments of more than $8 billion to support various markets. It has bailed out almost the entire banking system.

The stock market has rallied about 20%, and could go up 40% or 50%, as the little bull market did. Then reality is going to set in -- the reality that the economy is terrible, the unemployment rate is going to rise, the Fed's policies are imprecise. The dollar could get killed sometime this year, causing all kinds of problems. We have a more protectionist Congress. Deficit spending is unlikely to work. In sum, we have a date with more traditional bear-market levels. You'll see the single-digit P/Es [price/earnings multiples] that were typical in 1982, '74 even 1930 and '32. The market will go down significantly, and then make a bottom.

Black: A lot of the stock market's performance will be contingent on public policy. The consumer is dead. There has been a paradigm shift. The savings rate is going up. People are terrified. It's like my parents' generation after the Depression. Gross private domestic investment won't go up, even if you give corporations tax incentives. There is too much idle capacity already. We can't meaningfully reduce the trade deficit because we don't manufacture enough goods that the rest of the world wants. That leaves government spending to create final demand for U.S. goods and services. Giving a tax cut to people who spend the money at Wal-Mart on products made in China isn't going to do it. Infrastructure and defense spending are the best way out of this mess because by law, defense goods must be made in the U.S. and we have depleted our conventional forces, whether it is tanks or helicopters. Also, cement, concrete and structural steel all are made in the U.S.

As for the market, the current 2009 earnings estimate for the Standard & Poor's 500 stock index is about $60. The market is trading for 15.5 times earnings. If Congress passes an infrastructure-spending bill and we spend between $750 billion to $1 trillion, that could provide enough boost for the economy to turn up by year end. We could be looking at $70 in S&P earnings for 2010, which suggests the S&P, now in the low-900s, could rally to between 980 and 1,050. But again, it is all contingent on good public policy. That's the only thing that will kick-start the economy in 2009.

Faber: There is no such thing as good public policy, certainly not in the U.S. The current crisis was produced largely by policy measures that led to the formation of Fannie Mae and Freddie Mac, and later the repeal of the Glass-Steagall Act, which had prohibited banks from owning brokers. It all led to increased leverage. Fed policy has been a disaster. Instead of smoothing markets, it has increased volatility. By cutting interest rates the Fed created bubbles -- in housing, in commodities. Now that the federal-funds rate has been slashed just about to zero, you're not getting anything for your money when you deposit it in the banking system and buy Treasury bills. There is no such thing as investment; everybody becomes a trader.

With a few exceptions, the U.S. doesn't produce anything. It is a consumption-led economy. When the economy expands, the U.S. imports from other countries, such as China, which increase industrial production and capital spending. From 2002 to 2007 the markets of emerging economies outperformed the U.S. But when the economy slowed in 2008, it was a catastrophe for these economies. They immediately cut spending and production, which affected demand for commodities. Last year, emerging markets were hit much harder than the U.S.

Cohen: The P/E ratio of the Chinese market was more than 50 times earnings at the end of 2007, so the issue isn't only fundamental demand but relative valuation.

Faber: I'm aware of that. I recommended shorting Chinese stocks last year. It would be best at this point for the U.S. to have 10% less consumption. It would make people save again and follow Christian principles of frugality and humility. I doubt it will happen, but it would be good for the U.S.

We've had history lessons, and now, religion lessons. What does any of this mean for 2009?

Faber: The U.S. economy fell off a cliff between October and December, and will stabilize at a lower level of activity. Some indicators may look better than expected, which will justify the present rally. Stocks already are up 25%. If they go up 50% from the Nov. 21 low of 741 on the S&P, you'll have the S&P at around 1,100. Afterward, reality will set in and in real terms the market will go much lower for much longer.

Around the world, governments are throwing money at the system to revitalize debt growth. When an economy is credit-addicted and debt growth slows, it is a catastrophe. With the Fed buying up everything and boosting the federal deficit, hyperinflation will be the result down the line. I am pleased that Barron's just wrote a cover story about the inflation in Treasury bonds ["Get Out Now!" Jan. 5]. This was the last bubble the Fed was able to inflate, aside from their egos.

[Laughter]

So, Marc, you're not too bullish this year.

Faber: Let's put it this way. A true market low will be lower, but in a hyperinflating economy, you can have nominal price gains while going lower in real, or inflation-adjusted, terms. Between the start of 2008 and November, almost every asset market collapsed, but the dollar was strong. After November the asset markets rebounded but the dollar went down again. There's an inverse correlation. Dollar weakness is a signal that the Fed has succeeded in pushing liquidity into the system. Some say the dollar will collapse this year, but collapse against what? The euro? The Russian ruble? These currencies are even weaker. In the very long run, each citizen must become his own central bank. Every responsible citizen must hold some physical gold, platinum and silver -- physically, not through derivatives.

Click here to read the rest of the article.

Comments

[Independent Accountant]

I agree with Faber.

[farang]

"Infrastructure and defense spending are the best way out of this mess because by law, defense goods must be made in the U.S. and we have depleted our conventional forces, whether it is tanks or helicopters. Also, cement, concrete and structural steel all are made in the U.S."

With over $2.3 trillion admitted "unaccounted for" by the DOD, and with overseas bases using domestic materials and contractors (Japan and South Korea to be exact), and with the military spread out over hundreds of bases world-wide, and spending more than all other countries put together, I find the thought of INCREASING the DOD budget to be, to say the least, the most idiotic idea of this short year. And NO, the materials DO NOT need to be "made in the U.S.", they must be made by any countries on the list of approved countries world-wide: You can use Korean steel on US bases, and many other countries are on that list. That little thing known as "Free Trade" you economic geniuses all worship, ya know?

But yes, we do have "depleted...conventional forces", because we are off involved in illegal invasions and occupations across the globe.

So, let's rearm the military/industrial complex?

Geez, why do the words "head" and "examined" keep popping into my thoughts?

Let me give you an example of where this type "wisdom" leads: I am a contractor, have worked on bases in US and Asia. The last base I worked on, was in Killeen, Texas, Ft. Hood to be exact. At West Ft. Hood to be precise. In 2004, my first go-round at this base, they were building three new entrances, with three new security guard complexes. The main entrance had four lanes, with over 15 security (private) personnel manning it. These guards were paid $25/hr. I would drive up to main entrance in morning, and have a guard in one lane wave me on up to show my pass, another hold up his hand to stop, while another would wave me to pull to their lane.....like having Moe, Larry and Curly as security guards. And paying them $200/day, plus the profit the private contractor made supplying them. Don't ask me where the Army's security was, who fricking knows? The base roads were patrolled by local cops, too, with radar traps everywhere.

Another day, while the entrance was busy, they had a guard (woman) walking down the lanes pre-checking ID and passes. She was walking up to me, holding something in her hands, I couldn't quite make out what it was until she was almost to my window, when she fumbled what she was holding, and dropped in on pavement. It was her gun, she had been fumbling her holster...OOPS! And paying them $200/day. Gee, lets give DOD MORE funds to play with, shall we?

The second time I performed a contract there, two of the new entrances had been closed, abandoned actually, mothballed, and the guards at the remaining two entrances were telling me they were getting laid off. Of course, that had NOTHING to do with the fact Bush had been re-elected, and didn't need their votes any more.......Air Force One would refuel there, near his fake ranch, ya knopw? of course, now that he is leaving officve, he doesn't need that prop any more, so he is moving to Dallas. Who knows? Maybe they can get a job manning the security gate they are placing on the public road to keep traffic away from his Neocon Highness......

So, we taxpayers have two new multi-million dollar entrances to W. Ft. Hood, that weren't needed, to show for the increased debt we took on to build them. Yeah, great idea that "increasing military spending." Unless you have worked for the military, you have no idea the amount of money wasted every day, week in, week out. Like coating specs using 1950s technology, because the retired general that holds the patent has his friends in DOD keep the spec, while new 21st centurycoating technology far surpasses it in function and ease of use.....I could go on and on...pallets of US dollars delivered to Iraq, and carried off without accountability......."reconstruction" funds for sewage treatment plants that are inoperable when completed....power plants never finished...."spare" F-16's shipped to foreign countries to use to invade other countries.....need more?

How about we CUT DOD spending by 75% (leaving us the top military spender in the world, btw) and we use the money to spend on health care and education, paying down the National Debt run up by overspending on DOD now, then maybe 32 million adult Americans would be able to actually READ this article.....or funding space exploration, or alternative energy programs while fossil fuel energy is still relatively cheap and available? No, THAT makes TOO much sense, let's keep on with the status quo that has done us so well (projected $1.2 trillion deficit this year).

[farang]

By all means, we should INCREASE DOD spending...

http://www.nytimes.com/2009/01/11/opinion/11rich.html?_r=3&ref=opinion

An excerpt:

Eight Years of Madoffs

By FRANK RICH
Published: January 10, 2009

THREE days after the world learned that $50 billion may have disappeared in Bernie Madoff’s Ponzi scheme, The Times led its front page of Dec. 14 with the revelation of another $50 billion rip-off. This time the vanished loot belonged to American taxpayers. That was our collective contribution to the $117 billion spent (as of mid-2008) on Iraq reconstruction — a sinkhole of corruption, cronyism, incompetence and outright theft that epitomized Bush management at home and abroad.

The source for this news was a near-final draft of an as-yet-unpublished 513-page federal history of this nation-building fiasco. The document was assembled by the Office of the Special Inspector General for Iraq Reconstruction — led by a Bush appointee, no less. It pinpoints, among other transgressions, a governmental Ponzi scheme concocted to bamboozle Americans into believing they were accruing steady dividends on their investment in a “new” Iraq.

The report quotes no less an authority than Colin Powell on how the scam worked. Back in 2003, Powell said, the Defense Department just “kept inventing numbers of Iraqi security forces — the number would jump 20,000 a week! ‘We now have 80,000, we now have 100,000, we now have 120,000.’ ” Those of us who questioned these astonishing numbers were dismissed as fools, much like those who begged in vain to get the Securities and Exchange Commission to challenge Madoff’s math.

What’s most remarkable about the Times article, however, is how little stir it caused. When, in 1971, The Times got its hands on the Pentagon Papers, the internal federal history of the Vietnam disaster, the revelations caused a national uproar. But after eight years of battering by Bush, the nation has been rendered half-catatonic. The Iraq Pentagon Papers sank with barely a trace.

[Marion Shaw]

An old lady once gave my brother some advice, if he
wished to succeed in high society: "Never, never tell
the truth." If "farang" who is quite accurate in his
assessment of the state of defense spending, could
trace this giant monster back to its origins, he would
stop off in Houston at the Baker, Botts law firm, which
manages a great percentage of the defense companies
interests ( as well as supplying the officials for
defense procurement); if the truth fairy allowed it, he
would find that these sweethearts got in bed during
World War I; he would then find that they solidified
their interests with select banks and oil companies
after the bankers picked off the world in 1929, all
in the name of free enterprise of course; and then
if the truth fairy really was generous, he would
find that these sweethearts sired sons and grandsons
who have run the world since the end of World War II
and since the untimely death of Defense Secretary
James Forrestal, who, being one of their own, had
the knowledge and integrity to stop it. Instead, they
claim he went mad and jumped out of the Naval Hospital
in Bethesda. President John Kennedy did not live to
make the speech where he was going to call off the
"international arms race" with evil Russia, and that
was all she wrote. The international bankers and their
lawyers have run the world ever since, and here we
are: getting ready for World War III; the obvious only
solution to save "the system."

[ron]

The economist and traders are clueless, they have no conception of modern manufacturing and the role of digital technology. This article points out how critial financial speculation has become and like rats on a sinking ship they keep looking about for various routes to safety. The 800lb gorilla in the room is manufacturing automation which along with the internet is making economic
models useless as they are all rear mirror data driven. The world is going through an historic economic change that none of the traditional economic captains can imagine created by the power and influence of digital technlogy.

[aghast]

But why do they insist on dragging Abby Joseph Cohen out of the third circle of dot.com shill hell? no sane person would believe a word she says.